Ahmedabad, January 2017 - K C Mehta & Co · 2017-01-21 · • India follows residence based...
Transcript of Ahmedabad, January 2017 - K C Mehta & Co · 2017-01-21 · • India follows residence based...
OECD MC
Article 23 to 26
Arpit Jain
Diploma in International Taxation Course
Ahmedabad, January 2017
Elimination of Double TaxationArticle 23
• Principles of Taxation
– Residence Based
– Source Based
– Citizenship Based
• Taxation Systems
– Worldwide [e.g.. USA, UK, India]
– Territorial [e.g.. HK]
– Modified territorial taxation [e.g.. Singapore]
Taxation Systems
• India follows residence based taxation - Residents taxed on global income
• Tax in India under Sections 4, 5 or 9 by way of residence or source in India
• In following circumstances, double taxation may occur
– A resident in India is also resident of other country which follows resident based
taxation
– A US resident has income from India (COR: US, COS: India)
Example: X Co. has provided some technical services in India. In India it will be
taxable u/s 9(1)(vii) whereas in US, X Co (a resident of US) will be liable to pay
tax on its global income
Double Taxation
INDIA R USA
USAIndiaX
CoSource Residence
• Juridical Double Taxation
– Same person taxed in two (or more) different countries for the same
income
• Dual Residence
• Based on residence in one country and source in another
• Economic Double Taxation
– Two different taxpayers taxed on same income in two (or more)
countries
• Eg. DDT on Dividends, Transfer Pricing adjustments, etc.
Types of Double Taxation
Typically DTAA eliminates Juridical Double Taxation
• Unilateral Relief
– Under Domestic Laws
– Section 91
• Bilateral Relief
– Under DTAAs
– Section 90 / 90A
Elimination of Double Taxation
• Provisions under the domestic law granting foreign tax credit under
DTAA
• Section 90 / 90A: Agreement with foreign countries / specified territories /
specified associations
– Govt may enter into agreement with ‘foreign countries’ or ‘specified
territories’
• for granting relief in respect of income which has been doubly taxed
• for avoidance of double tax
– The more beneficial provision applicable – DTAA or IT Act 1961
• GAAR overrides !! [GAAR postponed to A.Y. 2018-19]
• Tax Residency certificate (TRC) must for an NR to claim treaty benefits
in India [w.e.f. 1.4.2013]
Section 90 / 90A
• Section 91 of the Act grants unilateral Tax Credit in case where
no DTAA exists.
• 91. (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…
• Conditions:
– Applies only to Resident
– In respect of income accruing outside India
– Income should not be deemed to accrue or arise in India
– For taxes paid in any country with which there is no DTAA
• Limited DTAA / EOI Agreements?
Unilateral Tax Credit..
• Amount of deduction of taxes by India =
• Doubly taxed income X min of (rate of foreign tax OR Indian tax)
• Example (‘Individual’ Indian resident):
• Indian income = 11,00,000 out of which 3,00,000 is from Chile
(tax paid is 1,00,000
Particulars India Chile Total
Income 11,00,000 3,00,000 11,00,000
Tax 1,60,000 1,00,000 2,80,000
Rate 14.55% 33.33%
Relief 3,00,000 X 14.55% = 43,636
..Unilateral Tax Credit..
• Foreign tax rate
– “(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;”
..Unilateral Tax Credit..
• Example: An Indian resident has a PE in Chile. This PE earns
$100 from Germany and this income is subject to withholding tax
in Germany (say $20). Let assume that as per Chile laws, this
$100 is taxable in Chile at 25%, i.e. $25 and Chile grants credit
of the foreign tax paid ie $20. $100 taxable in India since it is
income earned by Indian resident.
– Tax payable in Chile: $25
– Credit of foreign tax paid: $20
– Tax actually paid in Chile: $ 5 (25-20)
– What will be the tax paid in Chile for the relief u/s 91? - $5 or $25?
..Unilateral Tax Credit..
• Tata Sons [DCIT v. Tata Sons Limited (ITA No. 4776)] – Mumbai
Tribunal
– US has a federal system wherein States have autonomy in levying state
income taxes
– US constitution does not permit Federal Government to enter into treaty with
respect to foreign countries for giving relief
– Indo – US Treaty – Taxes covered includes only federal tax
– Federal Tax in US: 35% and state tax can vary from 3 % to 11 %
• Tribunal held that under treaty, only 35% credit will be given whereas
under the provisions of the Act u/s. 91, 38.5% credit is available. Since
Act is beneficial, provisions of the Act shall apply.
