tax treaties-an overview -by vinay n sanji - Bangalore Branch of SIRC

1/19/2010TAX TREATIES-AN OVERVIEW-BY VINAY N SANJIWorkshop on Basics of International TaxationBangalore Branch of SIRC of ICAI18 th Jan. 2010SYNOPSIS International Taxation- An Introduction Tax Treaties-An Introduction. Tax Treaty Structure Discussion of prominent Articles of a Tax Treaty Some important conceptsVinay N Sanji & Co. 21

1/19/2010INTERNATIONAL TAXATIONAN INTRODUCTIONVinay N Sanji & Co.3GLOBALIZATIONWhat is Globalization ?Globalization is the phenomenon of Sourcing capital from where it is cheapest, Sourcing people from where it is bestavailable, Producing where it is most cost effectiveand Selling where the markets are.Vinay N Sanji & Co.42

1/19/2010INTERNATIONAL TAXATION- MEANINGIt is a body of legal provisions embedded in the tax lawsof each country to cover the tax aspects of cross bordertransactions.InternationalLawInternational TaxTax TreatiesVinay N Sanji & Co.5INTERNATIONAL TAXATION-OBJECTIVESEconomicEfficiencyBalanceCapitalExport &ImportNeutralityKeyObjectsNationalWealthMaximizationTaxEquityVinay N Sanji & Co.63

1/19/2010TAX TREATIESAN INTRODUCTIONVinay N Sanji & Co.7TAX TREATYMeaning-A tax treaty is a formally concluded andratified agreement between two independentnations (bilateral treaty) or more than two nations(multilateral treaty) on matters concerningtaxationVinay N Sanji & Co.84

1/19/2010OBJECTIVESAvoid Double TaxationPrevent Tax EvasionAllocate Tax JurisdictionExchange of InformationCertainty of Tax Treatment toInvestorsVinay N Sanji & Co. 9TAX TREATIES- EVOLUTIONARY MILESTONES•The first DTAA entered in to between Prussia & Austria189919281943194619561961196319771979•The first model draft DTAA was published with the concept of PE being introduced for the first time•The Mexico Model was released•The London Model convention was released•The OEEC took upon the task of improving the model DTA to suit the needs of its member countries•OEEC was superseded by OECD•The first draft of OECD model was published•The final version of the OECD Model was published & has been last revised in 2008•Developing countries take recourse to UN model as OECD model is biased towards Developed nations (Last Update in 2001)•US model is introduced. Last revised in 20061981Vinay N Sanji & Co.105

1/19/2010MODEL CONVENTIONSModel conventions- provide the broad framework for treaty formulation serve as useful interpretation materialThe popular model conventions are:a) UN Modelb) OECD Modelc) US ModelVinay N Sanji & Co.11TYPES OF TAX TREATIES Limited Treaties-which cover -a) income from operation of aircrafts and ships,b) estates,c) inheritance andd) gifts. Comprehensive Treaties-which are wider in scopeaddressing all sources of incomeVinay N Sanji & Co.126

1/19/2010TREATY POSITION IN INDIASection 90(1) of the Indian Income Tax Act, 1961authorizes the Central Government to conclude taxtreatiesIndia presently has treaties with 91 countriesSection 90 (2) of Income Tax Act Vs. Section 258(8) ofthe Direct Tax CodeSection 91 - provides unilateral reliefVinay N Sanji & Co.13TAX TREATY STRUCTUREVinay N Sanji & Co.147

1/19/2010ARTICLES- CLASSIFICATIONApplicationArticlesDefinitionProvisionsAnti-AvoidanceProvisionsElimination ofDouble TaxationMiscellaneousProvisions• Article 1-Applicability• Article 2- TaxesCovered• Article 30-Entryinto Force• Article 31-Termination• Article 3-GeneralDefinitions• Article 4-Residence• Article 5-PermanentEstablishment• Article 9-AssociatedEnterprises• Article 26-Exchange ofInformation• Article 27-Assistance forcollection of tax• Article 23-Elimination ofDouble Tax• Article 24-Non-Discrimination• Article 28-Diplomats• Article 25-MutualAgreement• Article 29-TerritorialextensionVinay N Sanji & Co.15DISTRIBUTIVE ARTICLESArticle 6-Immovable PropertyArticle 7-Business ProfitsArticle 8-Shipping, etc.Article 10-DividendsArticle 11-InterestArticle 12-Royalties & Fees for Technical ServicesArticle 13-Capital GainsArticle 14-Independent Personal ServicesArticle 15-Dependent Personal ServicesArticle 16-DirectorsArticle 17-Artistes & Sports personsArticle 18-PensionsArticle 19-Government ServicesArticle 20-StudentsArticle 21-Other IncomeArticle 22-CapitalVinay N Sanji & Co.168

1/19/2010PROMINENT ARTICLES-A DISCUSSIONVinay N Sanji & Co.17SCOPEArticle 1- Applicability -Applies to a person who is a resident ofone or both the countries.Article 2- Taxes covered- Taxes on income and capital Indian taxes covered are income tax, surcharge and cessArticle 30-Entry into forceThis article tells when and how a DTA becomes operativeArticle 31-TerminationThis article tells when and how a DTA can be terminatedVinay N Sanji & Co.189

1/19/2010DEFINITIONS Article 3-General Definitions1. Person2. Company3. Contracting State4. Enterprise of a Contracting State4. Competent Authority6. NationalUndefined Terms-meaning to be as defined under thedomestic tax laws applicable to the taxes covered in thetreatyVinay N Sanji & Co.19DEFINITIONSArticle 4 - ResidenceA person is a resident of a country if he is liable to tax in the country by virtue of:-Domicile-Residence-Place of Incorporation-Place of management-Any other criterion of a similar natureTie-Breaker Rules- In the case of a dual resident, the tie-breaker rules shallapply to determine the residential statusa) In the case of an individual his personal and economic ties determine hisresidential statusb) In the case of others it is the place of effective managementVinay N Sanji & Co.2010

