In the world, business and economics have taken a major role in providing employment and in developing a country’s economic growth and development. The conglomerates and investors across the globe have a very crucial role in establishing and maintaining the economic growth of the country and on the other hand, the government of that country also has responsibilities and duties to grow the economy, foreign, literacy rate, infrastructure, health infrastructure, exports and investments of the country, in order to do this the government of the country requires taxes and the major contribution cokes from the business houses but now the tussle starts that as the multinational corporations (M.N.C.) have to work a cross the globe, so, they have to re-pay taxes on a particular income twice or thrice in different countries where they are operating. After observing this problem, the government of the country came up with a solution to avoid double taxation by signing treaties or agreements on the same on a bilateral or multilateral basis.
What Is A Double Taxation Treaty?
It is a treaty or agreement between two countries in order to avoid the dual taxation mechanism on the same earnings or assets of a company or individual in both countries. Normally, a taxpayer is always liable to pay the amount of taxes as per the country’s tax slab, norms, or laws. The treaty or agreement between two countries related to double taxation includes all types of earnings, such as profits earned by a company, capital gains, dividends, interest earned on any investment, royalties, income from any legal sources, etc. The double taxation treaty (DTT) is also known as the double taxation agreement (DTA) or the double tax avoidance agreement (DTAA). The primary focus and objective of the double taxation avoidance agreement are to reduce the double taxation problem and promote trade and commerce for the economic growth of the countries.
The main benefits of the double taxation treaty are as follows:
- To provide tax relief and exemptions,
- Promote business trade between the countries,
- Promote investments in a country and also prevent unnecessary tax evasion.
- Helps in creating a sustainable economic system, and
- To provide motivation for the stakeholders and have a fair evaluation by creating mutual cooperation between themselves for progressive economic growth,
- Promoting and providing cross-border trade,
- To have a non-discrimination approach and apply the rule of equity and
- Allocation and division of taxation rights and jurisdiction between the two countries
There are two types of double taxation, which are as follows:
1) Corporate double taxation: Here, the profits of the company are taxed twice in its home country and outside the home country.
2) International double taxation: here, the investors or individuals who have earned some income in foreign lands are also twice taxed.
Historical Background Of The DTAA
The first official double taxation treaty was signed in 1899 between Austria and Hungary. In the mid-20th century, the double taxation avoidance agreement was introduced in India. The first double taxation avoidance agreement was signed by India and the United Kingdom (U.K.) in 1950. In 1960–1970, India was able to sign double taxation avoidance agreements with economic powerhouses of that time, such as the U.S.A., the Netherlands, Germany, France, etc. In the decade of 1900–2000, India signed double taxation avoidance agreements with countries such as Cyprus, Mauritius, and Singapore, thus strengthening its Asian presence as the new economic powerhouse. The Indian government, through its Ministry of Finance, is responsible for negotiating and signing double taxation treaties. These are then ratified by the Parliament of India so that they can commence.
Provisions In Indian Law Related To The Double Taxation Treaty
India has a double taxation avoidance system that is mentioned in the Income Tax Act of 1961, and the Double Taxation Avoidance Agreements (DTAA) entered into by India with multiple countries. Sections 90, 90 (A), and 91 of the Income Tax Act, 1961, deal with the reliefs of double taxation avoidance agreements. Some relevant sections related to the double taxation avoidance agreements are as follows:
1) Section 90 of the Income Tax Act of 1961, states the basic foundation for the implementation of a double taxation avoidance agreement in India. It gives authority to the Central Government (Union Government) to enter into agreements with foreign countries for the avoidance of double taxation and for information exchange. The quoted paragraph shows the true bare-act statement in Section 90 of the Income Tax Act, 1961: “Agreement with foreign countries.”
(1)The Central Government may enter into an agreement with the government of any country outside India.
(a) for the granting of relief in respect of income on which have been paid both income- tax under this Act and income- tax in that country, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, 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 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, 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 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.”
Section 90 of the Income Tax Act, 1961 deals with double taxation cases where a treaty or agreement is signed between the countries.
Section 90(A) of the Income Tax Act, 1961 deals with the provisions where a double taxation avoidance agreement is applied to a particular association. Between two institutional bodies not with any person or individual.
Section 91 of the Income Tax Act, 1961 deals with the provisions where the double taxation avoidance agreement is not signed with India but the taxation issue is considered.
2) Ambit of Taxation: here, the treaties or agreements state that all types of income are under its purview. This makes it easier for the home country’s authorities to determine the status of a foreign-origin company operating in India.
3) Tax Relief: it avoids or decreases the tax amount. The methods used are as follows:
(i) Tax credit method: the taxpayer residing in the country of residence can have credit for the amount that he or she has paid as taxes in the other country.
(ii) Exemption method: here, the taxpayer residing in the country of residence can get a full exemption on the income on which he or she has already paid taxes in the other country.
(iii) Reduced rates: here, the taxed amount in another country is not fully exempt but is partially exempt in the country, so the rate of taxation is applied at a discounted rate.
4) The double taxation avoidance agreement also facilitates the home country’s transfer of financial records of the taxpayer in cases of fraud, misleading, illegal, or false filing for exemption by the taxpayer. The exchange of information can be financial or non-financial, as per the requirements.
5) In case of any dispute between the taxpayer and the concerned authority in any country, he or she can approach the concerned authority to resolve the problem because, in certain cases, due to human or non-human error, the credits of the tax may not be credited, etc. Normally, the double taxation avoidance agreement has a mutual resolution process, either by way of arbitration or another way stated in the agreement.