• Hence, credit of State as well as Federal Tax paid in USA may be eligible
for credit under Section 91
..Unilateral Tax Credit
• Basic model conventions – OECD, UN, US
– OECD Model convention is followed in this presentation
• Article 23 of OECD - Elimination of Double Taxation
– Exemption method - Resident State grants complete exemption on
the income taxed in the Foreign State
– Tax Credit method - Resident State grants credit on the foreign tax
paid
• Article 23 governs taxation of Resident State
Bilateral Relief
Bilateral Relief Methods
Bilateral Relief
Exemption Method
Full Exemption
Bangladesh (PE Profits)
Brazil (dividend)
Exemption with
progression
Credit Method
Full Credit
India-Namibia DTAA
India-Canada DTAA (for
Canada)
Ordinary Credit
Most of Indian DTAA
Underlying tax credit
Singapore DTAA, -Mauritius
DTAA
Tax sparing credit
UK, Singapore, Italy
• Article 23A : Exemption method
• India rarely follows the exemption method
• In the following treaties with India, exemption method has
been followed:
• By both the CS:
Bulgaria, Poland (old treaty before Revision) and Egypt (United
Arab Republic)
• By the other CS (i.e. the other CS adopts exemption method and
India adopts Tax Credit method):
Austria, Belgium, Turkey
Exemption method
• Article 23A : Exemption method
• Para 1 – basic provision
• Where a resident of a Contracting State (say, Indian R.) derivesincome or owns capital which, in accordance with the provisionsof this Convention, may be taxed in the other Contracting State(say, Egypt), the first-mentioned State (i.e. India) shall, subject tothe provisions of paragraphs 2 and 3, exempt such income orcapital from tax.
• Exemption granted by the Resident State
• Exemption granted only if income is taxable in other Stateunder the treaty
Para 1 of Art. 23A
Resident State completely exempts the income
• Para 2 – the Exceptions
• Where an Indian resident derives items of income which, in accordance
with the provisions of Articles 10 (Dividends) and 11 (interest), may be
taxed in Egypt, India shall allow as a deduction from the tax on the
income of the Indian Resident an amount equal to the tax paid in Egypt.
Such deduction shall not, however, exceed that part of the tax, as
computed before the deduction is given, which is attributable to such
items of income derived from Egypt.
• Dividend and Interest are exceptions to the exemption method and
follow Tax Credit (TC) method.
• Such deduction is subject to the Indian Tax attributable on the
income so taxed in Egypt
Para 2 of Art. 23A
Dividend and Interest always follow TC method
• Para 3 – Inclusion of Exempt Income
• Where in accordance with any provision of the Convention income
derived or capital owned by an Indian resident is exempt from tax in
India, India may nevertheless, in calculating the amount of tax on the
remaining income or capital of such Indian resident, take into account
the exempted income or capital.
• This becomes relevant in case of a person who is subjected to
progressive taxation, e.g. Individuals
• Could be also relevant when there are additional taxes payable
beyond a certain thresh-hold - Surcharge
Para 3 of Art. 23A
Exempt income included for rate purpose
• The provisions of paragraph 1 shall not apply to income derived or
capital owned by a resident of a Contracting State where the other
Contracting State applies the provisions of this Convention to exempt
such income or capital from tax or applies the provisions of paragraph 2
of Article 10 or 11 to such income.
• Example:
• Indian resident derived income from Egypt (Exemption method followed)
• India will exempt such income provided it is taxable in Egypt under Indo
Egypt treaty
• Egypt tax authorities take a view that such income is not taxable in
Egypt under the treaty
Para 4 of Art. 23A
This provision not there in any Indian treaty
• Article : 23B
• Under Tax Credit method, the Resident State retains the right
to tax a particular income.
• Tax Credit method is adopted in most of the Indian treaties
Tax Credit method
• Where an Indian Resident derives income or owns capital which,in accordance with the provisions of this Convention, may betaxed in UK, India shall allow:
a) as a deduction from the tax on the income of that Indianresident, an amount equal to the income tax paid in UK;
b) as a deduction from the tax on the capital of that Indianresident, an amount equal to the capital tax paid in UK.
Such deduction in either case shall not, however, exceed thatpart of the income tax or capital tax, as computed before thededuction is given, which is attributable, as the case may be, tothe income or the capital which may be taxed in that other State.
• India to grant deduction of the taxes paid in UK
• Such deduction is subject to the Indian Tax attributable onthe income so taxed in UK
Para 1 of Art. 23B
• Where in accordance with any provision of the Convention
income derived or capital owned by an Indian resident is exempt
from tax in India, such State may nevertheless, in calculating the
amount of tax on the remaining income or capital of such Indian
resident, take into account the exempted income or capital.
Para 2 of Art. 23B
• What is tax attributable to Indian income?
– Relief provided based on incremental tax basis or on basis of
tax paid
• What is Indian tax payable?
– Does it include DDT?
Questions
Mr X an Indian resident has a PE in US
USA
• Mr X earns $10,000 (INR 500,000)
• Tax paid is $4,000 (INR 200,000, 40%)
India
• Income: INR 15,00,000
• Tax payable: INR 2,80,000
Global - India
• Income: INR 20,00,000
• Tax payable: INR 4,30,000 (21.5%)
• Tax paid in US: INR 2,00,000
Credit of tax paid on incremental basis (1) or on the basis of rate of
tax (2) ?