1/19/2010DEFINITIONSArticle 5 - Permanent Establishment (PE) Means a fixed place from where the business of theenterprise is carried onPE includes place of management, branch, office, factory,workshop, mine, quarry, an oil or gas well, a constructionsite for long duration, a services location for long durationand a dependent agency with power to conclude contractsVinay N Sanji & Co.21DISTRIBUTIVE PROVISIONSVinay N Sanji & Co.2211

1/19/2010ACTIVE & PASSIVE INCOME Passive Income-refers to income derived from investmentin tangible / intangible assets.Equity InvestmentDebtRight/Permission to use assetsDisposal of capital assets ownedYieldsDividendInterestRent / RoyaltiesCapital Gain Active Income is the income derived from carrying onactive cross border business operations or by personaleffort and exertion as in case of employment.Vinay N Sanji & Co.23PASSIVE INCOMES-DISTRIBUTION OF TAXING RIGHTSArticleRef.Nature of Income6 Income from ImmovablePropertyTaxing Rightof SourceStateHas the first rightto tax10 Dividend Income Has the rightto taxprovided ratedoes not11 Interest Income12 Royalties and Fees forTechnical Servicesexceed theagreed rate oftax as perDTAA13 Capital Gains Has the first rightto tax aTaxing Rightof State ofResidenceReserves theright to tax18 Pensions Cannot tax pension Can tax PensionVinay N Sanji & Co.RemarksDividend is nottaxable in India.DDT is levied uponthe companydeclaringdividendsTax can bedetermined as perthe domestic lax2412

1/19/2010ACTIVE INCOMES-DISTRIBUTION OF TAXING RIGHTSArticleRef.Nature ofIncomeTaxing Right ofSource State7 Business Profits Yes, if PE exists in thesource stateTaxingRight ofState ofResidenceRemarksIncome attributable to PEalone can be taxed insource state8 Shipping & AirTransport14 IndependentPersonal ServicesCannot tax this incomeYes, if the person has afixed base or his stayextends beyond 90 daysReservesthe right totaxIncome attributable toFixed Base alone can betaxed in source state15 DependentPersonal Services(Employment)Yes, if employment isexercised in the sourcestate. Cannot tax if stay isless than 183 daysIf salary is paid on behalfof foreign employer andis not borne by PE, thensource state cannot taxthe salaryVinay N Sanji & Co.25ACTIVE INCOMES-DISTRIBUTION OF TAXING RIGHTSArticleRef.Nature ofIncomeTaxing Right ofSource State16 Directors’ Fees Yes, the source state cantax the same17 Artiste & Athletes Yes, the source state cantax the same19 Govt. ServiceRemuneration20 Students &ApprenticesNo, unless the personrendering servicehappens to be a residentof and national of thesource stateNo taxing rights21 Other Income Yes, the source state cantax the sameTaxingRight ofState ofResidenceReservesthe right totaxRemarksDTA may specify theextent to which theincome may be exemptVinay N Sanji & Co.2613

1/19/2010ANTI-AVOIDANCE PROVISIONSArticle Ref. Title Comments9 AssociatedEnterprises26 Exchange ofInformation27 Assistance incollection oftaxesAdoption of Arms Length Price intransactions between AssociatedEnterprisesBoth the contracting states shallassist each other in collection ofrevenue claimsVinay N Sanji & Co.27ELIMINATION OF DOUBLE TAXATIONJuridical Double Taxation and Economic Double TaxationArticle 23 –Alternate methods are as below: The Exemption Method- Full Exemption- Exemption with progressionForeign Tax Credit Method- Full Credit- Ordinary CreditDeduction MethodVinay N Sanji & Co.2814

1/19/2010MISCELLANEOUS PROVISIONSArticle Ref.Title24 Non-Discrimination25 Mutual Agreement Procedure28 Diplomats29 Territorial ExtensionVinay N Sanji & Co.29INTERPRETATION OF TREATYTax Treaty Vs. Domestic LawThe Vienna Convention on Law of Treaties, 1969 (VCLT) has codifiedinternational law. The rules contained in it can be applied to interprettreaties.Section 31(1) to 31(4)) of the VCLT, 1969 lays down the foundation forinterpretation as per customary international lawsSection 31(1) states that a DTA shall be interpreted in GOOD FAITHin accordance with the ORDINARY MEANING to be given to theterms of the treaty in their CONTEXT and in the light of its object.Treaties are based either on UN or OECD model. Hence commentariesin these models may assist interpretationVinay N Sanji & Co.3015

1/19/2010SOME IMPORTANT CONCEPTS Treaty ShoppingForeignInvestorInvestsinCo. incorporated inMauritius (ShellCo.) which in turnInvestsinIndianCompany Most Favored Nation (MFN) Clause ProtocolsVinay N Sanji & Co.31APPLYING 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?Vinay N Sanji & Co.3216

1/19/2010REFERENCE MATERIALInternational Tax Policy and Double TaxTreaties by Kevin HolmesVinay N Sanji & Co.33Vinay N Sanji & Co.Chartered Accountants#2, I Floor, #347, M N Complex,Puttenahalli Main Road, J P Nagar 7 th Phase,Bangalore-560078+91 080 41329667 (D), Mobile +919342577382E-mail-vinaynsanji@gmail.com3417