Double taxation is imposition of two or more taxes on the same income, Capital Taxes or any sales taxes in different countries.
Double taxation occurs mainly due to overlapping tax laws & regulations of countries where an individual does business.
When an Indian business entity makes a profit or some taxable gain in another country, it may be required to pay Tax on that income in India, as well as in country in which income was made.
Double Taxation is also common in MNC’s (or employees deputed abroad) where it is not equitable for a taxpayer to bear burden of tax in both countries on a single income. To protect Indian tax payers from this practice, Indian government had entered into tax treaties, known as Double Taxation Avoidance Agreement (DTAA) with about 79 countries.This means there are agreed rates of tax & jurisdiction on specified types of income arising in a country to a tax resident of another country.
TYPES OF DOUBLE TAXATION
Economic double taxation
Same economic stream of income taxed in two or more states but in the hands of different taxpayers [E.g.business profit and dividend in different countries].
Juridical double taxation
Two or more states levy taxes on same entity on same income for identical periods Arises due to overlapping claims of tax jurisdictions
Tax treaties largely prevent/mitigate juridical double taxation
Section 90(1) authorises Central Government to enter into agreement with Government of another country. Section 90A(1) authorises entering into an agreement with any specified association in specified territory outside India.
Objectives of the agreement could be :
- Elimination of double taxation
- Promotion of mutual economic relations, trade and investment
- Certainty on nature of income and quantum of tax payable irrespective of tax laws of overseas state
- Establishing the right of a country to tax any income stream
- Exchange of information to combat tax avoidance / tax evasion
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-
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
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,
(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.
The assessee referred to in subsection (4) shall also provide such other documents and information as prescribed.
Tax treaty – Residency Rules
- A person is a resident of a country if it is ‘liable to tax’ in the country by virtue of :
- Place of management
- Any other criterion of a similar nature
- Term ‘liable to tax’ is not same as actual payment of tax [SC in ABA]
- In case a person is resident of both countries
- In case of an individual – tie breaker rule determines residency
- In any other case – the place of effective management
Treaty: Agreement between Governments
- Treaties are signed by two national jurisdictions to regulate matters concerning taxes
- Taxpayer is not a party to a tax treaty
- Desire of signatories to make business environment in their jurisdictions tax friendly
- Treaty represents understanding as to rights and obligations of respective country
- To forego its right to tax,
- To limit scope or rate of taxation,
- To grant credit of tax paid directly or indirectly in other jurisdiction/s etc. etc.
- Understanding between Governments is to share tax revenues equitably as between themselves, while mitigating hardship for taxpayers