Computation issues 1
Subject to Indian tax on
income earned in US:
(1) 4,30,000 – 2,80,000 =
1,50,000
OR
(2) 5,00,000 * 21.5% =
1,07,500
• Indian R. Co. has a branch in USA
• US profit: $ 100
• Tax Paid: $ 20
• Indian Co taxable profit : (-INR 50,000)
• Tax : 0
• US Co. tax profit : $100 * say 50 = INR 5,000
• Indian Co tax profit : (-INR 45,000)
• Indian Co. tax payable = [Book profit = (-3,000) + 5,000 = 2,000*18%
=INR 360]
• Tax Credit: INR 1,000 (Min of 1,000 or 5,000 * 18%) or INR 360
• Different Accounting Period – PE Related Issues
• Forex conversion issues
• Exemptions
Computation Issues 2
• An indirect credit for tax levied on the profit of the company out of
which the dividend has been paid
– Avoidance of Economic Double Taxation
• Important treaties having UTC clause
• Both CS granting UTC
– Mauritius, Singapore
• Only other CS granting UTC
– Canada, China, Germany, Japan, UK, US
• Only India granting UTC
– None!!
Underlying Tax Credit..
• USA (UTC only for US residents)
• ARTICLE 25 - Relief from double taxation - 1. In accordance withthe provisions and subject to the limitations of the law of theUnited States (as it may be amended from time to time withoutchanging the general principle hereof), the United States shallallow to a resident or citizen of the United States as a creditagainst the United States tax on income—
• (a)… ; and
• (b) in the case of a United States company owning at least 10 percent of the voting stock of a company which is a resident of Indiaand from which the United States company receives dividends,the income-tax paid to India by or on behalf of the distributingcompany with respect to the profits out of which the dividends arepaid.
..Underlying Tax Credit..
• Japan treaty
– Where the income derived from India is a dividend paid by a
company which is a resident of India to a company which is a
resident of Japan and which owns not less than 25 per cent
either of the voting shares of the company paying the dividend,
or of the total shares issued by that company, the credit shall
take into account the Indian tax payable by the company paying
the dividend in respect of its income.
– Will ‘Indian Tax Payable’ include DDT ??
• Threshold
– 1. % of holding
– 2. manner of holding: direct, direct or indirect, not specified
– 3. holding of share capital, shares issued, voting power, etc
..Underlying Tax Credit..
..Underlying Tax CreditParticipation threshold for exemption
Country % holding % holding of- Benefit available
China* 10 Shares UTC
Germany* 10 Voting Dividend exemption
Japan* 25 Total shares issued OR Voting
power
UTC
Mauritius 10 Shares paying dividend UTC
Singapore 10 Share Capital UTC
UK* 10 Voting power UTC
US* 10 Voting power UTC
UTC: Underlying Tax Credit
•Not for the Indian Resident
• Extension of normal and regular tax credit to taxes that are spared,
forgiven or reduced by source country.
– Credit for taxes forgone by the source State as incentives for economic
development of source state
• Most of the treaties contain this provision in so far as credit for Indian
Taxes granted by the foreign country
– Developing Countries
– Tax laws are pre-dominantly used for growth
– If the Tax sparing provisions are not applied then the benefit given to a
person is taken away by other country and not retained by the
enterprise
• Here, tax is deemed to be paid in the foreign country
Tax Sparing..
• France (Tax sparing provision for the French Resident)
• (c) For the purposes of the tax credit referred to in sub-paragraph (a) (i) the term “tax
paid in India” shall be deemed to include any amount which would have been
payable as Indian tax under the laws of India, and within the limits provided for by
this Convention, for any year but for an exemption from, or reduction of, tax
granted for that year under :
• (i) section 10(4), 10(4B), 10(15)(iv) covering interest, section 10(6)(viia) covering
salaries and section 80L covering interest and dividends, of the Income-tax Act, 1961
(43 of 1961), so far as they were in force on, and have not been modified since, the
date of the signature of this Convention, or have been modified only in minor respects
so as not to affect their general character ; or
• (ii) any other provisions which may be enacted after this Convention enters into force
granting a deduction in computing the taxable income or an exemption or reduction
from tax which the competent authorities of the Contracting States agree to be for the
purposes of the economic development of India, if it has not been modified thereafter
or has been modified only in minor respects so as not to affect its general character.
..Tax Sparing
• Inter-play of various Factors
– Underlying Tax Credit
– Tax Sparing
• Foreign Tax Credit
– Tax Relief or Mode of Payment of Tax
Tax Credit
Mauritius – Interesting Case
UAE – FZE
MauCo – HoldCo
GBC1
InCo – Ultimate
HoldCo
Earns income of US $ 10 Million
Tax Nil – Remittance as Dividend 10 Million
Receives Dividend of US $ 10.00 Million
Tax @ 15 % of US $ 1.50 Million
Tax Credit of 80 % of tax1 i.e. us $ 1.20 Mi.
