Elimination of Double Taxation
Elimination of Double Taxation
INDIA
Presentation by:
T.P.OSTWAL
26/07/2013
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
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CAUSES OF DOUBLE
TAXATION
Rules of taxation
Residence rules
[Supreme Court Ruling- Ishikawajma-Harima Heavy Industries Ltd. vs. DIT (288 ITR
408)]
Taxation systems:
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Concept of:
DTR:
Unilateral; or
Bilateral
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Foreign source
income
No DTAA with state X [providing for (a) relief or, (b) avoidance of, double taxation]
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?
By deduction or otherwise
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Relief at
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Whichever is
lower
S. 91 Foreign Source
Income ??
Loan for Indian project
SBT HK
Branch
Interest
ABC Ltd
HK
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Indian
Project Office
Indian
Customer
ILLUSTRATION
CASE 1
Income in foreign state A
100
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
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150
250
25%
30%
75
25
30
CASE 2
100
150
250
35%
30%
75
35
30
ILLUSTRATION
CASE 1
2
DTR in India
30
Effective tax out go
In State A
In India
45
Total income tax paid
Effective global tax rate
80
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CASE
25
25
35
50
7530%
32%
TREATY RELIEF
Article 23 of MC- Methods of Elimination of Double Taxation.
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
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TREATY PROVISIONS
Shall be taxable only(normally) in state R
No DTR required
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:
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CREDIT METHOD
State R includes the income earned in State S for computing
paid in S
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CREDIT METHOD
Two approaches:
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CREDIT METHOD
Exemption Method = income exclusion
V/s.
Credit Method
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= tax credit .
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ILLUSTRATIONS
Income from R
80,000
Income from S
20,000
Total Income
1,00,000
Rate of Tax in R :
On 80,000
30%
On 1,00,000
35%
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ILLUSTRATIONS
Rate of Tax in S :
Case I
Case II
:
:
20%
40%
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24,000
4,000
CASE II
24,000
8,000
28,000
11,000
11,000
39,000
43,000
32,000
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EXEMPTION WITH
PROGRESSION
CASE I
CASE II
28,000
28,000
Tax in S
4,000
8,000
Total tax
32,000
36,000
7,000
39,000
7,000
43,000
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CREDIT METHOD
(FULL CREDIT METHOD)
CASE I
CASE II
35,000
4,000
35,000
8,000
Tax credit:
Total tax payable in State R
35,000
35,000
4,000
31,000
8,000
27,000
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CREDIT METHOD
(ORDINARY CREDIT-simplistic
illustration)CASE I
CASE II
Tax in R(35% of 1,00,000)
Tax in S
35,000
4,000
8,000
35,000
35,000
Tax credit:
State R tax on foreign source income
Qualifying tax credit
Final tax payment in state R
35,000
7000
7000
4000
7000
31000
28000
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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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Computation Methodology
claimed
UTC under national tax law eg. Singapore, UK, Mauritius etc.
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TAX SPARING
Not found in MC -but found in some treaties.
Generally, national tax laws of countries not provide for Tax
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TAX SPARING
Generally attached to income like:
Dividend
Royalty
Interest
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
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Date: 18th May 2007
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(c) T.P. Ostwal
Some issues
Qualifying foreign taxes?
Taxes on income
expense?
Issues concerning source of income?
Section 91
Tax treaty
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..some issues
Amount of maximum tax credit?
How to quantify residence country tax on foreign source income?
How to compute?
Level of shareholding?
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..some issues
Whether accrued foreign tax but not paid, can be claimed as
Additional liability
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some issues
ESOPs
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Sec. 90 of ITA
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Sec. 91 of ITA
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THANK YOU
T.POSTWAL
[email protected]
+919004660107
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