CA Relief from Double Taxation

INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
RELIEF FROM DOUBLE TAXATION
Presentation by: T.P.OSTWAL

26/07/2013 (c) T.P.Ostwal & Associates 1
SYNOPSIS
Causes of double taxation
What is double taxation relief (DTR)

Unilateral relief Treaty relief

Credit method Exemption method
Tax sparing Underlying tax credit Other methods for relieving double taxation Some issues
CAUSES OF DOUBLE TAXATION

Rules of taxation
Article 265 of Constitution (Indian context)

[No tax shall be levied or collected except by authority of law.]
Sufficient nexus between subject and state.

Residence rules Source based rules
[Supreme Court Ruling- Ishikawajma-Harima Heavy Industries Ltd. vs. DIT (288 ITR 408)]
Taxation systems:

worldwide taxation system [eg. USA, UK, India, etc] territorial taxation system [eg. HK] modified territorial taxation system [eg. Singapore]
(c) T.P.Ostwal & Associates 3
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CAUSE OF DOUBLE TAXATION

Same income taxed twice
Residence in two states

Residence in state A and source in state B Juridical double taxation Economic double taxation Unilateral; or
Concept of:

DTR:
Bilateral
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(c) T.P.Ostwal & Associates
UNILATERAL TAXATION RELIEF-INDIA S.91 OF ITA

Resident in India only eligible for UTR Income accrued outside India (say, in state X) and
That income NOT deemed to accrue in India
Foreign source income
No DTAA with state X [providing for (a) relief or, (b) avoidance of, double taxation]
What about notified territories with which only exchange of information or assistance in tax collection treaty signed? Will they be out of section 91? What about the countries with whom limited treaty exist [eg. India-Ethiopia] and subject income is not covered in treaty? Whether s.91 will rescue the case?
Tax paid in state X-federal, state or municipal
By deduction or otherwise
Relief from Indian income tax available Relief only on doubly taxed income
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UNILATERAL TAXATION RELIEF - INDIA

Relief at

Indian rate of tax. or Rate of tax in state X
Whichever is lower
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S. 91 Foreign Source Income ??

Loan for Indian project
SBT BANK Ltd India
SBT HK Branch
HK income tax on interest income
Interest
ABC Ltd HK
-Whether tax credit for HK corporate tax available? - Whether tax credit for Indian TDS, if any, available?
Power project set up contract
Indian Project Office
Indian Customer
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ILLUSTRATION
Income in foreign state A Indian income Global income Tax rate in foreign state A
Tax rate in India

Indian tax on global Income Foreign tax on foreign income Indian tax on foreign income
CASE 1 CASE 2 100 100 150 150 250 250 25% 35% 30% 30% 75 75 25 35 30 30
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ILLUSTRATION
DTR in India Effective tax out go

CASE 1 25 25 50 75
CASE 2 30 35 45 80
In State A In India Total income tax paid
Effective global tax rate
30%
32%
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TREATY RELIEF
Article 23 of MC- Methods of Elimination of Double Taxation.

Article 23A : Exemption Method

Article 23B : Credit Method
Credit subject to the restriction and limitation of the domestic tax laws Covers cases of juridical double taxation [same income taxed in the hands of same person by more than one state] Does not cover all cases of Economic double taxation [same income taxed in the hands of different persons by different states]
MAP is remedy for economic double taxation ??
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INTERNATIONAL JURIDICAL DOUBLE TAXATION
Concurrent full liability to tax ( e.g. residence in both states)

Residence of state R taxed in state R on residence rules and taxed in
state S on source rules
PE situations-NR in both states.
(Concurrent limited tax liability)
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TREATY PROVISIONS
Shall be taxable only(normally) in state R
No DTR required
DTR required to be given by state R
May be taxed ( in state S)
Article 23 provides rules for DTR by state R and not by state S.
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EXEMPTION METHOD
R does not tax income which may be taxed in S.
R does not tax income which shall be taxable only in S

Two Methods:
Income taxed in S not taken into account at all by R (full exemption method) Income taxed in S not taxed by R, but R takes into consideration the income for tax rate purposes (exemption with progression)
Effective only where progressive rates of taxes exist, mostly in case of individuals
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CREDIT METHOD
State R includes the income earned in State S for computing total tax
liability in State R
Out of the total tax liability in state R, credit is given for tax paid in S
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CREDIT METHOD
Two approaches:
R allows deduction of total amount of tax paid in S