Tax Paid in Mauritius US $ 0.30 Million [3 %]
Remittance as dividend US $ 9.70 Million
- Deemed foreign tax credit of 80% in Mauritius
- UAE income gets distributed to shareholders with 3% ETR
- Additional 10% on dividends received by Indian resident individuals
Dividend Received in India US $ 9.70 Mi
Grossed up [UTC] US $ 10.00 Mi
Tax U/s. 115 BBD 15 % US $ 1.50 Mi
Tax Credit [Mauritius] US $ 1.50 Mi [Tax Paid Nil]
• Exemption from taxation for shareholder in a company
on dividends received, and / or potential capital gains arising on sale
of shares
• GERMANY
• ARTICLE 23 - Relief from Double taxation - 1. Tax shall be determined in
the case of a resident of the Federal Republic of Germany as follows :
• (a) …
• In the case of dividends exemption shall apply only to such
dividends as are paid to a company (not including partnerships)
being a resident of the Federal Republic of Germany by a company
being a resident of the Republic of India at least 10 per cent of the
capital of which is owned directly by the German company.
– Example: A German company receives dividend from its Indian subsidiary.
Such dividend will be completely exempt in Germany.
Participation Exemption
Issues in Claiming Tax Credit
“in accordance with the provision of the Convention
“may be taxed”
Inclusion of surcharge in
calculation of credit
Availability of credit for DDT
Impact of losses in State R
Timing of creditCarry forward/
Carry backward of excess credit
Administrative burden
Foreign Tax Credit
Rules Notified w.e.f.
1 April 2017
Foreign tax credit rules – Rule 128
• Furnish Form 67 before due date of filing tax return (even for carry back losses)
• Income and Tax certificate from deductor, deductee or tax authority
• Proof of payment/ deduction of tax
Compliance
• In the year when the income offered to tax
• Can be claimed proportionately as and when income offered
When to claim
• Ordinary credit
• Source by source and country by country
• No carry forward of credit – excess ignored
• Foreign tax conversion - TT Buying rate on last day of month preceding the month in which taxes paid / deducted
• Credit available against MAT liability
Mode of credit
• DTAA country –Taxes covered by DTAA
• Non DTAA country – Section 91(iv)
• Tax, surcharge or cess – not interest, penalty
• No tax credit if the amount of foreign tax/ part thereof is in disputes
Taxes covered
Non-DiscriminationArticle 24
• Article 24 establishes principle of non-discrimination in tax
matters in double taxation law
• The Article specifies 4 criteria which a national tax law of
Contracting States is not permitted to use as a basis for tax
discrimination.
– Nationality
– Location (Permanent Establishment)
– Deduction of expense – payments made to Non Residents
– Ownership
Non-Discrimination
• Para 1 : Nationality
• Nationals of India shall not be subjected in Armenia to any taxation or any
requirement connected therewith, which is other or more burdensome than the
taxation and connected requirements to which nationals of Armenia in the same
circumstances, in particular with respect to residence, are or may be subjected.
This provision shall, notwithstanding the provisions of Article 1, also apply to
persons who are not residents of one or both of the Contracting States.
• Aimed to curb nationality based discrimination
• Taxation or any requirement connected therewith (other requirement
(returns, payments, prescribed times, etc)
• other or more burdensome than...
Para 1 of Art. 24..
No ban on favourable treatment of foreigners!
• This provision applicable even if a person is not a
resident of either Contracting States.
• in the same circumstances, in particular with respect
to residence
– Example :
In India, an Indian national who is a resident of India may be
granted certain benefits not available to an Armenian national who
is not a resident of India. This is not discrimination based on
nationality but discrimination based on residence.
Special emphasis is
provided
..Para 1 of Art. 24
• Para 2 : Residence
• Stateless persons who are Indian residents shall not be subjected in either
Contracting State to any taxation or any requirement connected therewith,
which is other or more burdensome than the taxation and connected
requirements to which nationals of the State concerned in the same
circumstances, in particular with respect to residence, are or may be
subjected.
• Residence based discrimination
• None of the Indian treaties have adopted this provision!
• Klaus Vogel: ‘Stateless person’ means a person who is not considered as
a national by any State under its law.
– The field of application of Article 24(2) of Model Convention is limited
to individuals. The question, whether a stateless company is even
able to exist thus does not play a role for Article 24(2) MC.
Not relevant for India
Para 2 of Art. 24
• Para 3 : Permanent establishment (PE)
• The taxation on a permanent establishment which a UK enterprise has inIndia shall not be less favorably levied in India than the taxation leviedon Indian enterprises carrying on the same activities. This provision shallnot be construed as obliging India to grant to UK residents any personalallowances, reliefs and reductions for taxation purposes on account ofcivil status or family responsibilities which it grants to its own residents.
• Location based discrimination• PE of an Indian enterprise in UK cannot be less favourably taxed
compared to a UK enterprise ‘carrying on the same activities’
Para 3 of Art. 24..
• Benefits granted by a country to its residents
– A country may treat its residents favourably based on civil status or
family responsibilities. This wont attract the non discrimination
provisions.
• Para 3 deals only with ‘taxation’, i.e. the quantum of tax. It
doesn’t deal with the requirements connected to taxation.
• Exceptions : Any benefits granted by a state to its Residents on
account of civil status or family responsibilities.
– Examples: Sec 80U which grants deduction in case of a person
with disability and other similar sections like Sec 80DD (medical
treatment of a disable dependant), 80DDB (deduction in respect of
medical treatment for specified disease), etc.
