Presentation-CA Jimit Devani - Credit Mechanism - 16 October 2013

Credit
Mechanism
- CTC International
Tax Study circle
16 October 2013
Scenario 1 | Resident of two states
Where each Contracting State subjects the same person to tax on his worldwide
income or capital (concurrent full liability to tax)
X may be tax resident of State R1 and
State R2;
State R1 and State R2 will seek to tax his

global income
Whether Article 23 would deal with it?
Conflict resolved by Article 4 (Resident) tie breaker test

2013 KPMG , an Indian Partnership firm and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Scenario 2 | Resident of one state and source in other state

Where a person is a resident of Contracting State (State R) and derives
income from, or owns capital in, the other Contracting State (State S or E)
and both States impose tax on that income or capital
Conflict resolved by renunciation / sharing of the right Article 6 to 23

Types of double taxation
Juridical
double
taxation
Where the same income

or capital is taxable in the
hands of the same
person by more than one
state
Economic
double
taxation
Two different persons are
taxable in respect of the
same income or capital
Can both types of double taxation be dealt through a tax treaty?

2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Methods of
Elimination of
Double Taxation
Draft for Discussion
Types of double taxation relief
Elimination of
double
taxation
Non-treaty
countries
Treaty
countries
Unilateral credit
for residents
Section 91
Bilateral credit
Section 90 +
Article 23 of DTAA
Treaty relief
Article 23 of Model Convention - Methods of Elimination of Double Taxation.
Covers cases of juridical double taxation
Does not cover all cases of Economic double

taxation
Methods of credit
Methods of
granting
credit
Exemption
method
Article 23A
Full
exemption
Exemption
with
progression
Credit
method
Article 23B
Full credit
Ordinary
credit
Exemption vs. Credit
Exemption method
Credit method
Income exclusion i.e. State R

does not tax the income
which may be taxed in State
S
Income inclusion However,

State R gets only a
subsidiary right to tax
No overlapping of taxing
rights
Credit available of tax paid in

State S i.e. only additional
amount of tax payable in
State R
Exemption method
Concept
Full exemption
Completely exempt in State R
irrespective of rate of tax in State
S
Most beneficial method for
taxpayer
Exemption with
progression
Exempt in State R
Included for determining tax rate
on rest of income in State R
Normally followed method
10
Illustration | Facts
Total income
1,00,000
Derived from State R
80,000
Derived from State S
20,000
Rate of tax in State R
Income of 100,000 35%

Income of 80,000 30%
Case (i) 20% - tax on 20,000 4,000
Case (ii) 40% - tax on 20,000 8,000
Rate of tax in State S

Tax in State R (if no Convention)
35,000
Source: OECD Commentary
11
Illustration | Full exemption method

Particulars
Case (i)
Case (ii)
Tax in State R @ 30% on 80000 (A)
24,000
24,000
Tax in State S @20% on 20000 (B)
4,000
8,000
Total taxes if DTAA (C) = (A) + (B)
28,000
32,000
Tax in State R (Assuming no DTAA) (D)
35,000
35,000
Total taxes if no DTAA (E) = (D) + (B)
39,000
43,000
Relief given in State R = (E) (C)
11,000
11,000
Here, State R shall exempt 20,000 and tax only 80,000
12
Illustration | Exemption with Progression

Particulars
Case (i)
Case (ii)
Tax in State R @ 35% on 80000 (A)
28,000
28,000
Tax in State S @20% on 20000 (B)
4,000
8,000
Total taxes if DTAA (C) = (A) + (B)
32,000
36,000
Tax in State R (Assuming no DTAA) (D)
35,000
35,000
Total taxes if no DTAA (E) = (D) + (B)
39,000
43,000
7,000
7,000
Relief given in State R = (E) (C)

State R imposes tax on 80,000 at the rate of tax applicable to total income
wherever it arises (1,00,000) i.e. @ 35%
13
Credit method
Concept
Full credit
Ordinary credit
Credit in State R for entire amount

No restrictions on credit
Proportionate tax credit

Cannot exceed tax liability in State
R
Normally followed method
15
Illustration | Facts
Total income
1,00,000
80,000
20,000

35%
Case (i) 20% - tax on 20,000 4,000
Case (ii) 40% - tax on 20,000 8,000
Tax in State R (if no Convention)
35,000
Total Tax
Case (i) 39,000

Case (ii) 43,000
16
Illustration | Full credit method

Particulars
Case (i)
Case (ii)
35,000
35,000
4,000
8,000
Tax due (C) = (A)-(B) (if DTAA)
31,000
27,000
Total taxes in State R (D) (Assuming no DTAA)
35,000
35,000
Relief given in State R (D) (C) (under DTAA)
4,000
8,000
Tax in State R @ 35% on 1,00,000 (A)

Less: Tax in State S @ 20%/40% on 20,000 (B)
Here, State R shall give credit of entire tax paid in State S

irrespective of tax paid on the same income in State R
17
Illustration | Ordinary credit method

Particulars
Case (i)
Case (ii)
35,000
35,000
4,000
7,000
Tax due if DTAA (C) = (A) (B)
31,000
28,000
Total taxes
35,000
36,000
4,000
7,000
Tax in State R @ 35% on 1,00,000 (A)

Less: Tax in State S @ 20% on 20,000 in case(i) and
as above in Case (ii) (and not 40% of 20,000) (B)
Relief given in State R

State R allows deduction of tax in State S on the income from S, but in no case
allows more than the portion of tax in State R attributable to the income from S
(maximum deduction). The maximum deduction would be 35% of 20,000 = 7,000
18
Special Types of Tax