(Full Credit Method) R allows deduction restricted to that part of tax payable in R which is appropriate to the income earned in S (Ordinary Credit Method)
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CREDIT METHOD
Exemption Method = income exclusion
V/s.
Credit Method
= tax credit .
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ILLUSTRATIONS
Income from R
80,000
Income from S
Total Income Rate of Tax in R :

20,000
1,00,000
30% 35%
On 80,000 On 1,00,000
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ILLUSTRATIONS
Rate of Tax in S :

Case I
Case II
:
:
20%
40%
Assume no DTAA relief /no Unilateral relief. Total Tax Liability:

Case I : (R)35,000 + (S) 4,000=39,000 Case II: (R)35,000 + (S) 8,000= 43,000
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FULL EXEMPTION METHOD

CASE I
Tax in R (30% of Rs 80,000) Tax in S (20 or 40% of 20K)
CASE II 24,000 8,000
24,000 4,000
Total global tax

(Notional) DTA relief
28,000
11,000 39,000
32,000
11,000 43,000
In full exemption method, rate of tax in foreign jurisdiction does matter
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EXEMPTION WITH PROGRESSION

CASE I
Tax in R(35% of Rs 80,000) Tax in S Total tax
CASE II
28,000 4,000 32,000 7,000 39,000
28,000 8,000 36,000 7,000 43,000
(notional) tax relief
In exemption with progression, level of foreign source income matters in addition to foreign tax rate.
CREDIT METHOD (FULL CREDIT METHOD)

CASE I
Tax due in R(35% of 1,00,000)
Tax due in S
CASE II
35,000
8,000
35,000
4,000
Tax credit:
Total tax payable in State R
Foreign tax credit by R (full) Final tax payable in R
35,000
4,000 31,000
35,000
8,000 27,000
In full tax credit, total amount of foreign taxes is credited to the extent does not exceed overall state R taxes.
CREDIT METHOD (ORDINARY CREDIT-simplistic illustration)

CASE I
Tax in R(35% of 1,00,000)
Tax in S
CASE II
35,000
4,000 35,000 7000 35,000 7000 4000 31000
35,000
8,000
Tax credit:
Total tax payable in state R State R tax on foreign source income Qualifying tax credit Final tax payment in state R
7000 28000
In ordinary tax credit, tax credit is restricted to state R tax or foreign tax on foreign income whichever is lower. Excess FTC?
ORDINARY CREDIT METHOD LIMITATIONS:

Usual restrictions:
item or source basis

per category basis
averaging of foreign taxes on income falling in same category averaging of foreign taxes on incomes arising in single country
per country basis
worldwide or overall limitations averaging of foreign taxes on all foreign source income
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Ordinary Credit Method:Limitations:

Effect of Country R Source Rules.
Effect of Country R tax computation rules

Effect of Country R expense allocation rules
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UNDERLYING TAX CREDIT

Concept:
A form of relief from Economical Double Taxation.

Co-relation of dividends to post tax profits of subsidiary Effect of exchange rates
Computation Methodology

Requirement of substantial shareholding Also applied under CFC regulations Indias tax treaty with Singapore and Mauritius provide for
underlying tax credit.
Some countries specify upto how many layers, UTC can be claimed UTC under national tax law eg. Singapore, UK, Mauritius etc.
TAX SPARING
Not found in MC -but found in some treaties.
Generally, national tax laws of countries not provide for Tax Sparing;
only treaty may provide for same.
Exception: national tax credit rules of Mauritius.
Income exempt in S for some reasons
(like economic development etc)

Income taxable in R R provides for deemed tax exemption or deemed tax credit.
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TAX SPARING
Generally attached to income like:
Dividend
Royalty Foreign branch / PE income Interest
May provide for more or less than the Country S tax waived(e.g. Source country taxes spared are not grossed up (No Phantom
India-Cyprus on interest @ 10%, Cyprus=> India: dividend @10%)
Grossing up)
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Other Methods
Expense deduction for foreign tax
Carry forward / backward of excess tax credit

Countries have exhaustive foreign tax credit rules.
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Some issues
26/07/2013
Date: 18th May 2007

(c) T.P. Ostwal
| 29
Some issues
Qualifying foreign taxes?
Same or similar taxes

Taxes on income
What if foreign taxes are paid on presumptive basis? Whether foreign taxes to be grossed up in case of underlying tax
credit?...tax sparing?
Whether foreign taxes can be claimed as tax deductible expense? Issues concerning source of income?

