Double Taxation Treaties
|DTAA - an Introduction
By the very nature of their status as non residents they are likely to be covered by the laws of at least two countries, one country of which they are residents and second where such persons are earning income as non residents. It is, therefore, essential to know the manner in which income earned by them will be taxed whether in the country of their residence or the country where income is earned.
In fact most of the countries in the world that have taken to levy tax on income/capital have adopted more or less similar pattern, i.e. Income Tax is imposed on the person who has derived the income and the tax is levied at the place where either he has earned it or where he resides.
Due to phenomenal growth in international trade and commerce and increasing interac tivity among the nations, residents of one country extend their sphere of business opera tions to other countries where income is earned. It is in the interest of all countries to ensure that undue tax burden is not cast on persons earning income by taxing them twice, once in the country of residence and again in the country where the income is derived. At the same time sufficient precautions are also needed to guard against tax evasion and to facilitate tax recoveries.
|Need for Double Taxation Avoidance Agreements
Double taxation can be defined as the levy of taxes on income / capital in the hands of the same tax payer in more than one country in respect of the same income or capital for the same period. The problem gets complicated since taxation schemes of different countries contain divergent notions regarding definition of income as source. The position becomes anomalous in a situation where an assessee residing in one country earns income in another country, and the tax rates in both the countries are higher than 50%. If taxed at both places on the same income the assessee will be left with a negative income. This is bound to affect the economic growth.
To avoid such a hardship to individuals and also with a view to seeing that national economic growth does not suffer, Double Taxation Avoidance Agreements (D.T.A.A.) are entered into with other countries.
Such tax treaties, therefore, serve the purpose of providing full protection to tax payers against double taxation and thus prevent the discouragement which double taxation may provide in the free flow of international trade and international investment. Be sides, such treaties generally contain provisions for mutual exchange of information and for reducing litigation.
|DTA Agreement by Govt. of India with
Coming to specific provisions contained in the Indian Income-tax Act, such tax trea ties are made under the provisions contained in Section 90 of the Income-tax Act which enables the Central Government to enter into treaties to avoid double taxation. Govt. of India has entered into DTA agreement with several countries, some of the main countries are Australia, Bangladesh, Canada, China, Germany, Japan, Malaysia, Mauritius, Nepal, Singapore, Srilanka, UAE, UAR, UK, USA, USSR etc.
|Salient Features of DTA agreements between
India & others
A typical DTA Agreement between India and another country covers only residents of India and the other contracting country who has entered into the agreement with India. A person who is not resident either of India or of the other contracting country cannot claim any benefit under the said DTA Agreement. Such agreement generally provides that the laws of the two contracting states will govern the taxation of income in respective states except when express provision to the contrary is made in the agreement.
A situation may arise when originally the tax provision in the other contracting state gave concessional treatment compared to India at a particular time but Indian laws were subsequently amended to bring incidence of tax to a level lower than the tax rate existing in the other contra cting state.
Since the tax treaties are meant to be beneficial and not intended to put tax payers of a contracting state to a disadvantage, it is provided in Sec. 90 that a benefi cial provisions under the Indian Income Tax Act will not be denied to residents of contra cting state merely because the corresponding provision in tax treaty is less beneficial. Some Double Taxation Avoidance agreements provide that income by way of interest, royalty or fee for technical services is charged to tax on net basis.
This may result in tax deducted at source from sums paid to Non-residents which may be more than the final tax liability.
The Assessing Officer has therefore been empowered u/s 195 to determine the appropriate proportion of the amount from which tax is to be deducted at source. There are instances where as per the Income-tax Act, tax is required to be deducted at a rate prescribed in tax treaty. However this may require foreign companies to apply for refund. To obviate such difficulties Sec. 2(37A) provides that tax may be deducted at source at the rate applicable in a particular case as per section 195 on the sums payable to non-residents or in accordance with the rates specified in D.T.A. Agreements
|Taxation of Business Profits under DTA
One of the important terms that occurs in all the Double Taxation Avoidance Agree ments is the term 'Permanent Establishment' (PE) which has not been defined in the Income- tax Act. However as per the Double Taxation Avoidance Agreements, PE includes, a vide variety of arrangements i.e. a place of management, a branch, an office, a factory, a workshop or a warehouse, a mine, a quarry, an oilfield etc. Imposition of tax on a foreign enterprise is done only if it has a PE in the contracting state. Tax is computed by treating the PE as a distinct and independent enterprise.