Credit
Tax sparing | Concept
Not found in
model
convention but
found in some
treaties
Credit is given
for taxes that
would have
been payable
in State S
during the tax
holiday period
Protects fiscal
incentives
provided by a
country
Usually, State
R would
provide for
deemed tax
exemption or
deemed tax
credit
20
Tax sparing | Illustration (1/2)

Facts:
Total income
1,00,000
80,000

Tax free income (incentives provided by
State S)
20,000
20% - tax on 15,000 3,000
5,000
Income of 1,00,000 - 35%
21
Tax sparing | Illustration (2/2)
Particulars
Amount
Tax in State R @ 35% on 1,00,000
Amount
35,000
Less: Tax credit available

Tax paid in State S (15,000 @20%)
3,000
Tax Spared = 5,000 @ 20%,
1,000
4,000
Tax due
31,000
Total taxes
34,000
Relief given in State R
4,000
22
Underlying tax credit (UTC) | Concept
Available to company
resident in State R
which receives dividend
from company resident
in State S
Considers tax paid by

company in State S
Computation
methodology - Corelation of dividends to
post tax profits of
subsidiary
A form of relief from

economic double
taxation
Requirement of
substantial shareholding
23
UTC | Illustration (1/2)
Company in State S
Amount
PBT
3,00,000
Tax @ 30%
90,000
PAT
2,10,000
Dividend distribution
2,10,000
Company in State R holds 80% stake in Company in State S and receives dividend of 1,68,000
(210000@80%) from Company in State S
Tax deducted at source by State S 33,600 (168,000@20%); Net dividend received by Company in
State R 1,34,400
Tax rate in State R 35%

Assumption: Dividend Income is the only income of Company in State R and it has no deductible
expenses
24
UTC | Illustration (2/2)

Particulars
Amount
Net Dividend Income received in State R
1,34,400
Add: Taxes withheld

Gross Dividend Income
Underlying tax credit = Gross Dividend / Distributable profits *
Actual tax paid on those profits (1,68,000 / 2,10,000 * 90,000)
33,600
168,000
72,000
25
Indian tax treaties
Indian Treaties usually follow the

ordinary credit method of
granting tax credit
The only treaty where full credit is

available
Namibia
Treaties containing all the three

methods of elimination of double
taxation, viz. exemption, credit
and tax sparing for different types
of incomes
Bulgaria
Czechoslovakia
Poland
Various treaties which provide for

UTC in respect of dividend income
26
Certain Issues (1/2)

Whether tax credit can be claimed in the
year of payment in foreign country or in
the year in which income is offered for tax
in the resident country ?
Whether credit is available even if income

is not subject to tax in State S?
Whether tax credit available on interest or
penal sums paid in foreign country?
Whether relief u/s 91 can be taken in
respect of incomes not covered within the
purview of DTAAs?
Credit for Dividend Distribution Tax and
Fringe Benefit Tax paid?
27
Certain Issues (2/2)
Whether credit can claimed against MAT

paid in India?
Whether credit can be claimed in case of
different treatment given by State S?
Characterisation of income
How to claim credit in State R when there

are profits / losses from one or more
foreign jurisdictions?
Whether reliance can be placed upon the
certificate issued by the revenue
authorities of State S?
28
Thank You
Jimit Devani
Senior Manager KPMG
jimitdevani@kpmg.com
+91 98207 51951
Disclaimer:
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date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough
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provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the
future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
2013, KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
29

Presentation-CA Jimit Devani - Credit Mechanism - 16 October 2013

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Credit

Scenario 1 | Resident of two states

State R1 and State R2 will seek to tax his

Whether Article 23 would deal with it?

Conflict resolved by Article 4 (Resident) tie breaker test

Scenario 2 | Resident of one state and source in other state

Conflict resolved by renunciation / sharing of the right Article 6 to 23

Types of double taxation

Where the same income

Can both types of double taxation be dealt through a tax treaty?

Draft for Discussion

Types of double taxation relief

Covers cases of juridical double taxation

Does not cover all cases of Economic double

Draft for Discussion

Exemption vs. Credit

Income exclusion i.e. State R

Income inclusion However,

Credit available of tax paid in

Derived from State R

Derived from State S

Rate of tax in State R

Income of 100,000 35%

Rate of tax in State S

Source: OECD Commentary

Illustration | Full exemption method

Tax in State R @ 30% on 80000 (A)

Tax in State S @20% on 20000 (B)

Total taxes if DTAA (C) = (A) + (B)

Tax in State R (Assuming no DTAA) (D)

Total taxes if no DTAA (E) = (D) + (B)

Relief given in State R = (E) (C)

Source: OECD Commentary

Here, State R shall exempt 20,000 and tax only 80,000

Illustration | Exemption with Progression

Tax in State R @ 35% on 80000 (A)

Tax in State S @20% on 20000 (B)

Total taxes if DTAA (C) = (A) + (B)

Tax in State R (Assuming no DTAA) (D)

Total taxes if no DTAA (E) = (D) + (B)

Relief given in State R = (E) (C)

Credit in State R for entire amount

Proportionate tax credit

Derived from State R

Derived from State S

Rate of tax in State R

Tax in State R (if no Convention)

Case (i) 39,000

Source: OECD Commentary

Illustration | Full credit method

Tax due (C) = (A)-(B) (if DTAA)

Total taxes in State R (D) (Assuming no DTAA)

Relief given in State R (D) (C) (under DTAA)

Tax in State R @ 35% on 1,00,000 (A)

Source: OECD Commentary

Here, State R shall give credit of entire tax paid in State S

Illustration | Ordinary credit method

Tax due if DTAA (C) = (A) (B)

Tax in State R @ 35% on 1,00,000 (A)

Relief given in State R

Special Types of Tax

Tax sparing | Concept

Tax sparing | Illustration (1/2)

Derived from State R