Elimination of Double Taxation

INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

RELIEF FROM DOUBLE TAXATION

Presentation by: T.P.OSTWAL26/07/2013(c) T.P.Ostwal & Associates*

(c) T.P.Ostwal & Associates

SYNOPSISCauses of double taxationWhat is double taxation relief (DTR)Unilateral reliefTreaty reliefCredit methodExemption methodTax sparingUnderlying tax creditOther methods for relieving double taxationSome issues26/07/2013(c) T.P.Ostwal & Associates*


CAUSES OF DOUBLE TAXATIONRules of taxationArticle 265 of Constitution (Indian context)[No tax shall be levied or collected except by authority of law.]Sufficient nexus between subject and state.Residence rulesSource 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]26/07/2013(c) T.P.Ostwal & Associates*


CAUSE OF DOUBLE TAXATIONSame income taxed twiceResidence in two statesResidence in state A and source in state BConcept of:Juridical double taxationEconomic double taxationDTR: Unilateral; or Bilateral26/07/2013(c) T.P.Ostwal & Associates*


UNILATERAL TAXATION RELIEF-INDIA S.91 OF ITAResident in India only eligible for UTRIncome accrued outside India (say, in state X)andThat income NOT deemed to accrue in IndiaNo 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 otherwiseRelief from Indian income tax availableRelief only on doubly taxed income

26/07/2013(c) T.P.Ostwal & Associates*Foreign source income


UNILATERAL TAXATION RELIEF- INDIA

Relief at Indian rate of tax. orRate of tax in state X

26/07/2013(c) T.P.Ostwal & Associates*Whichever is lower


S. 91 Foreign Source Income ??26/07/2013(c) T.P.Ostwal & Associates*SBT BANK LtdIndia SBT HK BranchABC LtdHKIndian CustomerIndian Project OfficeLoan for Indian projectInterestHK income tax on interest incomePower project set up contractWhether tax credit for HK corporate tax available?- Whether tax credit for Indian TDS, if any, available?


ILLUSTRATION CASE 1 CASE 2Income in foreign state A 100 100Indian income 150 150 Global income 250 250 Tax rate in foreign state A 25% 35%Tax rate in India 30% 30%Indian tax on global Income 75 75Foreign tax on foreign income 2535Indian tax on foreign income 303026/07/2013(c) T.P.Ostwal & Associates*


ILLUSTRATIONCASE 1 CASE 2DTR in India 25 30Effective tax out goIn State A 25 35In India 5045Total income tax paid 75 80

26/07/2013(c) T.P.Ostwal & Associates*


TREATY RELIEF Article 23 of MC- Methods of Elimination of Double Taxation.Article 23A : Exemption MethodArticle 23B : Credit MethodCredit subject to the restriction and limitation of the domestic tax lawsCovers 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 ??



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 rulesPE situations-NR in both states. (Concurrent limited tax liability)26/07/2013(c) T.P.Ostwal & Associates*


TREATY PROVISIONSShall be taxable only(normally) in state RNo DTR requiredMay be taxed ( in state S)DTR required to be given by state RArticle 23 provides rules for DTR by state R and not by state S.26/07/2013(c) T.P.Ostwal & Associates*


EXEMPTION METHOD R does not tax income which may be taxed in S.R does not tax income which shall be taxable only in STwo 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 individuals26/07/2013(c) T.P.Ostwal & Associates*


CREDIT METHOD State R includes the income earned in State S for computing total tax liability in State ROut of the total tax liability in state R, credit is given for tax paid in S



CREDIT METHODTwo 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)26/07/2013(c) T.P.Ostwal & Associates*


CREDIT METHOD

Exemption Method = income exclusion V/s.

Credit Method = tax credit .26/07/2013(c) T.P.Ostwal & Associates*


ILLUSTRATIONSIncome from R 80,000Income from S 20,000Total Income 1,00,000Rate of Tax in R :On 80,000 30%On 1,00,000 35%26/07/2013(c) T.P.Ostwal & Associates*


ILLUSTRATIONSRate of Tax in S :Case I : 20% Case II : 40% Assume no DTAA relief /no Unilateral relief.Total Tax Liability:Case I : (R)35,000 + (S) 4,000=39,000Case II: (R)35,000 + (S) 8,000= 43,00026/07/2013(c) T.P.Ostwal & Associates*


