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How to read A Tax Treaty

By CA Sushil Lakhani. How to read A Tax Treaty. ICAI - Live Webcast By the Committee on International Taxation of ICAI on Friday 13th September, 2013 at 6.00 pm to 7.30 pm. Agenda: . Following DTAAs of India: United Kingdom(UK) Netherland Singapore Mauritius UAE.

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How to read A Tax Treaty

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  1. By CA Sushil Lakhani How to readA Tax Treaty ICAI - Live Webcast By the Committee on International Taxation of ICAI on Friday 13th September, 2013 at 6.00 pm to 7.30 pm

  2. Agenda: Following DTAAs of India: • United Kingdom(UK) • Netherland • Singapore • Mauritius • UAE How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  3. Note: • For convenience of understanding of the Articles, India has been treated as the source country in the following slides. • The treaties would equally apply if the other country would have been the source country. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  4. DTAA with United Kingdom (UK)

  5. Relevant Dates: • Signed on – January 25th, 1993 • Date of notification in the official gazette: February 11, 1994 • Date of coming into force April 1, 1994 i.e. A.Y. 1995-96 • Protocol signed on January 25th, 1993 (“Old Protocol”) • Protocol signed on October 30th, 2012 coming into force from April 1, 2013 i.e. A.Y. 2014-15 (“New Protocol”) Treaty with United kingdom How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  6. Treaty with United kingdom Article 1: Scope of the Treaty • The Convention shall apply to persons who are residents of India and/or United Kingdom (UK) • India is defined in Article 3(1)(b) to mean – “the Republic of India” • UK is defined in Article 3(1)(a) to mean – “Great Britain and Northern Ireland” How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  7. Treaty with United kingdom Article 1 (contd.): Territorial Extension of India/ UK • This Convention extends to the territory of India/UK, including its territorial sea, and to those areas of the exclusive economic zones or the continental shelf adjacent to the outer limit of the territorial sea of India which it has, in accordance with international law, sovereign rights for the purpose of exploration and exploitation of the natural resources of such areas, and references in this Convention to India shall be construed accordingly. • The territory of India has not been extended to include the airspace above it?? (contrast with DTAA s with other countries eg. Singapore, Netherlands etc) How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  8. Treaty with United kingdom Article 2: Taxes Covered • In India, income tax include surcharge thereon • In UK, corporation and petroleum tax are also covered under the Convention. • Compare the same with India-Norway, India-Hungary or India-Germany tax treaties. • In Norway:Nine types of taxes are covered; E.g. Municipal tax on income, National contribution to Tax Equalisation Fund, Seamen’s tax, etc. • In Hungary:Seven types of taxes are covered; E.g. income-tax on household and auxiliary farms, Town and community contributions, levy on dividends and profit distributions of commercial companies, etc. • In Germany: Trade Tax is covered How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  9. Treaty with United kingdom Article 3: General Definitions • “Tax” excludes amount paid in relation to any default, omission or penalty in relation to the taxes. • “Fiscal year” defined for India to mean as “previous year” as per Income Tax Act & for UK to mean as a year beginning with April 6 in one year and ending with April 5 in the following year. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  10. Treaty with United kingdom Article 3: General Definitions • Prior to amendment the definition read as under: The term “person” includes an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States, but, subject to paragraph 2 of this Article, does not include a partnership; Para 2 of the Article states that a “partnership which is treated as a taxable unit under the Income-tax Act, 1961 of India shall be treated as a person for the purposes of this Convention.” (Refer Linklaters LLP vs. ITP (40 SOT 51) (TMum)) • After the amendment vide the New Protocol, the definition of person has been amended to read as under: The term "person" includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States; How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  11. Treaty with United kingdom Article 4: Fiscal domicile(resident) • Prior to the amendment the Para 1 of the Article read as under: “Resident of a Contracting State” means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. • The Para 1 of this Article has been replaced w.e.f. April 1, 2013. “Resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that: • This term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and • In the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. (Note: This definition has been brought in line with US Treaty. Difference between “liable to tax” Vs. “subject to tax”) How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  12. Treaty with United kingdom Article 4: Fiscal Domicile(contd’) Tie-Breaker Tests: • Where an Individual is a resident of both India and UK, then following would be considered sequentially for the determination of the country of residence: • Permanent home available to the individual • Centre of vital interests • Country of habitual abode • Country of which he is a national • Mutual Agreement between the countries. • Person other than an Individual – deemed to be a resident of the Country where the effective place of management is situated. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  13. Treaty with United kingdom Article 5: Permanent Establishment • Means a fixed place of business of an enterprise through which it is wholly or partly carried out. • Permanent establishment incudes: • a) to e) and h)—standard as per OECD Model • f) Premises used as a sales outlet or for receiving or soliciting orders • g) a warehouse in relation to a person providing storage facilities for others; • i) an installation or structure used for the exploration or exploitation of natural resources; • j) Where charges payable for the project or supervisory activity exceed 10% of the sales price of the machinery or equipment and such activities continue for a period not exceeding 6 months – (to be read with the Protocol(old)) How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  14. Treaty with United kingdom Article 5: Permanent Establishment Protocol in relation to sub-paragraph (j) of Article 5: • For determining whether a building site or construction, installation or assembly project or supervisory activity in connection therewith has continued for a period of more than 6 months, a contracting state shall: • Take no account of time spent by employees on other sites having no connection with the current site. • Apply more than 6 months test to each sitewhich has no connection with any other site, and • regard a building site as a single site, even if several contracts have been entered into for work being done, provided it forms a coherent whole, both geographically & commercially How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  15. Treaty with United kingdom Article 5: Permanent Establishment Service PE of an Indian Enterprise in UK • k) the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within UK by an enterprise through employees or other personnel, but only if: • activities of that nature continue within UK for a period or periods aggregating more than 90 days within any twelve-month period; or • services are performed within UK for an enterprise within the meaning of Article 10(1) (Associated Enterprise) and continue for a period or periods aggregating more than 30 days within any twelve-month period. ( contrast with US Treaty where one day presence triggers Service PE in case of related enterprises) How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  16. Treaty with United kingdom Article 5: Permanent Establishment 3. Exclusions from PE—auxiliary and preparatory activities—in line with UN Model : • storage of stock of goods for delivery triggers PE; 4. Dependent Agency PE of Indian Enterprise in UK( in line with Indian Income Tax Act,1961) • A person acting in UK for or on behalf of an enterprise of India other than an agent of an independent status to whom paragraph (5) applies, shall be deemed to be a PE of the Indian enterprise in UKif: (contd…) How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  17. Treaty with United kingdom Article 5: Permanent Establishment • he has, and habitually exercises in UK, an authority to negotiate and enter into contracts for or on behalf of the Indian enterprise, unless his activities are limited to purchase of goods or merchandise for the Indian enterprise; or • he habitually maintainsin UKa stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the Indian enterprise; or • he habitually secures ordersin UK, wholly or almost wholly for the Indian enterprise or for other enterprise and the enterprises controlling, controlled by, or subject to the same common control, as the Indian enterprise. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  18. Treaty with United kingdom Article 6: Income from Immovable Property • Income from Immovable property will be taxed in the state where such property is situated • Immovable property shall include: • Property accessory in immovable property • Livestock and equipment used in agriculture • Usufruct of immovable property • Ships and Aircrafts have been excluded from the meaning of immovable property as there are separate Articles for these. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  19. Treaty with United kingdom Article 7: Business Profits Profits of the UK PE of an Indian Resident • The profits of an Indian enterprise shall be taxable only in India unless the enterprise carries on business in UK through a PE situated in UK. If the enterprise carries on the business as aforesaid, the profits of the enterprise may be taxed in UK, but only so much of them as is directly or indirectly attributable to the PE. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  20. Treaty with United kingdom Article 7: Business Profits Special features of Article 7 • Taxation of PE income both by India & UK & credit method for elimination of Double Taxation • PE to be treated & taxed as separate & distinct entity • No Force of Attraction – However, Clause (b) of old Protocol clarifies that tax authorities not precluded from determining whether PE took active part in Orders placed directly with HO How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  21. Treaty with United kingdom Article 8 : Air transport • Profits derived from the operation of aircraft in international traffic by an Indian enterprise shall not be taxed in UK. • Profits to include interest derived from the investment or deposit of receipts arising directly from the operation of aircraft in international traffic but shall not include interest derived from reinvestment of such interest How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  22. Treaty with United kingdom Article 9 : Shipping • Income of an Indian enterprise from the operation of ships in international traffic shall be taxable only in UK. • This Articles does not apply to income from journeys between places which are situated in India or UK How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  23. Treaty with United kingdom Article 10: Associated Enterprises • Article 10(1) permits transfer pricing adjustment Where: • an enterprise of India participates directly or indirectly in the management, capital or control (MCC) of an enterprise of UK, or • the same persons participate directly or indirectly in the MCC of an Indian and an UK enterprise, and conditions are made between the two enterprises in their commercial or financial relations which differs from those which would be made between independent enterprises, then any profits which would have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  24. Treaty with United kingdom Article 10: Associated Enterprises • Article 10(2): Mandates corresponding adjustment in the other Country • Similar clause for corresponding adjustment in the other country is missing in the treaties of India-Mauritius and India-Singapore. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  25. Treaty with United kingdom Article 11: Dividends Old Provision In respect of dividend paid by a UK Company to an Indian resident: • Taxable in India • UK tax on dividends to Individual resident of India limited to 15% of gross dividends provided that the Individual is entitled to tax credit in India. • UK tax on dividends to other Indian residents (other than Individuals) to be exempt in UK. In respect of dividends paid by an Indian Company to a UK resident • Taxable in UK • India tax not to exceed 15% of gross amount • DDT (in India) not affected New Provision wef AY 2014-15 • Standard Article • 10% of gross dividends in the source country (15% in case of distribution of income/gains from immovable property) • Para 6 – Anti – Avoidance provision – clarified that benefit not available if the “main purpose” of creation or assignment of shares was to take advantage of this Article. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  26. Treaty with United kingdom Article 12: Interest 1. Interest arising in UK and paid to resident of India may be taxed in India. 2. However, such interest may also be taxed in UK where it arises and according to the laws of UK provided that where the resident of India is the beneficial owner of the interest, the tax so charged shall not exceed 15% of the gross amount of interest. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  27. Treaty with United kingdom Article 12: Interest 3. Notwithstanding the provisions of para 2: • Where the interest is paid to a bank carrying on a bonafide banking business which is a resident of India and is the beneficial owner of the interest, the tax charged in UK in which the interest arises shall not exceed 10% of the gross amount of interest. • Where the interest is paid to the Government of India or a political sub-division or a local authority of India or the RBI, it shall not be subject to tax in UK. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  28. Treaty with United kingdom Article 13 : Royalties / FTS Example UK resident as recipient of income: • Royalties & FTS arising in India and paid to resident of UK may be taxed in UK. • However, such Royalties & FTS may also be taxed in India where they arise and according to the laws of India but if the beneficial owner of Royalties / FTS is resident of UK, the tax so charged shall not exceed…… How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  29. Treaty with United kingdom Article 13 : Royalties / FTS Tax Rates for Royalties & FTS are as follows: • For Equipment Royalties & Services ancillary & subsidiary to enjoyment of such equipments – 10% of gross amounts • For Royalties & Fees for Technical Services other than those covered above: • During first five years for which this Convention has effect: • 15% where the payer is Government or its political sub division • 20% where the payer is other than what stated above • During subsequent years – 15% of gross amounts How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  30. Treaty with United kingdom Article 13 : Royalties / FTS • Definition of “fees for technical service” inter-alia includes payments of any kind in consideration for the rendering of any technical or consultancy services which: • C) “make available”technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. • Meaning of “make available” as explained in other treaties would have to applied to the UK Treaty. • CIT vs. De Beers