International Taxation
Due to globalisation and the businesses expanding across the
cotinents, the implications of corporate tax and personal income tax have
assumed significant importance. Gone are the days when the tax practitioner was
required to know only the local laws. Now, the detailed knowledge of the laws
concerning corporate tax and personal income tax in various countries is a must.
Globalisation and the business entity expanding their bases in many countries
only made their taxation complex by resulting into double taxation of their
income. The consequence of ‘double taxation’ was only against the principle of
natural justice as no one can be expected to pay the tax twice. This only
resulted into the execution of Tax Treaties amongst various nations to avoid
double taxation of their respective citizens.
Tax treaties exist between many countries on a bilateral
basis to prevent double taxation (taxes levied twice on the same income, profit,
capital gain, inheritance or other item). There are a number of model tax
treaties published by various national and international bodies, such as the
United Nations and the OECD.
International double taxation, narrowly defined, occurs when
two different states impose a comparable tax on the same potential tax-payer on
the same taxable item. The concept has been defined more broadly, but with less
precision, as the result of overlapping tax claims of two or more states. For
example, someone who is resident for tax purposes in India and who makes an
interest-bearing deposit with a bank in the USA is potentially exposed to income
tax on the interest in the USA and in India.
The concept of international double taxation that bilateral
tax treaties seek to remove is broader than the narrow definition. It includes
some types of economic double taxation—that is, taxation of something already
taxed under another country’s laws whether or not it is formally subject to
multiple levels of taxation. For example, many tax treaties operate to provide
tax relief to a corporate group when a state has imposed a corporate income tax
on profits earned by a subsidiary corporation and another state otherwise would
impose a corporate income tax on its parent corporation when those profits are
distributed as a dividend.
In general, tax treaties attempt to eliminate most forms of
international double taxation, narrowly defined, and various other forms of
international double taxation when a failure to do so would have a demonstrably
harmful impact on international trade and investment.
A major goal of bilateral tax treaties is to remove
impediments to international trade and investment by abating the risk of double
taxation that can occur when both contracting states impose tax on the same
income. This goal is advanced in four distinct ways.
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First, a bilateral tax treaty generally increases the
extent to which exporters residing in one contracting state can engage in
trading activity in the other contracting state without attracting tax
liability in that latter. The second state can usually only impose tax on the
business profits of a person who is resident in the other state if they
operate in the second state through a permanent establishment there.
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Second, when a resident of a contracting state does
engage in a sufficient activity in the other contracting state for that state
to have the right to tax, the treaty establishes certain guidelines on how
that income is to be taxed; that is, in general, which profits are
attributable to the permanent establishment in the second state. For example,
those guidelines may assign to one contracting state or the other the primary
right of taxation with respect to particular categories of income. They may,
in certain cases, provide for the allowance of deductions in measuring the
amount of income subject to tax. They may require a reduction in the
withholding taxes otherwise imposed by a contracting state on payments made to
a resident of the other contracting state.
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Third, a bilateral tax treaty provides a dispute resolution
mechanism that the contracting states may invoke to relieve double taxation in
particular circumstances not dealt with explicitly under the treaty.
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Fourth, where income or gains remain in principle taxable
in both contracting states, the state of residence of the tax-payer will
relieve the double taxation that results either by allowing a credit for the
tax paid in the other state or by exempting the income or gain from its own
tax in practice.
Special Story – International Taxation
In view of the complexities of international taxation and its
importance in the current scenario of globalisation, the Journal Committee has
decided to carry a special story on ‘International taxation’ covering various
aspects in two parts. Part – I will be published in the July 2006 Issue of the
journal and the next part will be published in the August 2006 Issue.
In this special story on International taxation, we have
tried to explain various aspects that generally concern any person. The topics
cover wide ranging aspects such as what is Permanent Establishment, taxation of
shipping and airlines, Pension Funds, EPC contracts, Royalty, Taxation of
Telecom and Telecasting companies, etc. The special story will be very much
useful to all our members as a reference material in their day-to-day practice.
I thank Shri N K Bhat, Shri Tarun Singhal, Shri Natwar G Thakrar and Shri Kirit
Dedhia for designing and co-ordinating the Special Story. I also thank all
authors for sparing their valuable time and giving their articles within the
scheduled time.
Right to Information Act
Every one of us is aware of the enactment of the Right to
Information Act, 2005. This Act is a potent weapon in the hands of the ordinary
citizen not only to fight injustice but to expose corruption and inefficiency in
Government Departments. However, being a new Act, not everyone is aware of the
finer aspects of the issue. In order to apprise the members on the issues
covered by the Right to Information Act, 2005, we have started ‘Queries and
Replies’ feature on the said Act with this Issue. Shri Narayan Varma has kindly
agreed to answer the queries referred to him on the subject. We are sure, the
members would find it very informative and useful.
We already had "Queries and Replies" feature on Direct Taxes.
Now we are reviving the said feature by starting with queries raised on the
subjects coverved under the Right to Information Act, 2005. We intend to extend
this ‘Queries and Replies’ feature to other laws as well. We welcome your
queries on issues under the Right to Information Act, 2005 and also other laws.
My Salutes
Over the last four years or so, the concept of carrying
special story on specific subjects has proved to be very beneficial to the
readers. We have received the appreciation for the quality of the contents. All
this achievement is the outcome of the efforts and contribution by many; the
Editorial Board, the Chairman, the office bearers and other members of the
Journal Committee and others who have contributed directly or indirectly as
authors, etc. My sincere thanks to all of them.
In the last four years, I had the previlege of being the
Editor of the journal. I must say that not only did I enjoy the responsibility
as the Editor but also gained in knowledge. Now it is time for a change and a
new person to take charge as the Editor of this invaluable journal of our
Chamber. I am sure you would continue your unstinted support for further
improvement of the journal.
