Product Code Database
Double taxation is the levying of tax by two or more jurisdictions on the same income (in the case of ), asset (in the case of Wealth tax), or financial transaction (in the case of sales taxes).
Double liability may be mitigated in a number of ways, for example, a jurisdiction may:
may enter into tax treaty with other Country, which set out rules to avoid double taxation. These treaties often include for exchange of information to prevent tax evasion such as when a person claims tax exemption in one country on the basis of non-residence in that country, but then does not Declare Yourself it as foreign income in the other country; or who claims local tax relief on a foreign tax deduction at source that had not actually happened.
The term "double taxation" can also refer to the taxation of some income or activity twice. For example, Corporate tax may be taxed first when earned by the corporation (corporation tax) and again when the profits are distributed to shareholders as a dividend or other distribution (dividend tax).
There are two types of double taxation: jurisdictional double taxation, and economic double taxation. In the first one, when source rule overlaps, tax is imposed by two or more countries as per their domestic laws in respect of the same transaction, income arises or deemed to arise in their respective jurisdictions. In the latter one, when same transaction, item of income or capital is taxed in two or more states but in hands of different person, double taxation arises.income tax india
A DTA (double tax agreement) may require tax to be levied by the country of residence, and be exempt in the country in which it arises. In other cases, the resident may pay a withholding tax to the country where the income arose, and the taxpayer receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has already been paid. In the former case, the taxpayer would declare himself (in the foreign country) a non-resident. In either case, the DTA may provide that the two taxation authorities exchange information about such declarations. Because of this communication between the countries, they also have a better view on individuals and companies who are trying to tax avoidance or tax evasion.Darren Rykers (2009): "A Critical Analysis of how Double Tax Agreements can facilitate Fiscal Avoidance and Evasion"; The Taxpayer and the Lotus, 17 Nov. 2009.
South Africa maintains double taxation agreements (DTAs) with several countries, offering relief mechanisms such as tax credits and exemptions for foreign income.
Individuals ("natural persons") can only be resident for tax purposes in one country at a time. Corporate persons, owning foreign subsidiaries, can be based in one country and simultaneously based in another country: a subsidiary may make substantial income in one country but remit that income (as license fees, for example) to a holding company in another country that has a lower rate of corporation tax. Because of this, the control of unreasonable tax avoidance of corporations becomes more difficult and it requires more investigation when goods, rights and services are transferred.Gio Wiederhold (2013). Valuing Intellectual Capital, Multinationals and Taxhavens; Springer Verlag, 2013, Chap. 4.
The EM method requires the home country to collect the tax on income from foreign sources and remit it to the country where it arose. Tax jurisdiction extends only to the national border. When countries rely on territorial principle as described above, they usually depend on the EM method to relieve double taxation. But the EM method is only common for certain income classes or sources, such as international shipping income for example.
The FTC method is used by countries that tax (individual or corporate) residents on income, irrespective of where it arises. The FTC method requires the home country to allow credit against domestic tax liability where the person or company pay foreign income tax.
Another solution used is 'relief provision'. They create more favorable terms for multinational companies to (remain) based in countries that use less effective measures than the EM or FTC method.Ernest R. Larkins(2001): Double Tax Relief for Foreign Income: A Comparative Study of Advanced Economies; HeinOnline, 2001. Vol:21:233
(For a transition period, some states have a separate arrangement.See (17) and (18) of 2003/48/EC above, for a "temporary" period, Austria, Belgium and Luxembourg may apply a withholding tax to non-resident accounts rather than exchange information. They may offer each non-resident account holder the choice of taxation arrangements: either (a) disclosure of information as above, or (b) deduction of local tax on savings interest at source as is the case for residents).
A 2013 study by Business Europe says that double taxation remains a problem for European MNEs and an obstacle for cross border trade and investments. In particular, the problematic areas are limitation in interest deductibility, foreign tax credits, permanent establishment issues and diverging qualifications or interpretations. Germany and Italy have been identified as the Member States in which most double taxation cases have occurred.
So, for example, the Double Tax Treaty with the UK looks at a period of 183 days in the German tax year (which is the same as the calendar year); thus, a citizen of the UK could work in Germany from 1 September through the following 31 May (9 months) and then claim to be exempt from German tax. As the double taxation avoidance agreements will give the protection of income from some countries.
While double taxation agreements do provide for relief from double taxation, Hungary only has some 73 of them in place. This means that Hungarian citizens receiving income from the 120-odd countries and territories that Hungary has no treaty with will be taxed by Hungary, regardless of any tax already paid elsewhere.
Example of double taxation avoidance agreement benefit: Suppose interest on NRI bank deposits attracts 30 per cent tax deduction at source in India. Since India has signed double taxation avoidance agreements with several countries, tax may be deducted at only 10 to 15 per cent instead of 30%.
In case of any conflict between the provisions of the Income Tax Act or double taxation avoidance agreement, the provisions of the latter prevail.
A large number of foreign institutional investors who trade on the Indian stock markets operate from Singapore and the second being Mauritius. According to the tax treaty between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether.