FULL EXEMPTION METHOD CASE I CASE IITax in R (30% of Rs 80,000)24,000 24,000Tax in S (20 or 40% of 20K) 4,000 8,000Total global tax 28,000 32,000(Notional) DTA relief 11,000 11,000 39,000 43,000 26/07/2013(c) T.P.Ostwal & Associates*


EXEMPTION WITH PROGRESSION CASE I CASE IITax in R(35% of Rs 80,000) 28,000 28,000Tax in S 4,000 8,000Total tax 32,000 36,000 (notional) tax relief 7,000 7,000 39,000 43,000 26/07/2013(c) T.P.Ostwal & Associates*


CREDIT METHOD (FULL CREDIT METHOD) CASE I CASE IITax due in R(35% of 1,00,000)35,000 35,000Tax due in S 4,000 8,000Tax credit:Total tax payable in State R 35,000 35,000Foreign tax credit by R (full) 4,000 8,000Final tax payable in R 31,000 27,000 26/07/2013(c) T.P.Ostwal & Associates*


CREDIT METHOD (ORDINARY CREDIT-simplistic illustration) CASE I CASE IITax in R(35% of 1,00,000) 35,000 35,000Tax in S 4,000 8,000Tax credit:Total tax payable in state R 35,000 35,000State R tax on foreign source income 7000 7000Qualifying tax credit 4000 7000Final tax payment in state R 31000 2800026/07/2013(c) T.P.Ostwal & Associates*


ORDINARY CREDIT METHOD LIMITATIONS:Usual restrictions:item or source basisper category basisaveraging of foreign taxes on income falling in same categoryper country basisaveraging of foreign taxes on incomes arising in single countryworldwide or overall limitationsaveraging of foreign taxes on all foreign source income



Ordinary Credit Method:Limitations:Effect of Country R Source Rules.Effect of Country R tax computation rulesEffect of Country R expense allocation rules



UNDERLYING TAX CREDITConcept:A form of relief from Economical Double Taxation.Computation MethodologyCo-relation of dividends to post tax profits of subsidiaryEffect of exchange ratesRequirement of substantial shareholdingAlso applied under CFC regulationsIndias tax treaty with Singapore and Mauritius provide for underlying tax credit.Some countries specify upto how many layers, UTC can be claimedUTC under national tax law eg. Singapore, UK, Mauritius etc.26/07/2013(c) T.P.Ostwal & Associates*


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 RR provides for deemed tax exemption or deemed tax credit.



TAX SPARING Generally attached to income like:DividendRoyaltyForeign branch / PE incomeInterestMay provide for more or less than the Country S tax waived(e.g. India-Cyprus on interest @ 10%, Cyprus=> India: dividend @10%) Source country taxes spared are not grossed up (No Phantom Grossing up)26/07/2013(c) T.P.Ostwal & Associates*


Other MethodsExpense deduction for foreign taxCarry forward / backward of excess tax creditCountries have exhaustive foreign tax credit rules.26/07/2013(c) T.P.Ostwal & Associates*


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1

ITD

The Income Tax (Foreign Tax Credit) Regulations 1996GN 80 of 1996 - 20 July 1996

Regulations made by the Minister under sections 77 and 161 of the Income Tax Act 1995

Regulation

1. Short title

2. Interpretation

3. Credit for foreign tax

4. Creditable foreign tax

5. Computation of income subject to foreign tax

6. Limit on foreign tax credit

7. Underlying foreign tax credit

8. Proof of charge to foreign tax

9. Tax sparing credit

1.Short title

These regulations may be cited as the Income Tax (Foreign Tax Credit) Regulations 1996.

2.Interpretation

In these regulations -

"Act" means the Income Tax Act 1995;

"arrangement" means an arrangement entered into with the government of a foreign country under section 76 of the Act;

"foreign source income" means income which is not derived from Mauritius;

"Mauritius tax" means income tax imposed under the Income Tax Act 1995;

"offshore bank"(1)

"offshore company" and "offshore trust"(2)

"offshore socit"(1)

qualified corporation means a corporation holding a Category 1 Global Business Licence under the Financial Services Development Act 2001 or a bank holding a Class B Banking Licence under the Banking Act 1988, as the case may be;(2)

"underlying tax" has the meaning assigned to it in regulation 7(1).

3.Credit for foreign tax

(1)Subject to section 77 of the Act and to these regulations, credit shall be allowed for foreign tax on the foreign source income of a resident of Mauritius against Mauritius tax computed by reference to the same income.

(2)Where credit is allowed against Mauritius tax chargeable in respect of any income, the amount of Mauritius tax so chargeable shall be reduced by the amount of the credit.

