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International Taxation - Some very basics!

CA Madhvi 
Updated on 08 March 2017

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The nomenclature "International Taxation" has gained enough attraction amongst the tax practitioners during the last couple of years.

Personally, I have been introduced to the world of International Taxation when I had opted for Certificate Course on International Taxation by ICAI few years back and since then I have been in love with this subject.

Today, in this "Google" era, where whole world is on the edge of becoming one tiny village in this ever expanding Universe, this is the "Time" for those who want to excel in this particular area of practice.

In nutshell, international taxation deals with taxing those incomes which is generated in one country by resident of other countries. Thus, international tax deals with only direct taxes such as income tax, wealth tax.

If we look at our Income Tax Act, there are very few sections which deal with international tax (Isn’t it a relief!!)

There are two types of double taxation:

1. Economic Double Taxation

Economic double taxation refers to a situation where same income is taxed in hands of different tax payers. For e.g. Net profit earned by company is taxed in hands of company and when same is disturbed as dividend amongst shareholders, same is taxed in hands of them. (That’s why dividend is exempt income under domestic tax laws, it is a relief measure to curb economic double taxation)

2. Juridical Double taxation

Juridical Double taxation refers to a situation where income is taxable in a country on the basis of source and in other countries on the basis of residential status/domicile /citizenship. Here the real game (read dispute) begins!!Who will get the biggest piece of the cake? (Read share in tax revenue)

Bust western world had found a solution of this situation long ago(as usual!).

OECD:

Every one is aware of OECD (Organization for Economic Co-operation and Development). Basically, it’s a group of nations mainly consist of developed countries (read rich) countries. It has 35 permanent members as on date. India is not a member yet but acting as an observer.

OECD had come with first draft of Model Convention in 1963 to provide relief to judicial double taxation. Since then this treaty has been periodically updated along with its commentary and other additional materials. This model convention was last updated in the year 2014.

On following footsteps of OECD, US also came with its own model treaty.

The OECD model treaty follows resident taxing rules. i.e. each clause is drafted in a way that resident country gets maximum rights to tax the income.

So to support developing countries, UN(United Nations) also prepared model treaty which favour source tax regime. Because for developing countries, tax is one of the most crucial source of revenue.

So, we have following model treaties at present:

  • OECD model
  • UN model
  • US model

India follows both UN and OECD model. One can find combinations of both treaties

Characteristics in different treaties that India has entered into with different countries to mitigate juridical double taxation.

Basis of Charge:

The most common instance when advice on cross border transaction is sought, at the time of issuance of 15 CA-15CB certification.

I have often observed that practitioners directly jumped to respective treaty to find remedy and to give advice.

But here most fundamental check is to determine whether payment which is subject matter is income liable to tax as per the provisions of the Income Tax Act in hands of payee or not.

In our Income Tax Act, Section 4 is charging section, while section 5 and section 9 determine scope of total income. Thus, first one has to see whether such payment is hit by section 4,section 5 or section 9 ,if answer is affirmative then and then only on should go further to seek any relief is available either under the Act or in treaty.

If income is not chargeable to tax India as per provisions of domestic laws, then there is no need to proceeds towards treaty. Tax treaties do not have any power to levy tax. Only Act has such powers. Though one thing is established over the years beyond doubt that, if treaty provisions are more beneficial to the assessee then they will apply irrespective of provisions of the Income Tax Act.

Even though these are some of the basics on the subject but one can find plethora of judicial pronouncements by different courts, tribunals, AAR etc on these "Basics"!

Have pleasant taxing days ahead!


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