How Does International Taxation Operate?
International taxation is to levy tax on an individual’s personal income which he has earned in the country where he runs his business and where he resides. This means that income earned at one place is taxed at two different places:
Taxed at the place of residence
Taxed at the place of earning
Basics of International Taxation from the perspective of India
For international taxation perspective, it is divided into two parts-
Taxation on Foreign Income- Taxation resident individuals and corporations on income arising in foreign countries.
Taxation of Non-Resident- Taxation on individuals residing domestically.
Indian Income Tax Act levies tax on the income earned in a foreign country by residents and on Indian income of NRIs. According to Indian taxation law we have been using residential status in order to determine the taxable income for international taxation. In this blog we are focusing on income that is earned in India as well as in Foreign country.
TDS (Tax Deducted at Source) Provision
We have a TDS system where the tax is collected at the source of remittance of the sum to non-resident. Sometimes non-residents do not have assets or establishments situated in India. Such income is referred to as Non-resident income.
Double Taxation Avoidance Agreement (DTAA)
The concept of Double taxation is explained under Vienna Convention on law of Treaties, 1960. It is basically an agreement between the countries which says how taxes are to be levied and computed at both the countries and under the treaty.
The agreement is signed between the countries to reduce the burden on the taxpayer and resolving the issue of taxability of income between the concerned nations and to increase transparency and reduce tax evasion.
How does DTAA work?
In every country their domestic law is applied on both residents and non-residents, but section 90 is the guiding section in case of DTAA.
This Section permits the Indian Government to enter into agreements with the countries or specified territories for the purpose of Double Taxation. India has entered into agreements with approximately 88 countries.
The provision of Section 90 as follow:
The relief to the taxpayer where he has paid tax under both systems of tax laws in different countries, that is, Indian Law and in corresponding foreign law.
To avoid the double taxation imposed in Indian Law and the corresponding foreign jurisdiction.
To prevent tax evasion in either India or foreign jurisdiction.
It helps to exchange information of tax evasions or helps in investigating agencies in the cases of tax evasion in either of the jurisdiction.
Helps to create recovery of income tax under the Income tax law or foreign jurisdiction
Section 90(2) helps to bring the treaty into force.
It helps to compute the amount of liability of tax
The assessee on whom the DTAA applies,
The provision of Income Tax Act Or Provision Of DTAA will be computed
Whichever Will Be Less Beneficial to the Assessee Will be Deducted.
DTAA application with Domestic Laws-
The following steps have to be considered for DTAA
Verify the person seeking relief under the treaty is a resident in terms of a contracting.
If the person qualifies to be domestic law then his income is to be computed according to domestic Tax law.
Then verify the corresponding provision in DTAA for the assessee where the income lability is generated. Calculate tax with respect to the item of income given in treaty.
Check whether the tax computed for the assessee in both the law and treaty, which one is beneficial.
If the domestic law is beneficial, it gives benefit to the assessee.
For foreign tax credit, Rue 128 applies.
International Tax planning and International Taxation
International tax planning is done to achieve tax effectiveness at the cross border transactions and lawful routing of business activities and capital flows. The international tax planning checks the relationship between two or more taxation system., the impact of juridical and economic double taxation. It also involves tax incentives, or tax exemptions for foreign income, use of tax treaty and anti- avoidance treatments.
India’s Position to stop Tax Planning are-
SAAR- Specific Anti avoidance Regulations like section 9, section 64 ITA, 1961.
Transfer Pricing
GAAR
Tax planning is prevented by the above mentioned methods by the Government. The reason is very simple even if the assessee wants to pay tax due to prevailing provisions in double taxation agreement and information exchange systems. Also for any medium size taxpayer it is difficult to comply with the compliances under international taxation.
Conclusion
The number of cross border transactions has increased and so is the tax planning of international transactions. The complication under international taxation will increase day by day. The future of taxation is dependent on international transactions. Therefore DTAA and treaty shopping needs to be stopped.
Contact BIAT Consultants for any Taxation assistance.
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