(3)Where Mauritius tax is charged on the amount of income received in Mauritius, credit for foreign tax shall only be allowed for so much of the foreign tax as is imposed on the amount of the income actually received in Mauritius.

4.Creditable foreign tax

(1)No credit shall be allowed under section 77 of the Act unless the foreign tax is a tax on income and is of a similar character to Mauritius tax.

(2)For the avoidance of doubt, any foreign tax which is charged by reference to a presumed amount of profit or income shall be regarded as of a similar character to Mauritius tax.

5.Computation of income subject to foreign tax

In the computation of the amount of any income in respect of which a credit for foreign tax is allowed -

(a)no deduction shall be made for the foreign tax charged on that income; and

(b)in the case of a dividend, any underlying tax in respect of which credit is allowed shall be added to the amount of that income.

6.Limit on foreign tax credit

(1)The amount of credit for foreign tax which may be allowed against Mauritius tax computed by reference to an amount of foreign source income shall be -

(a)the amount of foreign tax proved or presumed in accordance with these regulations to have been charged on that income;

(b)the amount of foreign tax which may be charged in the other country in accordance with any arrangement in force between Mauritius and the government of that country; or

(c)the amount of Mauritius tax computed in accordance with the following provisions of this regulation by reference to that income,

whichever is the least.

(2)Where it is necessary for the purposes of paragraph (1)(c) to compute an amount of Mauritius tax -

(a)the amount of foreign source income shall be computed in accordance with regulation 5; and

(b)where the taxpayer is entitled to make any deductions in computing his chargeable income for the purposes of the Act, he may allocate those deductions to such foreign source income or income derived from Mauritius, as he wishes.

(3)In determining the amount of credit for foreign tax which may be allowed in accordance with this regulation, the taxpayer may -

(a)compute the amount by reference to all foreign source income derived by him and which is chargeable to Mauritius tax in that year of assessment; or

(b)compute the amount by reference to each item of foreign source income separately.

7.Underlying foreign tax credit

(1)Where a dividend is paid by a company which is not resident in Mauritius to a person who is resident in Mauritius and who owns directly or indirectly not less than 5 per cent of the share capital of the company paying the dividend, the credit allowed shall, in addition to any foreign tax charged on the dividend, whether directly or by deduction, include foreign tax charged on the income out of which the dividend was paid, referred to in this regulation as underlying tax.

(2)Where a company not resident in Mauritius which pays a dividend has itself received a dividend, referred to in this regulation as the secondary dividend, from another company not resident in Mauritius of which it owns directly or indirectly not less than 5 per cent of the share capital, the underlying tax shall, in addition to any foreign tax charged on the secondary dividend, whether directly or by deduction, include the foreign tax charged on the income out of which that secondary dividend was paid.

(3)Paragraph (2) shall also apply where the company paying the secondary dividend has itself received a dividend from a company not resident in Mauritius of which it owns directly or indirectly not less than 5 per cent of the share capital, and so on for any number of companies which have so received dividends.

(4)In computing the amount of underlying tax, any foreign tax charged on the profits out of which a dividend has been paid shall be regarded as having been charged rateably on all the profits of the company paying the dividend.

(5)Where a resident of Mauritius is taxable on his share of income from a non-resident socit, he shall be entitled to a credit in respect of any foreign tax borne by the non-resident socit on such income.(1)

(6)The amount of credit under paragraph (5) in respect of an income year shall be computed by reference to the proportion which the income accruing to the resident bears to the total income of the socit in that income year.(1)

8.Proof of charge to foreign tax

(1)Subject to the provisions of this regulation and regulation 9, no credit shall be allowed in respect of foreign tax unless written evidence is presented to the Commissioner showing the amount of foreign tax which has been charged.

(2)For the purposes of this regulation, "written evidence" includes a receipt of the relevant authorities of the foreign country for the foreign tax or any other evidence that the foreign tax has been deducted or paid to the relevant authorities of that country.

(3)Notwithstanding regulation 6,(1) where in the case of a qualified corporation,(2) written evidence is not presented to the Commissioner showing the amount of foreign tax charged, the amount of foreign tax shall nevertheless be conclusively presumed to be equal to 80 per cent(3) of the Mauritius tax chargeable with respect to that income and computed in accordance with regulations 5 and 6.