Section 91 Tax treaty

26/07/2013
..some issues
Amount of maximum tax credit?
How to quantify residence country tax on foreign source income?

What if tax exemptions or deductions exist on foreign source income? Average rate to be applied? Issues related to allocation of expenses to foreign source income?
Issues connected with underlying tax credits:

Upto how many layers? How to compute? Level of shareholding?
Proof of foreign taxes?

..some issues
Whether accrued foreign tax but not paid, can be claimed as foreign
tax credit?
What if there is change in foreign tax liability subsequently?

Additional liability Refund of foreign taxes
What exchange rate to be applied for conversion of foreign taxes into
Indian rupees?
Carry back or carry forward of foreign tax credit?
Whether excess foreign tax credit can be claimed as expenses?

Whether tax credit can be claimed for interest and / or penalty or fine
paid in foreign country?
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some issues
ESOPs
Perquisites in state A in year of exercise Capital Gains in state B in year of sale
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Sec. 90 of ITA
[Agreement with foreign countries or specified territories. 1490. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India, (a) for the granting of relief in respect of (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. Explanation 1.For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Explanation 2.For the purposes of this section, specified territory means any area outside India which may be notified14a as such by the Central Government.]
Sec. 91 of ITA

Countries with which no agreement exists. 1791. (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income 18 at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. (2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him (a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or (b) of a sum calculated on that income at the Indian rate of tax; whichever is less. (3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. Explanation.In this section, (i) the expression Indian income-tax means income-tax 19[***] charged in accordance with the provisions of this Act; (ii) the expression Indian rate of tax means the rate determined by dividing the amount of Indian income -tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this 20[Chapter], by the total income; (iii) the expression rate of tax of the said country means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country; (iv) the expression income-tax in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. 26/07/2013 (c) T.P.Ostwal & Associates 35
THANK YOU
T.POSTWAL FCA@VSNL.COM +919004660107
26/07/2013
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CA Relief from Double Taxation

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INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

RELIEF FROM DOUBLE TAXATION

Presentation by: T.P.OSTWAL

What is double taxation relief (DTR)

Credit method Exemption method

CAUSES OF DOUBLE TAXATION

Article 265 of Constitution (Indian context)

Sufficient nexus between subject and state.

Residence rules Source based rules

CAUSE OF DOUBLE TAXATION

Residence in two states

(c) T.P.Ostwal & Associates

UNILATERAL TAXATION RELIEF-INDIA S.91 OF ITA

That income NOT deemed to accrue in India

Foreign source income

Tax paid in state X-federal, state or municipal

UNILATERAL TAXATION RELIEF - INDIA

Indian rate of tax. or Rate of tax in state X

(c) T.P.Ostwal & Associates

S. 91 Foreign Source Income ??

SBT BANK Ltd India

Power project set up contract

Indian Project Office

(c) T.P.Ostwal & Associates

Tax rate in India

(c) T.P.Ostwal & Associates

In State A In India Total income tax paid

Effective global tax rate

(c) T.P.Ostwal & Associates

Article 23A : Exemption Method

MAP is remedy for economic double taxation ??

(c) T.P.Ostwal & Associates

INTERNATIONAL JURIDICAL DOUBLE TAXATION

Concurrent full liability to tax ( e.g. residence in both states)

state S on source rules

PE situations-NR in both states.

(Concurrent limited tax liability)

(c) T.P.Ostwal & Associates

May be taxed ( in state S)

Article 23 provides rules for DTR by state R and not by state S.

(c) T.P.Ostwal & Associates

R does not tax income which shall be taxable only in S

(c) T.P.Ostwal & Associates

(c) T.P.Ostwal & Associates

R allows deduction of total amount of tax paid in S

(c) T.P.Ostwal & Associates

(c) T.P.Ostwal & Associates

(c) T.P.Ostwal & Associates

Assume no DTAA relief /no Unilateral relief. Total Tax Liability:

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FULL EXEMPTION METHOD

CASE II 24,000 8,000

Total global tax

In full exemption method, rate of tax in foreign jurisdiction does matter

(c) T.P.Ostwal & Associates

EXEMPTION WITH PROGRESSION

28,000 4,000 32,000 7,000 39,000

28,000 8,000 36,000 7,000 43,000

(notional) tax relief

CREDIT METHOD (FULL CREDIT METHOD)

CREDIT METHOD (ORDINARY CREDIT-simplistic illustration)

ORDINARY CREDIT METHOD LIMITATIONS:

item or source basis