DTAA(NEW)

Relief from Double Taxation of Income

Introduction

• Addressing the issue of double taxation of income which can occur when a resident of one country earns income from sources in another country.

Taxation Rules

• ‘X’ is a resident of ‘Y’ country.

• Y country follows the residence rule of taxation for income.

• X has income sourced in ‘Z’ country, which follows the source rule of taxation.

Kinds of Relief

• Two main types of relief to avoid double taxation:

  • Bilateral Relief:

    • Achieved via Double Taxation Avoidance Agreements (DTAA) between two countries.

    • Provisions are established in Section 90.

  • Unilateral Relief:

    • Granted by a country in absence of a DTAA, allowing relief for income taxed in another country.

    • Covered under Section 91.

Bilateral Relief (Section 90)

• Central Government can enter agreements for:

  • (a) Granting relief for income taxed by both the country and the source country.

  • (b) Avoiding double taxation of income to promote trade.

  • (c) Exchange of information to prevent tax evasion.

  • (d) Recovery of taxes under both jurisdictions.

Effects of DTAA

• Tax liability:

  • No tax can arise if not imposed by domestic law.

• If taxed in both countries:

  • Income may be taxed in one country or deductions may be allowed from taxes paid in one country against the other.

• Resident status in at least one country is required for DTAA benefit.

• Tie Breaker Rule:

  • Applies if a person is considered a resident in both countries.

Implementation and Conflict Resolution

• If DTAA differs from domestic law, the agreement prevails unless a subsequent domestic amendment is more beneficial to the assesse.

• Absence of specifics in the agreement will default to ITA, 1961 provisions.

• Certification of residence by a government body is binding for taxation purposes.

Enhanced Powers of Central Government

• Since A.Y. 2004-05, powers have expanded to include tax exemption agreements.

• New provisions may allow the definition of undefined terms in DTAA by the government.

Taxation of Specific Income Types

• Income from Property:

  • Taxable in India if immovable property is located in India.

• Capital Gains:

  • Capital gains from transfer of immovable property taxable in India.

  • Movable property gains taxable as per domestic law or treaty, whichever is more favorable.

Conflict Between Sections

• Amendment to ITA impacts the interpretation of DTAA provisions.

• Certain rulings highlight income taxation based on residency and permanent establishment (PE) status.

Concepts of Permanent Establishment (PE)

• Defined as a fixed place of business where the enterprise conducts business.

• Types of establishments considered:

  • Managerial location.

  • Branch, office, workshop.

  • Construction projects exceeding 12 months.

• Exemptions include activities limited to storage and auxiliary functions, essential for understanding PE rules.

Case Studies on PE and Taxation

• Supreme Court rulings on specific cases demonstrate the relevance of PE:

  • Income from projects like ONGC contracts shows the importance of establishing a PE in India for tax obligations.

  • Liaison offices not considered PE unless they earn taxable income.

• Specific high-profile cases illustrate how the nature of agreements affects taxation rights under DTAA.

Conditions for Tax Liability

• Tax liability under DTAA requires making technical knowledge available in providing services, as emphasized in various rulings.

• Key conditions established such as the necessity for royalty to be 'received' rather than deemed income.

Conclusion

• Understanding the intersection of residence, source taxation, and the relief mechanisms available for alleviating double taxation is crucial for effective tax planning and compliance.