..Para 3 of Art. 24
• Para 4 : Deduction of expenses
• Except where the provisions of paragraph 1 of Article 9,paragraph 7 of Article 11, or paragraph 7 of Article 12 (dealingwith expenses not incurred at Arm’s length), apply, interest,royalties and other disbursements paid by an Indian enterprise toa UK resident shall, for the purpose of determining the taxableprofits of such Indian enterprise, be deductible under the sameconditions as if they had been paid to the Indian resident.Similarly, any debts of an Indian enterprise to a UK resident shall,for the purpose of determining the taxable capital of such Indianenterprise, be deductible under the same conditions as if theyhad been contracted to an Indian resident.
Para 4 of Art. 24
• Para 5 : Capital
• Indian enterprise, the capital of which is wholly or partly
owned or controlled, directly or indirectly, by one or more
residents of UK, shall not be subjected in India to any
taxation or any requirement connected therewith which is
other or more burdensome than the taxation and connected
requirements to which other similar enterprises of India are
or may be subjected.
Para 5 of Art. 24
• Para 6 : Taxes included
• The provisions of this Article shall, notwithstanding the provisions
of Article 2, apply to taxes of every kind and description.
• Alternative
• The provisions of this Article shall apply to taxes which are
subject to this convention. [UK Treaty]
Para 6 of Art. 24..
• Example:
• Austria
• ARTICLE 2 : Taxes Covered -
3. The existing taxes to which the Convention shall apply are in particular:
(a) in Austria :(i) the income-tax (die Einkommensteuer);(ii) the corporation tax (die Korperschaftsteuer);
(hereinafter referred to as ‘Austrian taxes’)(b) in India :
the income-tax, including any surchargethereon imposed under the Income-tax Act,1961 (43 of 1961); (hereinafter referred to as‘Indian tax’)
..Para 6 of Art. 24..
• Para 5 : The provisions of this Article shall, notwithstanding the
provisions of Article 2, apply to taxes of every kind and
description.
• Hence although only income tax is included in Article 2,
Article 24 may be applicable even in case of DDT, FBT, etc.
• Most of Indian treaties contain the provision that only those
taxes which are a subject matter of the treaty would be
included.
..Para 6 of Art. 24
• Minor modifications present in all the treaties with India in the non
discrimination article
• Lets analyse Article 24 of Indo – Denmark, which is in line with
OECD with only minor differences
A typical tax treaty
• 1. The nationals of a Contracting State shall not be
subjected in the other Contracting State to any taxation or
any requirement connected therewith which is other or
more burdensome than the taxation and connected
requirements to which nationals of that other State in the
same circumstances, in particular with respect to
residence, are or may be subjected. This provision shall,
notwithstanding the provisions of Article 1, also apply to
persons who are not residents of one or both of the
Contracting States.
Indo Denmark DTAA..
• Para 2 w.r.t stateless persons is absent in this treaty.
• 2. The taxation of a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State shall not be less
favourably levied in that other State than the taxation levied on
enterprises of that other State carrying on the same activities in the
same circumstances and under the same conditions. 3. Nothing
contained in this Article shall be construed as obliging a Contracting
State to grant to persons not resident in that State any personal
allowances, reliefs, reductions and deductions for taxation purposes
which are by law available only to persons who are so resident. (Clause
3 with respect to Model Convention)
Bold portion addition in treaty vis-à-vis OECD
..Indo Denmark DTAA..
• 4. Except where the provisions of paragraph 1 of Article 10,paragraph 7 of Article 12, or paragraph 7 of Article 13,apply, interest, royalties and other disbursements paid byan enterprise of a Contracting State to a resident of theother Contracting State shall, for the purpose ofdetermining the taxable profits of such enterprise, bedeductible under the same conditions as if they had beenpaid to a resident of the first-mentioned State. Similarly,any debts of an enterprise of a Contracting State to aresident of the other Contracting State shall, for thepurpose of determining the taxable capital of suchenterprise, be deductible under the same conditions as ifthey had been contracted to a resident of the first-mentioned State.
..Indo Denmark DTAA..
• 5. Enterprises of a Contracting State the capital of
which is wholly or partly owned or controlled,
directly or indirectly, by one or more residents of
the other Contracting State, shall not be subjected
in the first-mentioned Contracting State to any
taxation or any requirement connected therewith
which is other or more burdensome than the
taxation and connected requirements to which
other similar enterprises of that first-mentioned
State are or may be subjected in the same
circumstances and under the same conditions.
..Indo Denmark DTAA..
• 6. In this Article, the term “taxation” means taxes
which are the subject of this Convention.
..Indo Denmark DTAA..
• Exceptions to Non-Discrimination..
Discrimination..
• Para 3 of Art. 24 (PE)
• Most of the Indian treaties contain additional provision:
• Example : Indo UK treaty
• 2. The taxation on a permanent establishment which an enterprise of a Contracting State has
in the other Contracting State shall not be less favorably levied in that other State than the
taxation levied on enterprises of that other State carrying on the same activities in the same
circumstances or under the same conditions. This provisions shall not be construed as
preventing a Contracting State from charging the profits of a permanent establishment which
an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax
which is higher than that imposed on the profits of a similar enterprise of the first-mentioned
Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of this
Convention.
