What is International Taxation?
The system of taxation varies from country to country. These systems are applicable to the persons or the business entity residing in that country. However, when income is earned or remitted from one country to another country, the concept of international taxation comes into purview. International taxation involves rules with respect to the taxation of an entity which operates in more than one country.
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International taxation is an important aspect of financial decision making for an individual or an organisation operating in an international environment. Every country has its own policies and rules regarding taxation on the income of an individual or an organisation. Therefore, whenever an individual or an organisation decides to conduct trade in different countries, he should be aware of taxation policies of the concerned countries.
Objectives of International Taxation
The objectives of international taxation are as follows:
- To avoid double taxation: International taxation aims to avoid double taxation on the assessee.
- To prevent tax evasion: Due to variations in tax laws between two countries, some companies may try to avoid taxes from both the countries. International taxation aims to prevent such malicious evasion of tax.
- To allocate tax jurisdiction: International taxation aims to help in finding out the jurisdiction area for the assessee where he has to pay tax and be assessed. For example, if the rules of international taxation allow a country to tax an individual in which he has earned the income, then the assessee shall be assessed in that country only and will pay tax to that country only.
- To exchange information: International taxation aims to promote exchange taxation information relating to assesses between the concerned countries. It also helps in gathering knowledge about illegal activities conducted by the assessees, if any
Central Principles of International Taxation
Some of the central principles of international taxation are as follows:
- Jurisdictional rights: It states that no country can force any other country or restrict the other country in levying the taxes or to follow the principles of the taxation laws on the assessee of their own jurisdiction. All the countries have to follow international laws so that double taxation can be avoided and for applying those rules on their assessees.
- Principle of Taxation Rights (Source versus residency): The source country for an individual is the country in which he earns the income. The residency country is the country in which the assessee resides. The central principles of international taxation make rules in the international market to clear the jurisdictional rights of the assessee. These principles state which country should tax an individual according to the decided jurisdiction.
Double Taxation
In the present era of world economy, a country should consider the effect of taxation on its business, trade and commerce. Double taxation occurs because companies are considered to be separate entities from their employees.
Double taxation arises from two rules, namely:
- Source rule
- Residence rule
The source rule states that the income has to be taxed in the country in which it is generated irrespective of whether the person is residing in the source country or in any other country. The residence rule states that the income has to be taxed in the country in which the individual resides irrespective of whether the income is earned in the same country or not.
Relief From Double Taxation
There are two ways in which relief can be granted from double taxation.
Bilateral Relief
Under this method, a double taxation avoidance agreement is established between the two countries in order to avoid double taxation on the generation of income of the individual. India has entered into DTAA with more than 90 countries.
The relief under the bilateral method is provided under two methods:
- It is agreed between the countries involved that the income will be taxed only by one of the countries The other country will not tax the income of the assessee.
- Both the countries will tax the income as per their taxation rules, but the tax paid by the assessee in one country can be claimed as a input in relief while paying the tax in the other country.
Section 90 of the Income Tax Act covers the bilateral relief agreement between countries. This section provides that the Central Government can enter into an agreement with any other country or countries of the world in order to:
- Grant relief with respect to the income which has been earned in some other country and has been taxed in that particular country as well as in India
- Grant relief from tax laws and provisions so as to promote the economic relations through trade and commerce with other countries
- Avoid double taxation on the income
Unilateral Relief
Under this method, relief is provided by the home country in the cases where there is no bilateral agreement with the other country. In this case, the residency country does not charge taxes on the income earned in the other country. Section 91 of the Income Tax Act covers the provision of unilateral agreements in which no agreement has been established between two countries.
In case no agreement exists between the countries, relief would be provided by the country on the fulfilment of the following conditions:
- The assessee who is under the tax jurisdiction must be a resident in India during the previous years in which the income has been earned.
- The income should have been earned by him outside India.
- The income is not deemed to be earned by the assessee in India.
- The assessee has paid taxes on the income earned in the foreign country as per the rules of taxation of that country.
- No DTAA has been established between India and that country in which the assessee has earned the income.
If all the above conditions have been fulfilled by the assessee who has earned the income and wants a tax relief in In
Double Taxation Avoidance Agreement (DTAA)
It refers to a bilateral agreement to avoid or eliminate double taxation on the income in two countries. It is also known as tax treaty.
Documents Required for Claiming Relief Under DTAA
A non-resident Indian (NRI) can claim the benefit of DTAA on producing the following documents:
- Tax Residency Certificate (TRC)
- PAN card copy duly self-attested in Form 10F
- Self-declaration cum indemnity form
- Passport and Visa copy duly attested
Concept of Permanent Establishment
In order to determine the jurisdiction and the taxability of an assessee, the concept of Permanent Establishment (PE) must be known. As per Article 5 of the DTAA, PE means any fixed place of business in India through which any foreign company is operating its business wholly or partially. PE includes:
- A place of management
- A branch office
- A factory
- A workshop
- A sales outlet
Features of PE
The features of permanent establishment are as follows:
- PE is a fixed place anywhere in India from where business can be conducted exclusively or partially.
- PE is handled by the clauses of the DTAA and every DTAA has a clause for the PE in India.
- An NRI will not be taxed in India until he/she has a PE in India.
Implication of Section 195
According to Section 195 of the Income Tax Act, 1961, any person responsible for the payment of interest to a non-resident or foreign company or any other taxable amount in India, not being salaries, shall deduct tax at the rates in force at the time of payment. Tax shall be deducted at the time of payment of income or at the time of its credit to the account of the NRI, whichever is earlier.
However, when interest is to be paid in accordance with Clause 23D of Section 10 to the Government or a public sector bank or a public financial institution, thereby, deduction of tax would be made only at the time of payment either in cash or by cheque or by draft.
Liability for Deduction
Any individual, who is paying taxable income to an NRI, is liable for deducting the tax. If the payer is a company, then the company itself is liable to recover tax and pay it to the central government. In any other case also, the payer has to deduct the tax from the income to be remitted to the non-resident and to pay the same to the tax department.
No Deduction in Certain Cases
In the following cases, no tax shall be deducted under Section 195:
- No deduction has to be made if the income does not involve any credit of the payment.
- Section 172 of the Income Tax Act is applicable, wherein it concerns the levy or recovery of tax in the case of any ship that belongs to a non-resident and is carrying passengers, livestock, mail or goods to a port in India, then Section 195 does not apply.
- No deduction shall be made in case tax on income of the Foreign Institutional Investors (FII) arising from transfer of securities or capital gains under Section 115AD.
Requirement of 15CA and 15CB for the Remittance of Payment to a Non-Resident
Any person should fill the Forms 15CA and 15CB before making payments to any non-resident individual. Figure shows the procedure for Furnishing Form 15CA:
The Form 15CB is a certificate for making remittance payment, issued by a chartered accountant that certifies details of the payment along with TDS rate and TDS deduction according to Section 195 of the Income Tax Act before uploading Form 15CA. Generally, bankers in India are responsible for making payments to non-residents and they require Forms 15CA and 15CB before effecting such payments.
Procedure for Making Payment
The procedure for making payment is described as follows:
- The person responsible for making a payment has to obtain a certificate in Form 15CB from a certified chartered accountant.
- He has to furnish information with respect to payment in Form 15CA.
- Form 15CA has to be uploaded electronically to the income tax website.
- A printout of the uploaded form needs to be taken out by an NRI for signature and submission to the bank to get the acknowledgement generated. An acknowledgement is generated on the website which has to be deposited to the bank along with the certificate of the chartered accountant.
- The bank will remit the amount to the payee.