9.Tax sparing credit

(1)Where the Commissioner is satisfied that provisions have been introduced in the law of a foreign country with a view to promoting industrial, commercial, scientific, educational or other development in that country and that under those provisions -

(a)a lower rate of tax has been imposed in that country than would otherwise have been the case; or

(b)income has been exempted from tax which would otherwise have been chargeable to foreign tax,

he shall allow a credit for the amount of foreign tax which would have been chargeable had those provisions not been enacted.

(2)For the purposes of regulation 6, the amount of foreign tax for which credit is to be allowed under this regulation shall be presumed to have been charged.

Made by the Minister on 20 July 1996.

(1) Deleted by the Financial Services Development Act 2001. Effective as from 1.8.2001. Previously GN 163 of 1998 - 18.8.98 -

["offshore bank" has the same meaning as in the Banking Act 1988;]

(2) Deleted by the Financial Services Development Act 2001. Effective as from 1.8.2001. Previously -

["offshore company" and "offshore trust" -

(a)have the same meaning as in the Mauritius Offshore Business Activities Act 1992; and

(b)include a corporation certified to be engaged in international business activity by the Mauritius Offshore Business Activities Authority established under the Mauritius Offshore Business Activities Act 1992;]

(1) Deleted by the Financial Services Development Act 2001. Effective as from 1.8.2001. Previously -

["offshore socit" means a socit which is certified to be engaged in international business activity by the Mauritius Offshore Business Activities Authority established under the Mauritius Offshore Business Activities Act 1992;]

(2) Inserted by the Financial Services Development Act 2001. Effective as from 1.8.2001.

(1) Paragraphs (5) & (6) added by GN 154 of 2001 - 30.10.01.

(1) The words "Notwithstanding regulation 6 inserted by GN 87 of 1997 - 18.7.97.

(2) The words a qualified corporation" replaced an offshore company, offshore bank(1), offshore trust or offshore socit " by the Financial Services Development Act 2001. Effective as from 1.8.2001.

(1) The words offshore bank inserted by GN 163 of 1998 - 18.8.98.

(3) The words "80 per cent" replaced "90 per cent" by FA 2000. Effective as from year of assessment 200304. Previously GN 87 of 1997 - 18.7.97, the words 90 per cent replaced 80 per cent.

26/07/2013(c) T.P.Ostwal & Associates| *Some issuesDate: 18th May 2007(c) T.P. Ostwal


Some issuesQualifying foreign taxes?Same or similar taxesTaxes on incomeWhat 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 91Tax treaty26/07/2013(c) T.P.Ostwal & Associates*


..some issuesAmount 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?26/07/2013(c) T.P.Ostwal & Associates*


..some issuesWhether accrued foreign tax but not paid, can be claimed as foreign tax credit?What if there is change in foreign tax liability subsequently?Additional liabilityRefund of foreign taxesWhat 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?



some issuesESOPs Perquisites in state A in year of exerciseCapital Gains in state B in year of sale



26/07/2013(c) T.P.Ostwal & Associates*[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. 90 of ITA


Sec. 91 of ITACountries 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 income18 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.



THANK YOU 26/07/2013(c) T.P.Ostwal & Associates*T.POSTWAL

[email protected]+919004660107


*10/08/2008sharad Jain (c)T.P.Ostwal & Associatessharad Jain (c)T.P.Ostwal & AssociatesIndian treaties with exemption method:India-Poland (exemption with progression. However, such exemption does not apply to dividend, interest and royalty & FTS. Therefore, it is of practical use in case of Polish branches of Indian companies.)India-Hungary (this treaty has been amended in 2005. Now, instead of exemption method, new treaty use tax credit method for India)

10/08/2008sharad Jain (c)T.P.Ostwal & Associates*sharad Jain (c)T.P.Ostwal & AssociatesSharad: In case of full tax credit, if foreign taxes are high, they will go to reduce R state tax on R state source income as well. Therefore, countries generally do not adopt full tax credit method. 10/08/2008sharad Jain (c)T.P.Ostwal & Associates*sharad Jain (c)T.P.Ostwal & AssociatesSharad: some countries provide for carry forward or carry backward of foreign tax credits. Some countries allows writing off of excess foreign tax credit.

Question pertaining to section 40 (a)(ii) whether excess foreign tax credit that is not eligible u/s. 90 or 91 can be claimed as tax deductible expenses?10/08/2008sharad Jain (c)T.P.Ostwal & Associates*sharad Jain (c)T.P.Ostwal & Associates*10/08/2008sharad Jain (c)T.P.Ostwal & Associatessharad Jain (c)T.P.Ostwal & Associates

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Elimination of Double Taxation

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