• Higher rate of tax is not to be considered discriminatory
• Not relevant for an Indian resident because of the following amendment
• 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 favorable charge or levy of tax in respect of such
foreign company
..Discrimination..
• nor as being in conflict with the provisions of paragraph 4 of Article 7 of this
Convention.
• UK treaty - Para 4 to Article 7 (Business profits)
• 4. Insofar as it has been customary in a Contracting State according to its law to
determine the profits to be attributed to a permanent establishment on the basis
of an apportionment of the total profits of the enterprise to its various parts,
nothing in paragraphs 1and 2 of this Article shall preclude that Contracting State
from determining the profits to be taxed by such an apportionment as may be
necessary; the method of apportionment adopted shall, however, be such that the
result shall be in accordance with the principles laid down in this Article.
• Determination of profits of a PE by method of apportionment of the total
profits of the enterprise
Discrimination for convenience!
..Discrimination..
• Rajeev Sureshbhai Gajwani Vs. ACIT(ITAT Ahd- Special Bench)2011-TII-38-ITAT-AHM-SB-INTLAssessee is a Citizen of America and a non-resident. Exportedsoftware from a PE in India and claimed deduction u/s 80HHE (onlyresidents / domestic cos are eligible for 80HHE). Article-26(2) of theIndia-USA DTAA provides that the taxation of an enterprise of USAresident shall not be less favorable than the taxation of a residententerprise carrying on the same activity. So deductions (in the givencase 80HHE) & exemptions available to Indian Enterprises wouldalso be available to the US enterprises if they are carrying on thesame activity.
Held that the assessee is entitled to deduction under section
80HHE on the same footing as it is available to a resident
person in India.
Rajeev Gajwani (80HHE)..
• Deduction in respect of profits from export of computer software,
• 80HHE. (1) Where an assessee, being an Indian company or a
person (other than a company) resident in India, is engaged
in the business of,—
(i) export out of India of computer software or its transmission
from India to a place outside India by any means;
(ii) providing technical services outside India in connection with
the development or production of computer software,
..Rajeev Gajwani (80HHE)..
• Article 26(2) of Indo US (Permanent Establishment)
Except where the provisions of paragraph 3 of article 7 (Business
Profits) apply, the taxation on a permanent establishment which
an enterprise of a Contracting State has in the other Contracting
State shall not be less favourably levied in that other State than
the taxation levied on enterprises of that other State carrying on
the same activities. This provision shall not be construed as
obliging a Contracting State to grant to residents of the other
Contracting State any personal allowances, reliefs and reductions
for taxation purposes on account of civil status or family
responsibilities which it grants to its own residents.
..Rajeev Gajwani (80HHE)
• the ITAT, Bench 'B', Chennai
• 2011-TII-143-ITAT-MAD-INTL
• AY 2002-03 to 2006-07
• Assessee, an Indian co. had made certain payments to a NR
• Payment held to be royalty in nature
• Since tax deductible u/s 195, which was not deducted, payments were
disallowed u/s 40(a)(i)
• In AY 2006-07, there was no provision in Act requiring deduction of tax
on payment made to residents [Sec 40(a)(ia) effective AY 2007-08
onwards]. So, the case was of non-discrimination provision as contained in
article 26(3) (deductibility of expenses).
• (Herbalife International – 101 ITD 450 – ITAT Delhi - AY 2001-02) and
Peoplesoft are on similar lines.
ABAQUS Engineering [40(a)(i)]..
• Post insertion of Sec 40(a)(ia)?
• The provisions for payment to Residents are favourable compared to
payments to Non Residents regarding
– Time limit for depositing the tax deductible (for period between AY 2010-
11 to AY 2014-15)
– Not all taxable payments to residents are subject to TDS (eg. Payment
for purchase of goods – taxable if business connection exists)
– Only 30% of expense is disallowed in case of payments to Residents
– No disallowance us 40(a)(ia) if the resident recipient fulfils certain
conditions
• Hence, can Non Discrimination provisions be invoked?
• Similar views by ITAT Delhi in case of Mitsubishi Corporation [2015]
..ABAQUS Engineering [40(a)(i)]
• Section 44C deals with deduction of head officeexpenditure in the case of non-residents
• Sec 44C starts with a non obstante clause:44C. Notwithstanding anything to the contrary contained insections 28 to 43A, in the case of an assessee..
• There is a ceiling limit in respect of deduction of specifiedexpenses:
• Held that the non discrimination provisions are applicable.The scope of deduction under section 37(1) will notstand curtailed by the restriction placed under section44C of the Act.
Metchem Canada (44C)
• Can you think of any examples in the Indian
domestic tax law which contains non
discrimination provisions ??
64
Examples??..
• Discrimination should not be based on
– Nationality
• Individual Residency Determination
• Section 80-IA
– Permanent Establishment
• Section 44C
• Section 80HHE
– Payment to Non Resident
• Section 40(a)
– Ownership
• TP Adjustment on Income?
