Reliefs for double taxation

60 %
40 %
Information about Reliefs for double taxation

Published on May 13, 2014

Author: prakashaappi



Contents  Introduction  Meaning of double taxation  Reliefs for double taxation  Unilateral relief  Bilateral relief  Conclusion  References

Introduction of double taxation Before considering the basic principles of international double taxation ,you need to make sure we know what a tax is ? James(1998),in his dictionary of taxation, commonly used definition “A compulsory levy made by public authority for which nothing is received directly in return” This definition suggest that the nature of tax is that it is a payment made(a cost incurred ) without the usual associated receipt , Other transactions, of any consideration in return. The interaction of two tax systems each belonging to different country, can result in double taxation. Double Taxation of the same income in the hands of same entity would give rise to harsh consequences and impair economic development. Concept of Double taxation

Meaning of double taxation Double taxation means taxing the same income twice, once in the home country and again in host country. It is of relevance to mention here “No rules of international law prohibit international double taxation.” So it is for the countries in the international arena to solve double taxation problems. Double taxation of income is a great disincentive as it Hampers free flow of capital and  Becomes a prohibitive burden on taxpayers leading to decline in foreign investments.

Rules due to which double taxation arises  Source Rule – Under which the income of a person is subjected to taxation in the country where the source of such income exists i.e. where the business establishment is situated or where the assets/property is located irrespective of whether the income earner is a resident in that country or not; and  Residence Rule – Under which the income earner is, taxed on the basis of his/her residential status in that country. Hence, if a person is resident of a country, he/she may have to pay tax on any income earned outside that country as well.

HOW TO CALCULATE RELIEF UNDER SECTION 90, WHAT TREATY USE FOR THIS CALCULATION?  First include the income earned and taxed in the foreign country along with the income earned in India.  Then calculate tax on the Total income Above.  Now calculate average rate of tax.  Then multiply such rate with the income earned from foreign country.  Deduct tax paid in the foreign country from the tax calculated in step. 4 above, . Such amount is relief u/ s 90.

example In case of Resident individual. Income earned in India = Rs500000 Income earned from foreign = 200000 (tax paid there = Rs. 50,000) 1) Total income is = 500000 + 200000 = 700000 2) Tax calculated on 7,00,000/- is Rs. 118450/- 3) average rate of tax is (118450 / 700000) = 16.92% 4) Calculate average tax on foreign income i.e. 200000 x 16.92% = Rs. 33840/- 5) Tax paid in foreign country is Rs. 50,000. 6) Hence relief u/s 90 is lower of 33840 and 50000, i.e 33.840/- Therefore tax statement is, Tax on total income = 118450 Less: relief u/s 90 = 33840 Tax payable 84610/-

Reliefs for double taxation The relief against such double taxation in India has been provided under Section 90and Section 91 of the Income Tax Act. They contain two ways of double taxation relief Unilateral relief Bilateral Relief

Unilateral relief: Under this system of taxation whether the income is subject to tax abroad or not is immaterial. In Unitary system, relief is given by way of tax credit for the taxes paid abroad. The countries, which follow this method of tax credit, are, U.S, Greece, India, and Japan to name a few. For example, under section 91 of the Income tax Act,1961,the method is “tax credit method”. A resident in India who has paid income tax in any country with which India does not have a treaty for the relief or avoidance of double taxation is entitled to credit against his Indian Income tax for an amount equal to the Indian coverage rate or the foreign rate whichever is lower applied to the double taxed income. This is done as follows.

Unilateral relief will be available for the tax-payer, if the following conditions are satisfied:-  The person or company (assesses) in question must have been resident in India in the previous year;  Same income must have accrued or arisen to him outside India during the previous year and it should also be received outside India. Such income must not be deemed to accrue or arise in India;  That income should be taxed both in India and in a foreign country and there should be no reciprocal arrangement for relief or avoidance from double taxation with the country where the income has accrued or arisen.  In respect of that income, the person or company (assessee) must have paid by deduction or otherwise, tax under the law in force in the foreign country in question in which the income outside India has arisen.  It is necessary that the foreign tax be levied in a country with which India has no agreement for relief against or avoidance of double taxation, but it is immaterial that tax paid in such a foreign country is in respect of income arising in another foreign country with which Indian has such an agreement