6) A double taxation avoidance agreement usually comes with a limitation on benefits (LOB) clause, where the terms and conditions for eligibility for relief under the double taxation avoidance agreement are stated. This acts as a reasonable boundary or restriction that filters out the true beneficiaries of this scheme.
India has signed the double taxation avoidance agreement (DTAA) with more than 85 countries which are – Australia, Austria, Bangladesh, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kenya, South Korea, Kuwait, Kyrgyz Republic, Libya, Lithuania, Luxembourg, Malaysia, Malta, Mauritius, Mongolia, Montenegro, Morocco, Mozambique, Myanmar, Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Senegal, Serbia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sudan, Sweden, Switzerland, Syria, Taiwan, Tajikistan, Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States of America, Uruguay, Uzbekistan, Venezuela, Vietnam, Yemen, Zambia and Zimbabwe.
How A Company Can Apply For Relief Under The Taxation Treaty?
To determine eligibility for availing relief under the double taxation avoidance agreement, consider the following:
- The company should meet the criteria for residency as per the treaty in order to claim it.
- Form 10 F of Income Tax is a very vital form where non-resident taxpayers can file for tax rebates, exemptions, and benefits where the tax treaties or agreements are signed by India.
- A foreign tax credit can be claimed by filing Form 67, where the resident taxpayer could claim the tax credit if he or she has paid taxes on an income outside India. It can also be helpful to claim where a treaty or agreement is not signed.
- The company shall obtain a Tax Residency Certificate (TRC) from the tax authorities of the home country. This certificate is evidence of the residency status of the company in that land.
- Treaty provisions and requirements like where the full amount is exempted and where a partial amount is exempted should be taken care of while claiming the benefit; otherwise, the application can be rejected or denied by the authorities.
- The documents required as evidence, such as the invoice, receipts, financial documents, etc., are to be submitted to the authorities. The calculation for availing the benefit should be accurate and correct to get the benefits.
- Follow-ups are a must, as sometimes the government process can take time, and even a slight lack of expertise can ruin the claim.
- If no objection is raised or nothing is rectified from the taxpayer’s end, the authorities will grant the taxpayer a confirmation of relief information through the proper and official mode of communication.
Challenges In The Double Taxation Treaty
The double taxation avoidance agreement has some grey areas attached to it that require strong inquiry, inspection, and investigation in case of any fraudulent activity: –
1) The red tape in the bureaucratic system of the country can attract unnecessary delays and corruption during the verification process for granting the claims.
2) In the case of war or any problem with the other country with whom the double taxation avoidance agreement is signed, there can be a breach of the agreement, which ultimately can lead to its breakdown.
3) Changes in the government of the country can change the double taxation policies.
4) Companies can fraudulently form shell companies to evade full taxes.
5) The data and information transfer can lead to breaches of privacy and data protection laws in a country.
Case Laws Related To The Double Taxation Treaty
1) Union of India v. Azadi Bachao Andolan, Supreme Court, 2003: here, the Hon’ble Court interpreted the provision of the double taxation avoidance agreement signed with India and Mauritius. The court stated that the resident of Mauritius would be fully exempt from the capital gains taxes in India even though the capital gain was earned by the resident on an Indian company’s share trading.
2) Union of India v. Jain brothers, Supreme Court, 1960: here, the Jain brothers, New Delhi-based businessmen, did not file their taxes. In response to this, the income tax authorities sent a notice to them. The Income Tax Officer also levied a penalty of 1,03,434 for non-compliance with the notice. n reply, the Jain brothers filed a case challenging the constitutional validity of double taxation in India and stated that it violated fundamental rights, especially Article 14 (the right to equality). The Delhi High Court dismissed the case in the first instance. However, the party appealed to the Supreme Court, where the Court stated that the double taxation policies of the Indus are valid as they are made by the legislation and are constitutionally valid as well.
3) Vodafone International Holdings B.V. v. Union of India, Supreme Court, 2003: here, the Hon’ble Court stated that the offshore acquisition of Hutch by Vodafone Company was under the ambit of a double taxation avoidance agreement signed by India and the Netherlands, and hence, no taxes were to be paid in India.
4) McDermott International Inc. v. Commissioner of Taxes, The Privy Council, 1987: here, the Hon’ble court stated that as per the double taxation treaty signed by New Zealand and the U.S.A., the profits earned on the sale of shares by a company whose origin is in New Zealand and the seller of the shares is a resident of the U.S.A. are to be paid in New Zealand.
5) Philip Morris Products S.A. v. The Commonwealth of Australia, High Court of Australia, 2015: here, the Hon’ble Court stated that the Australian government’s tobacco plain packaging law was not affecting the tobacco company as per the double taxation treaty signed by Australia and Hong Kong, therefore no compensation was to be paid.
In conclusion, the double taxation avoidance agreement helps to boost trade and investment in the country, which ultimately makes the country a likeable place to invest by big multinational companies, and the ease of doing business ranking of that also increases. The foreign investments of a country are also boosted by the double taxation avoidance agreement benefits, which increase the foreign exchange inflow into the country. The main benefit is taken by the industries, as they can set up their manufacturing plants in the country; therefore, the cost of products decreases, the economic growth of the country is boosted, and the country can also focus on exports.
At present, India’s ease of doing business ranking is 10th. The tax benefits also help retail investors invest abroad, either directly in stock markets or indirectly through mutual funds, etc., and grow their capital in order to uplift their standard of living. It also supports the foreign diplomacy of a country by having a cooperative and development-oriented atmosphere and by simplifying the complexities of international taxation legislation.
This article is written and submitted by Ritwick Kundu during his course of internship at B&B Associates LLP. Ritwick is a final-year LL.B. student at Bharati Vidyapeeth, Campus, New Delhi.