• Transfer of Capital Assets by WOS to Indian Parent not regarded as Transfer
Food for Thought
• Corporate Entities – Whether Nationals?
– US defines it as individuals, UK does not define
• Standard Chartered Bank – 39 ITD 57 (Mum)
– No definition of term ‘national’ in Indo UK DTAA
– Reliance on SC in State Trading Corp – Corporations have
nationality
– Refers to the Jural relationship of nationals and citizens
– Held that Companies are nationals and have capacity to invoke
non-discrimination clause under the Indo UK DTAA
Corporate Entities are Nationals
By non discrimination provision, can the benefit of
treaty be availed, which otherwise is not available
(other than nationality based)?
InCo
Singapore Branch of
Netherlands Bank
Netherlands Bank
Payment of Interest
Tax With-held by InCo
Whether Tax Credit Available?
Entitlement to foreign treaty?
Mutual Agreement ProceduresArticle 25
• Unilateral
– APA
– AAR
– Regular Appellate Proceedings (Appellate or DRP)
– Safe harbours
– Settlement Commission
• Bilateral / Multilateral
– MAP
– Arbitration
– International Litigation – International Court of Justice
Resolving Disputes
• Mutual process for resolving difficulties arising out of application of DTAA
• Lays down procedural rules
• Negotiation process
– Different from litigation
– Assessee presents case to CA
– If deemed fit, CA will initiate discussion with CA of other CS
• Covers disputes of double taxation – TP Adjustment, existence of PE
and attribution of profits, dual tax residency not resolved under tie-
breaker, etc.
• CAs not obliged to find a solution!
• MAP is a lengthy procedure
What is MAP??
• Para 1: Where a person considers that the actions of one or
both of the CS result or will result for him in taxation not in
accordance with the provisions of this Convention, he may,
irrespective of the remedies provided by the domestic law of
those States, present his case to the CA of the CS of which
he is a resident or, if his case comes under paragraph 1 of
Article 24, to that of the CS of which he is a national. The
case must be presented within three years from the first
notification of the action resulting in taxation not in
accordance with the provisions of the Convention.
Assessee (A)
CA (A)
Assessee to present the case to CA within 3 years
Para 1 [Assessee presents case]
• Para 2: The CA shall endeavor, if the objection appears to it to be
justified and if it is not itself able to arrive at a satisfactory
solution, to resolve the case by mutual agreement with the CA of
the other CS, with a view to the avoidance of taxation which is not
in accordance with the Convention. Any agreement reached shall
be implemented notwithstanding any time limits in the domestic
law of the CS
Assessee (A)
CA (A) CA (B)
Mutual agreement with CA of other CS
Para 2 [Negotiation between CAs]
• Para 3: The CA of the Contracting States shall endeavor to
resolve by mutual agreement any difficulties or doubts arising as
to the interpretation or application of the Convention. They may
also consult together for the elimination of double taxation in
cases not provided for in the Convention.
• Suo motu by the CA?
• Resolution of problems relating to interpretation or application of
Convention
• Broad scope
– Includes cases not covered in DTAA
Para 3 [negotiation between CAs]
• Para 4:The competent authorities of the CS may communicate
with each other directly, including through a joint commission
consisting of themselves or their representatives, for the
purpose of reaching an agreement in the sense of the
preceding paragraphs.
• Direct communication between CAs
– Diplomatic channels not required
Para 4 [CA communicates directly]
• Para 5: Where, a) under paragraph 1, a person has presented a
case to the CA of a CS on the basis that the actions of one or
both of the CS have resulted for that person in taxation not in
accordance with the provisions of this Convention, and
• b) the competent authorities are unable to reach an agreement to
resolve that case pursuant to paragraph 2 within two years from
the presentation of the case to the CA of the other CS,
Para 5 [Unresolved issues
submitted to Arbitration]..
CA(A) CA(B)CAs unable to
reach consensus
• Any unresolved issues arising from the case shall be;
– Submitted to arbitration if the person so requests.
– Shall not be submitted to arbitration if decision already rendered by
Court/Tribunal of either CS
– Decision binding on both CS if person affected accepts mutual
agreement
– Decision to be implemented notwithstanding time limits under
Domestic laws of any CS
– CA of the CS to settle mode of application of this provision
..Para 5 [Unresolved issues
submitted to Arbitration]
• Mechanism for resolving Double taxation
– Probably the only solution for aggrieved tax payers
• Widens scope and broadens perspective towards a
particular issue
– as brings in additional perspective of the other CA.
