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International Taxation

The document provides an overview of key concepts in international taxation. It discusses how countries generally tax worldwide or local income using territorial or residential systems. India uses the residential system. It also covers aspects like tax rates, double taxation avoidance agreements, and tax havens. Transfer pricing is introduced as the prices for transactions between associated enterprises, which should follow the arm's length principle. The conditions for applying transfer pricing rules and important terms are defined. Methods for determining the arm's length price are also listed.

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97 views14 pages

International Taxation

The document provides an overview of key concepts in international taxation. It discusses how countries generally tax worldwide or local income using territorial or residential systems. India uses the residential system. It also covers aspects like tax rates, double taxation avoidance agreements, and tax havens. Transfer pricing is introduced as the prices for transactions between associated enterprises, which should follow the arm's length principle. The conditions for applying transfer pricing rules and important terms are defined. Methods for determining the arm's length price are also listed.

Uploaded by

karishmapatel93
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© © All Rights Reserved
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INTERNATIONAL

TAXATION
Companies and NR

GENERAL MEANING OF
INTERNATIONAL TAXATION

International taxation is the study or


determination of tax on a person or
business subject to the tax laws of
different countries or the international
aspects of an individual country's tax
laws.
Income tax systems imposes tax on both
local income and worldwide income.
Generally, where worldwide income is
taxed, reductions of tax or foreign credits
are provided for taxes paid to other
jurisdictions.

TAXATION SYSTEMINCIDENCE

Countries that tax income generally use


one of two systems: territorial or
residential.
In the territorial system, only local income
income from a source inside the country
is taxed.
In the residential system, residents of the
country are taxed on their worldwide (local
and foreign) income, while nonresidents
are taxed only on their local income.
India uses residential system.
Refer

ASPECTS OF
INTERNATIONAL TAXATION

Tax rates- special rates


Double taxation avoidance agreements
DTAA
Tax treaty
Tax havens

TRANSFER PRICING INTRO

it
is
a
universal
phenomena
that
MNCs)
have
Branches/subsidiaries/divisions operating in more than one
country.
MNCs to transfer goods produced by a branch in one tax
jurisdiction to an associate branch operating in another tax
jurisdiction. While doing so, the MNC concerned has in mind the
goal of minimizing tax burden and maximizing profits
but the two tax jurisdictions/countries have also the
consideration of maximizing their revenue while making laws
that govern such transactions.
It is an internationally accepted practice that such transfer
pricing should be governed by the Arms Length Principle (ALP)
and the transfer price should be the price applicable in caseof a
transaction of arms length.
In other words, the transaction between associates should be
priced in the same way as a transaction between independent
enterprises.

CROSS BORDER
TRANSACTONS

Introduced by finance act 2001


Introduced sec 92- 92F in Chapter X of
Income tax Act
Required conditions to be fulfilled for
initiating the above sections

CONDITIONS FOR INVOKING


TRANSFER PRICING RULES

There must be an international transaction;


( Such international transaction should be
between two or more associated enterprises
either or both of whom are non-residents;
Such international transaction should be in the
nature of:
(a) purchase, sale or lease of tangible or
intangible property; or
(b) provision of service; or
(c) lending or borrowing money; or
(d) any other transaction having a bearing on
the profits, income, losses or assets of such
enterprise

CONDITIONS -----

Such transaction may also involve allocation or


apportionment of, or any contribution to any cost or
expenses incurred or to be incurred in connection with a
benefit, service or facility provided or to be provided to any
one or more of the associated enterprises on the basis of
mutual agreement or arrangement between such
associated enterprises.
Such international transaction must be done at arms
length price and if such international transaction has been
done at less than the arms length price, it shall require
determination of income or apportionment of cost or
expense on the basis of arms length price.
The above adjustment should either result in an increase of
income or decrease of loss returned by the assessee. In
other words, the adjustment should not have the effect of
reducing the income chargeable to tax or increasing the
loss.

