MODULE 6: INTERNATIONAL TAXATION Q: 1 what is unilateral relief?

It refers to the relief scheme which can be provided to the tax payer by home country irrespective of whether it has any agreement with other countries or has otherwise provided for any relief at all in respect of double taxation. The need for such relief may arise because every country cannot be in position to arrive at double taxation avoidance agreements. Sec 91 of the Income Tax provides relieve to an assessee under unilateral relief. Under this, relief is being provided by the Central Government to an assessee irrespective of whether there is any DTAA (Double Taxation Avoidance Agreement) between India and the other country. No agreement is required b/w both the countries for claiming relief but certain conditions needs to be satisfied which are as under:

The person or Company has been a resident in India in the previous year. The same income should be gained and received by the tax payer outside India in the previous year.

The person or the Company has paid taxes as per the foreign country Income Tax Rules. The income should have been taxed in India and in a country with which India has no tax treaty or agreement.

Q: 2 what is bilateral relief?

This relief is being governed by Sec 90 of the Income Tax Act. Under bilateral relief, the Government provides safeguard against double taxation by mutually entering into DTAA with the other country. The assessees are being provided relief in respect of tax on the basis of agreement entered by both the countries. This relief is granted on the basis of two methods

Exemption method By which a particular income is taxed in only one of the two countries.

Tax Relief method Under this, an income is being taxable in both countries in accordance with their respective tax laws read with DTAA. However, the country of residence of the tax payer allows him credit for the tax charged thereon in the country of the source.

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Q: 3 what is tax haven?

A tax haven is a state, country or territory where certain taxes are levied at a low rate or not at all. Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels relative to typical international taxation. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. A country that offers foreign individuals and businesses little or no tax liability in a politically and economically stable environment. Tax havens also provide little or no financial information to foreign tax authorities. Individuals and businesses that do not reside a tax haven can take advantage of these countries' tax regimes to avoid paying taxes in their home countries. Tax havens do not require that an individual reside in or a business operate out of that country in order to benefit from its tax policies.

Q: 4 what is double taxation relief?

Double Taxation is a situation in which the same income becomes taxable in the hands of the same company or individuals (tax- payer) in more than one country. It is a situation in which the tax payer pays tax both in the country of residence as well as in the other country from which he earns income. The situation of Double Taxation arises due to different rules for taxation of income in different countries.

In order to reduce the tax burden of an assessee in relation to Double Taxation, Central Government u/s 90 of the Income Tax Act has been certified to enter into Double Tax Avoidance Agreements (DTAA) with other countries. Where an assessee is a residence of one country but has a source of income situated in other country it gives rise to Double Taxation. India has entered into Double Taxation Avoidance Agreements with 79 countries, including U.S.A, Canada, U.K, Japan, Germany, Australia, Singapore, U.A.E and Switzerland etc.

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Q: 5 what are the provisions of Indian taxation to foreign companies?

Indian companies are taxable in India on their worldwide income, irrespective of its source and origin. Foreign companies are taxed only on income which arises from operations carried out in India or, in certain cases, on income which is deemed to have arisen in India. The later includes royalty, fees for technical services, interest, gains from sale of capital assets situated in India (including gains from sale of shares in an Indian company) and dividends from Indian companies. Thus, the tax-liability on income of a company depends upon the residential status of the company.

A Company is said to be resident in India during any relevant previous year if:i. ii. It is an Indian Company; or The control and management of its affairs is situated wholly in India. In case of Resident Companies, the total income liable to tax includes [section 5(1)]:

Any income which is received or is deemed to be received in India in the relevant previous year by or on behalf of such company

Any income which accrues or arises or is deemed to accrue or arise in India during the relevant previous year

Any income which accrues or arises outside India during the relevant previous year.

Similarly, a Company is said to be non-resident during any relevant previous year if:i. ii. It is not an Indian company, and The control and management of its affairs is situated wholly/partially outside India. In case of Non-Resident Companies, the total income liable to tax includes[section 5(2)]:

Any income which is received or is deemed to be received in India during the relevant previous year by or on behalf of such company

Any income which accrues or arises or is deemed to accrue or arise to it in India during the relevant previous year.

As a result a situation may arise where the same income becomes taxable in the hands of the same company in one or more countries, leading to 'Double Taxation'. The problem of double taxation may arise on account of any of the following reasons:

A company (or a person) may be resident of one country but may derive income from other country as well, thus he becomes taxable in both the countries.

A company/person may be subjected to tax on his world income in two or more countries, which is known as concurrent full liability to tax. One country may tax on the basis of nationality of tax-payer and another on the basis of his residence within its border. Thus, a

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person domiciled in one country and residing in another may become liable to tax in both the countries in respect of his world income.

A company/person who is non-resident in both the countries may be subjected to tax in each one of them on income derived from one of them, for example, a non-resident person has a Permanent establishment in one country and through it he derives income from the other country.

In India the relief against double taxation has been provide under Section 90 and Section 91 of the Income Tax Act.

Section 90 of the Income Tax Act relates to bilateral relief. Under it, the Central Government has entered into an agreement with the Government of any country outside India. These agreements called as "double taxation avoidance agreements (DTAA's)" , provide for the following:

Granting of relief in respect of:o o

Income on which income tax has been paid both in India and in that country or Income tax chargeable in India and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or

The type of income which shall be chargeable to tax in either country so that there is avoidance of double taxation of income under this Act and under the corresponding law in force in that country

Q: 6 what is arm length Price?

The price at which two unrelated and non-desperate parties would agree to a transaction. This is most often an issue in the each case other. of companies with international operations whose For such companies, there is often

international subsidiaries trade with

an incentive to reduce overall tax burden by manipulation of inter-company prices. Tax authorities want to insure that the inter-company price is equivalent to an arm's length price, to prevent the loss of tax revenue. A deal between two interrelated or enterprise associates parties. That is behavior as if they were not related, so that there is no query of a disagreement of attention. In simple way we can describe this as a deal between two unconnected or associate parties. The concept of an arm's length deal is to make sure that both associates in the transaction are behave in their self attention and are not issue to any force or pressure from the other associate.

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