• Can be pursued along with domestic Appeals in CS
– Simultaneous application
• Demand stayed till dispute resolved, subject to provisions of
bank guarantee
– For e.g. US, UK
Benefits
• India
– The approach lacks cooperation
• Expected level of assistance/support absent among the CAs
– Lengthy process with long settlement cycle
• Low probability of actual settlement
• General
– TP Adjustments – Interplay of Article 9(2) and MAP
• For e.g. Indo- Japan DTAA
Issues
• Power given to Board u/s 295(2)
• Rule 44G
– Resident Assessee aggrieved by foreign tax authority
– Application to CA (India) for MAP by assessee
– Form 34F
• Rule 44H
– Foreign CA approaches Indian CA
• W.r.t. actions by Indian tax authorities
– Indian CA will examine the issue and will ‘endeavor’ to resolve it
– Detailed procedure mentioned
Provisions in Domestic Law
Exchange of InformationArticle 26
• Para 1:The competent authorities of the CS shall
exchange such information as is foreseeably relevant
for carrying out the provisions of this Convention or to
the administration or enforcement of the domestic
laws concerning taxes of every kind and description
imposed on behalf of the CS, or of their political
subdivisions or local authorities, insofar as the taxation
thereunder is not contrary to the Convention. The
exchange of information is not restricted by Articles 1
and 2.
Para 1 - CAs to exchange relevant
information
.
• (a) When applying Article 12
– State A where the beneficiary is a resident
– asks State B where the payer is resident,
– for information concerning the Royalty transmitted
• (b) Conversely, for granting exemption under Article 12
– State B asks State A whether
– the recipient is in fact a resident in State A and
– the beneficial owner of the Royalties paid
Application..
• (c) Similarly, information needed for proper allocation
– of taxable profits between AEs in different states or
– adjustment of profits in accounts of a PE in one State and HO in
other State.
– Articles 7, 9, 23A and 23B
..Application
• Competent Authorities of CS to
– supply info to carry out provisions of (i) DTAA and (ii) Domestictax laws
– in so far as the taxation thereunder is not contrary to DTAA
• Info to be supplied irrespective of whether or not such info
– concerns residents of either CS
– but certainly subject to specific restrictions
• Coupled with an obligation to observe secrecy in taxmatters
• The term ‘information’ to be understood broadly
– it should cover both actual facts and legal relationships
How does it work??
• Any information received by a CS under Article 26
– shall be treated as secret
– In same manner as information obtained under Domestic Laws of that
State
• To be disclosed only to persons or authorities which are
– involved in assessment or collection of,
– enforcement or prosecution in respect of, or
– determination of appeals in relation to, the taxes covered
• Such persons or authorities shall
– use such information only for the above mentioned purposes,
– but may disclose it in public court proceedings or in judicial decisions.
Para 2 - Secrecy Element
• To carry out administrative measures at
– variance with the laws and administrative practice of one of the CS,
nor
• To supply information
– (a) which is not obtainable under laws of one of the CS;
– (b) the contents of which come under the protection of a trade,
business, industrial, commercial or professional secret;
– (c) the supply of which would disclose a trade process; or
– (d) furnishing of which would be contrary to public policy.
Para 3 - No obligation on CS
• Exception
– However, in no case shall the no obligation provision
• be construed to permit a CS to decline to supply information
solely because
• (a) it has no domestic interest in such information or
• (b) information is held by a Bank, FI, person acting as agent
etc. or it relates to ownership interests in a person.
Para 4 and 5 - No obligation on CS
• Para 6 – Procedures for Effective EOI
– The competent authorities shall, through consultation, develop
appropriate methods and techniques concerning the matters in
respect of which exchanges of information under paragraph 1 shall
be made.
Para 6 - Procedures
• Exchange of information Article in most of Indian treaties
• 19 TIEAs signed by India
TIEAs of India
2016: Maldives, Saint Kitts and Nevis, Seychelles
2014: San Marino
2013: Argentina, Bahrain, Belize, Gibraltar, Liechtenstein, Monaco
2012: Guernsey, Jersey, Liberia, Macau
2011: Bahamas, BVI, Cayman Islands, Isle of Man
2010: Bermuda
• US-India – Agreement to Improve International Tax compliance
and to implement FATCA – 9 July 2015
• Various DTAAs revised – Switzerland, Mauritius, Cyprus
• Guidance provided to field officers for EOI with BVI - 12 May
2016
• Base Erosion and Profit Shifting Project of OECD
– Action Plan 12 – Mandatory Disclosure Rules
– Action Plan 13 - CBCR
• Multilateral Competent Authority Agreement (MCAA) for automatic
exchange of CbCR signed by 31 countries – 27 January 2016
• Does not include India
Another Step towards Transparency
EOI - Summarized
Periodic consultation and review
Limitation
Power of cross border
enquiry
Reasonable restraints
Ambit of power not uniform
Protection of confidentiality
March towards global
security
This presentation is prepared exclusively for the benefit
and use of the clients of K. C. Mehta & Co. This should
not be used as a substitute for professional advice.
Reasonable care has been taken for ensuring the
accuracy and the authenticity of the contents of the
presentation. However, we do not take any responsibility
for any error or omission contained therein on any
account. It is recommended that the readers should take
professional advice before acting on the same. The
provisions contained in Finance Bill, 2015 are the
proposals and are likely to undergo amendments while
passing through the Houses of the Parliament before
being enacted.
Arpit Jain
Director
Office: +91 79 4032 6400
Mobile: +91 96876 00207
Email: [email protected]