IMPORTANT TERMS

Transfer pricing= the prices at which an


enterprise transfers physical goods and
intangible property or provides services to
associated enterprises.
Enterprise
Associated enterprise if one of the enterprises
participates directly or indirectly in the
management, control or capital of the other or
if both enterprises are under common control.
Arms length price
International transaction

ENTERPRISE

a person (including its certain specified Permanent Establishment)


who is, or has been, or is proposed to be, engaged in any activity,
relating to the production, storage, supply, distribution, aquisition or
control of articles or goods, or know-how, patents, copy rights, trademarks, licences, franchises or any other business or commercial
rights of similar nature or any data, documentation, drawing or
specification relating to any patent, invention, model, design, secret
formula or process, of which the other enterprise is the owner or in
respect of which the other enterprise has exclusive rights, or the
provision of services of any kind, or in carrying out any work in
pursuance of a contract, or in investment, or providing loan or in the
business of acquiring, holding, underwriting or dealing with shares,
debentures or other securities of any other body corporate, whether
such activity or business is carried on, directly or through one or
more of its units or divisions or subsidiaries, or whether such unit or
division or subsidiary is located at the same place where the
enterprise is located or at a different place or places.
Permanent establishment includes a fixed place of business
through which the business of the enterprise is wholly or partly
carried on.

ASSOCIATED ENTERPRISESEC 92 A

Enterprise which participates directly or


indirectly or through one or more
intermediaries the management or control
or capital of the other enterprise; or
in respect of which one or more persons
who participate, directly or indirectly, or
through one or more intermediaries, in its
management or control or capital are the
same persons who participate, directly or
indirectly, or through one or more
intermediaries, in the management or
control of the other enterprise.

INTERNATIONAL
TRANSACTION-SEC 92B

Transaction between two or more associated


enterprises, either or both of whom are non-residents,
in the nature of purchase, sale or lease of tangible or
intangible property, or provision of services, or lending
or borrowing money, or any other transaction having a
bearing on the profits, income, losses or assets of
such enterprises.

TRANSACTION- SEC 92F

arrangement, understanding or action in consent


Whether or not such arrangement, understanding or
action is formal or in writing; or Whether or not such
arrangement, understanding or action is intended to
be enforceable by legal proceedings.
It may be noted that one of the parties to the
international transaction should be a non-resident.

ARMS LENGTH PRICEMETHODS

comparable uncontrolled price method;


resale price method;
cost plus method;
profit split method;
transactional net margin method;
Section 92C(2) provides that where more
than one price is determined by the most
appropriate method, the arms length
price shall be taken to be the
arithmetical mean of such price.

DTAA

DTAA
double taxation avoidance agreement
dtaa meaning
it is essentially a bilateral agreement entered into between two countries. The basic objective is to promote and foster
economic trade and investment between two Countries by avoiding double taxation.
withholding tax
A person responsible for making payment to non-resident or foreign company is required to withhold tax. Tax is deductible
at the rates prescribed under the Act or under the relevant DTAA, whichever is more beneficial for non-resident.
classic case of tax avoidance
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 Indian and Cypriot tax treaty is the only other such Indian treaty to provide for the same beneficial treatment of
capital gains.
why dtaa
Every country has its own international tax laws which are divided into two broad dimensions: I. Taxation of Resident
Individuals and corporations on income arising in foreign countries-Taxation of foreign Income II. Taxation of Non residents
on income arising domestically-Taxation of Non-Resident
From above one can understand what taxation of foreign income is for one country (Resident country) is the taxation of
Non-resident for another country (Source country). Thus, there is dual taxation, one in resident country taxing the income
and other in source country which levies taxes on same Income. Therefore, there is a need for agreement between the
countries for avoiding this kind of double taxation. This Agreement is known as Double Tax Avoidance Agreement
purpose of dtaa
Avoidance of Double Taxation of Income.
For recovery of Income Tax in both the countries. Allocate rationally, Equitable and fairly the taxing rights over a
Taxpayer's Income between two states. Encourage free flow of international Trade & Investment and Technology.
Increased transparency scope of dtaa
comprehensive or limited

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