In order to avoid double taxation it is provided that if a resident of India becomes liable to pay tax either directly or by deduction in the other country in respect of income from any source, he shall be allowed credit against the Indian tax payable in respect of such income in an amount not exceeding the tax borne by him in the other country on that portion of the income which is taxed in the said other country. The same benefit is available to the resident of the other Country, on income taxed in India.
In respect of incomes on which taxes are either exempted or reduced, the country of residence will not take the exempted income into account while determining the tax to be imposed on the rest of the income.
Taxation of income from Air and Shipping Transport under DTA agreement
Income derived from the operation of Air transport in international traffic by an enterprise of one contracting state will not be taxed in the other contracting state.
In respect of an enterprise of one contracting state, income earned in the other contracting state from the operation of ships in international traffic, will be taxed in that contracting state wherein the place of effective management of enterprise is situated. However some DTA agreement contain provisions to tax the income in the other contracting state also, although at reduced rate. These provisions do not apply to coastal traffic.
Taxation of income from Associated Enterprises under DTA agreements
In order to plug loop holes for tax evasion, a separate article in DTA agreement provides for taxing the notional income deemed to arise on account of an enterprise of one contracting state participating directly/indirectly in the management of another enter prise in the other contracting state or where some persons participate directly or indi rectly in both the enterprises under conditions different from those existing between the independent enterprises.
Taxation of Dividend income under DTA agreement
Dividend paid by a Company which is a resident of a Contracting State to a resident of the other Contracting State will be taxed in both the States.
Taxation of Interest Income under DTA agreement
Interest paid in a Contracting State to a resident of the other Contracting State is chargeable in both the States.
Taxation of income from Royalties under DTA agreement
Regarding Royalties arising in a Contracting State and paid to a resident of the other Contracting State:-
Some DTA agreements provide for taxation in the other Contracting State.
Some agreements provide for taxation in the contracting State.
Some agreements provide for taxation in both the States.
Taxation of Income from Capital Gains under DTA agreement
Capital Gains will be taxed in the state where the capital asset is situated at the time of sale.
Taxation of income from Professional Services under DTA Agreement
Income will be taxed in the state where the person is resident. However if he has a fixed base in the other Contracting State, the income attributable to the fixed base will be taxed in the other contracting state.
|Resolving of disputes in interpretation
of the terms of DTA Agreement
If there are any disputes in the interpretation/ implementation of the terms of DTA Agreements, normal remedies of appeal etc. provided in the Income-tax Act are available to the aggrieved party. The DTA Agreements also contain mutual agreement procedure. The aggrieved party may approach the Competent Authority of the contracting State wherein he is a resident, who, if he is unable to resolve the dispute by himself will approach the competant Authority of the other Contracting State to arrive at a solution after mutual discussion.
In respect of interpretation of terms contained in DTA Agreement The Indian Income-tax Act contains a special provision which is offered to those Non- residents who would like to have advance ruling on a matter of law or fact in relation to a transaction undertaken/proposed to be undertaken by them.
The facilities available in such provision can be availed of by the Non-residents in the matters regarding Double Taxation of income also. More on this matter will be discussed in a separate chapter on the subject.
|Double Taxation Relief where no DTA
Agreements are entered into
Apart from relief to persons of a country where India has entered in Double Taxation Avoidance Agreement, there is relief given even in cases where the Government of India has not entered into DTA agreement with any foreign country. In such cases if any resident Indian produces evidences to show that, he has paid any tax in any country with which the Government of India has not entered into a DTA agreement, tax relief on that part of his income which suffered taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income whichever is less shall be allowed as deduction u/s.91 while calculating his tax liabili ties on such income.
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