Bilateral Relief Under Section 90, Indian government provides protection against double taxation by entering into a mutually agreed tax treaty (DTAA) with another country. Under bilateral relief, protection against double taxation is provided either by completely avoidance of overlapping tax or waiving a certain amount of the tax payable in India. Bilateral relief is provided in section 90 and 90A of the Indian Income Tax Act. Bilateral relief is provided through following methods:

 Exemption Method One method of avoiding double taxation is for the residence country to altogether exclude foreign income from its tax base. The country of source is then given exclusive right to tax such incomes. This is known as complete exemption method and is sometimes followed in respect of profits attributable to foreign permanent establishments or income from immovable property. Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes. Credit Method This method reflects the underline concept that the resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the source country is given by the residence country against its domestic tax as if the foreign tax were paid to the country of residence itself.

Tax Sparing One of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreign investment flows in India from foreign developed countries. One way to achieve this aim is to let the investor to preserve to himself/itself benefits of tax incentives available in India for such investments. This is done through “Tax Sparing”. Here the tax credit is allowed by the country of its residence, not only in respect of taxes actually paid by it in India but also in respect of those taxes India forgoes due to its fiscal incentive provisions under the Indian Income Tax Act.

conclusion Apart from relief to persons of a country where India has entered in Double Taxation Avoidance Agreement, there is relief given even in cases where the Government of India has not entered into DTA agreement with any foreign country. In such cases if any resident Indian produces evidences to show that, he has paid any tax in any country with which the Government of India has not entered into a DTA agreement, tax relief on that part of his income which suffered taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income whichever is less shall be allowed as deduction u/s 91 while calculating his tax liabilities on such income.

References   International Tax Policy and Double Tax Treaties --- Kevin Holmes



Add a comment

Related presentations

Boat chandlery

Boat chandlery

October 26, 2014 We offer a ... Moori...

Silver bar!

Silver bar!

October 21, 2014

Pretty similar to gold bars are these silver slabs. Silver is considered as the mo...

Gold coin prices!

Gold coin prices!

October 21, 2014

If you are an investor of gold bars and coins, one of the major things that you ou...

CyberSecurity's social media stats for one week as of Oct 21st 2014

CyberSecurity's social media stats for one week as of Oct 28th 2014

Related pages

Double Taxation Relief for companies - Detailed guidance ...

How companies claim Double Taxation Relief and the types of income covered by the double taxation treaties.
Read more

DT - Double Taxation Relief Manual: main contents

DT - Double Taxation Relief Manual: main contents. Updates to this guidance. Guidance on the principles of Double Taxation Relief and Double Taxation ...
Read more

Tax on foreign income - GOV.UK

Find out whether you need to pay UK tax on foreign income - residence and ‘non-dom’ status, tax returns, claiming relief if you’re taxed twice ...
Read more

Double Taxation Relief - ICAI Knowledge Gateway

Double Taxation Relief 15.3 relief of tax, or for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the ...
Read more

Double Taxation - Tax Guide for Students

Double Taxation . Many countries have laws which mean that residents of that country pay tax on all income, irrespective of where it arises (like the UK ...
Read more

CIOT - Double Taxation relief

This paper sets out the response of the Chartered Institute of Taxation to the discussion paper issued by the Inland Revenue on 12 March 1999.
Read more

CAT Guide - Credit for Double Taxation - Revenue - Irish ...

Credit for Double Taxation Double taxation relief aims to mitigate the hardship which might arise when an event gives rise to a charge to Capital ...
Read more

Finnish Tax Administration > Relief for double taxation

Exemption method. This method involves no Finnish taxation of the foreign-sourced income, but it takes it into account in the assessment of the taxpayer's ...
Read more

Double Taxation Relief - Inland Revenue Department 稅務局

Double taxation arises when two or more tax jurisdictions overlap, such that the same item of income or profit is subject to tax in each. Hong Kong adopts ...
Read more

Double Taxation Relief - Isle of Man Government - Home

DOUBLE TAXATION RELIEF 4 1 INTRODUCTION An individual, resident for income tax purposes in the Isle of Man, is required to declare their whole
Read more