International Taxation
International Taxation
7. 7. Meaning-A TAX TREATY tax treaty is a formally concluded and ratified agreement
between two independent nations (bilateral treaty) or more than two nations (multilateral
treaty) on matters concerning taxation 8
8. 8. OBJECTIVES Avoid Double Taxation Prevent Tax Evasion Allocate Tax Jurisdiction
Exchange of Information Certainty of Tax Treatment to Investors 9
10. 10. provide the broad framework for MODEL CONVENTIONSModel conventions-
serve as useful interpretation materialThe popular treaty formulation model conventions
are: a) UN Model b) OECD Model c) US Model 11
11. 11. TYPES OF TAX TREATIES Limited Treaties-which cover - a) income from
operation of aircrafts and ships, b) estates, c) inheritance and d) gifts. Comprehensive
Treaties-which are wider in scope addressing all sources of income 12
12. 12. Section TREATY POSITION IN INDIA 90(1) of the Indian Income Tax India Act,
1961authorizes the Central Government to conclude taxtreaties Section presently has
treaties with 91 countries 90 (2) of Income Section Tax Act Vs. Section 258(8) ofthe
Direct Tax Code 91 - provides unilateral relief 13
17. 17. SCOPEArticle 1- Applicability -Applies to a person who is a resident ofone or both
the countries.Article 2- Taxes covered- Taxes on income Indian taxes covered are income
tax, surcharge and and capital cessArticle 30-Entry into force This article tells when and
how a DTA becomes operativeArticle 31-Termination This article tells when and how a
DTA can be terminated 18
20. 20. Means a fixed DEFINITIONSArticle 5 - Permanent Establishment (PE) place from
where the business of the enterprise is carried on PE includes place of management,
branch, office, factory, workshop, mine, quarry, an oil or gas well, a construction site for
long duration, a services location for long duration and a dependent agency with power to
conclude contracts 21
22. 22. ACTIVE & PASSIVE INCOME Passive Income-refers to income derived from
investment in tangible / intangible assets. Equity Investment Dividend Debt Interest
Yields Right/Permission to use assets Rent / Royalties Disposal of capital assets owned
Capital Gain Active Income is the income derived from carrying on active cross border
business operations or by personal effort and exertion as in case of employment. 23
29. 29. INTERPRETATION OF TREATY Tax Treaty Vs. Domestic Law The Vienna
Convention on Law of Treaties, 1969 (VCLT) has codified international law. The rules
contained in it can be applied to interpret treaties. Section 31(1) to 31(4)) of the VCLT,
1969 lays down the foundation for interpretation as per customary international laws
Section 31(1) states that a DTA shall be interpreted in GOOD FAITH in accordance with
the ORDINARY MEANING to be given to the terms of the treaty in their CONTEXT
and in the light of its object. Treaties are based either on UN or OECD model. Hence
commentaries in these models may assist interpretation 30
30. 30. SOME IMPORTANT CONCEPT S Treaty Shopping Co. incorporated in Foreign
Invests Invests Indian Mauritius (Shell Investor in in Company Co.) which in turn
Most Favored Nation (MFN) Clause Protocols 31
31. 31. APPLYING TAX TREATIESStep 1 What is the nature of the income ?Step 2 Does
the treaty apply?Step 3 Determine which Article applies?Step 4 How are taxation rights
assigned?Step 5 How is the income calculated?