The Protocol for amendment of the India-Mauritius Convention signed on 10 May 2016, provides for source-based taxation of capital gains arising from alienation of shares acquired from 1 April 2017 in a company resident in India. Simultaneously, investments made before 1 April 2017 have been grandfathered and will not be subject to capital gains taxation in India. Where such capital gains arise during the transition period from 1 April 2017 to 31 March 2019, the tax rate will be limited to 50% of the domestic tax rate of India. However, the benefit of 50% reduction in tax rate during the transition period shall be subject to the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019–20 onwards.
The revised double taxation avoidance agreement between India and Cyprus signed on 18 November 2016, provides for source based taxation of capital gains arising from alienation of shares, instead of residence based taxation provided under the double taxation avoidance agreement signed in 1994. However, a grandfathering clause has been provided for investments made prior to 1 April 2017, in respect of which capital gains would continue to be taxed in the country of which taxpayer is a resident. It also provides for assistance between the two countries for collection of taxes and updates the provisions related to Exchange of Information to accepted international standards.
The India–Singapore double taxation avoidance agreement at present provides for residence based taxation of capital gains of shares in a company. The Third Protocol amends the agreement with effect from 1 April 2017 to provide for source based taxation of capital gains arising on transfer of shares in a company. This will curb revenue loss, prevent double non-taxation and streamline the flow of investments. In order to provide certainty to investors, investments in shares made before 1 April 2017 have been grandfathered subject to fulfillment of conditions in Limitation of Benefits clause as per 2005 Protocol. Further, a two-year transition period from 1 April 2017 to 31 March 2019 has been provided during which capital gains on shares will be taxed in source country at half of normal tax rate, subject to fulfillment of conditions in Limitation of Benefits clause.
The Third Protocol also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases. This is a taxpayer friendly measure and is in line with India's commitments under Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases. The Third Protocol also enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion. Singapore's investment of $5.98 billion has over taken Mauritius's investment of $4.85 billion as the single largest investor for the year 2013–14.
For example, the DTA with the United States provides that, in the case of royalties, the US will tax Australian residents at the rate of 5%, and Australia will tax it at normal Australian rates (i.e., 30% for companies) but give a credit for the 5% already paid. For Australian residents, this results in the same liability as if the royalties had been earned in Australia, while the US retains the 5% credit.
Also, since each state makes its own rules on who is a resident for tax purposes, someone may be subject to the claims by two states on his or her income. For example, if someone's legal/permanent domicile is in state A, which considers only permanent domicile to which one returns for residency but he or she spends seven months of the year (say April–October) in state B where anyone who is there longer than six months is considered a part-year resident, that person will then owe taxes to both states on money earned in state B. College or university students may also be subject to claims of more than one state, generally if they leave their original state to attend school, and the second state considers students to be residents for tax purposes. In some cases one state will give a credit for taxes paid to another state, but not always.
In addition, China signed double taxation avoidance arrangement with Hong Kong and Macau Special Administrative Region. China also signed double taxation avoidance agreement with Taiwan in August 2015, which has not entered into force yet. According to the Chinese State Administration of Taxation, the first double taxation avoidance agreement was signed with Japan in September 1983. The latest agreement was signed with Cambodia in October 2016. As for the situation of state disruption, China would continue the signed agreement after the disruption. For example, China first signed double taxation avoidance agreement with Czechoslovakia Socialist Republic in June 1987. In 1990, Czechoslovakia divided into two countries, Czech Republic and Slovakia Republic, and the initial agreement signed with Czechoslovakia Socialist Republic was continually used in two new countries. In August 2009, China signed the new agreement with Czech Republic. And when it comes to the special case of Germany, China continued using the agreement with The Federal Republic of Germany after two Germanys reunited. China have signed double taxation avoidance agreement with many countries. Among them, there are not only countries which have made large investment in China, but also countries which as well-relationship recipient of Chinese investment. As for the agreement quantity, China is now next only to United Kingdom. For those countries which have not signed the double taxation avoidance agreements with China, some of them signed information exchange agreements with China.
There are mainly four effects of signing Double Taxation Avoidance agreement.
1. Eliminate the double taxation, decrease the tax cost of "going global" enterprises.
2. Increase the certainty of taxation, decrease the risk of cross-border taxation
3. Decrease the tax burden of "going global" enterprises in the host country, improve the competitiveness of those enterprises.
4. When taxation disputes occur, the agreements can provide bidirectional consultation mechanism, solve the existed disputed problems.
Under general conditions, the tax rate under tax treaty is often lower than the domestic tax rate under the law of host country. Take Russia as an example, in Russia, the standard withholding tax rate of interest and royalty under domestic law is both 20%. According to the newest tax treaty China signed with Russia, the withholding tax rate of interest is 0 and the withholding tax rate of royalty is 6%. This can obviously reduce the tax cost of enterprises, increase the willing of "going global" and the competitiveness of domestic enterprises, and bring the goodness.
|
|