India Minerals (P.) Ltd. (346 ITR 467) (Kar.) How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  31. Treaty with United kingdom Article 14: Capital Gains • Each Contracting state may tax capital gains in accordance with the provisions of its domestic laws. • Instead of providing for allocation of taxing rights, the Article makes a reference to Domestic Laws of respective Contracting States. • Same is the case with India-US tax treaty • Compare with other Tax treaties or even Model Conventions – Vast Difference How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  32. Treaty with United kingdom Article 15: Independent Personal Service • Income derived by an individual, whether in his own capacity or as a member of a partnership, who is a resident of India in respect of professional or other independent activities of a similar character may be taxed in India. Such income may also be taxed in UK if such services are performed in UK and if : • he is present in UK for a period or periods aggregating to 90 days in the relevant fiscal year; or • he, or the partnership, has a fixed base regularly available to him, or it, in UK for the purpose of performing his activities but in each case only so much of the income as is attributable to those services • It should be noted that the provisions of this Article apply only to income derived by an “individual”. Whereas in the treaty between India and Netherlands, similar Article applies to a “resident”. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  33. Treaty with United kingdom Article 15: Independent Personal Service How to Calculate No. of Days for partnerships: For the purposes of paragraph 1 of this Article an individual who is a member of a partnership shall be regarded as being present in the UK during days on which, although he is not present, another individual member of the partnership is so present and performs professional services or other independent activities of a similar character in UK. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  34. Treaty with United kingdom Article 15: Independent Personal Service “Professional services” include independent: - Scientific, literary, artistic, educational or teaching activities as well as independent activities of: - Physicians, surgeons, lawyers, engineers, architects, dentists and accountants How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  35. Treaty with United kingdom Article 16 : Dependent Personal Services Indian resident deriving salary from UK: • Subject to ………. Salaries, wages and other similar remuneration derived by an Indian resident in respect of an employment shall be taxable only in India unless the employment is exercised in UK. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in UK. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  36. Treaty with United kingdom Article 16 : Dependent Personal Services • Remuneration derived by Indian resident in respect of an employment exercised in UK shall not be taxed in UK if : • he is present in UK for a period not exceeding in aggregate 183 days during the relevant fiscal year; • the remuneration is paid by, or on behalf of, an employer who is not resident of UK, and • the remuneration is not deductible in computing the profits of an enterprise chargeable to tax in UK How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  37. Treaty with United kingdom Article 17 - Directors’ fees • Directors’ fees and similar payments derived by a resident of India in his capacity as a member of the board of directors of a company which is a resident of UK may be taxed in UK. • Taxability at place where the company is resident How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  38. Treaty with United kingdom Article 18: Artistes and Athletes • Income derived by entertainers (such as stage, motion picture, radio or television artistes and musicians) or athletes, from their personal activities, whether accruing to themselves or to any other person, may be taxed in the source country. • Provisions of the Article would not apply if the entertainer or the athlete is directly or indirectly supported, wholly or substantially, from the public funds of the other Contracting State How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  39. Treaty with United kingdom Article 19: Government Remuneration and Pensions • Standard as per UN and OECD Model How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  40. Treaty with United kingdom Article 20 : Pensions & Annuities • Any pension, other than a pension referred to in Art. 19(2) of this Convention, or annuity paid to a resident of Indiashall be taxable only in India. “CASE OF DOUBLE NON-TAXATION” How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  41. Treaty with United kingdom Article 21 : Students & trainees • Indian residents, who are temporarily present in UK for purpose of studying, or for securing necessary training or studying or doing research as a recipient of a grant, allowance, or award from governmental, religious, …. organisation shall not be subject to tax in UK in respect of following (for a maximum of 5 years): • Gifts from abroad for the purposes of his maintenance, education, study, research or training; • the grant, allowance or award; and • income from personal services to the extent of 750 sterling pounds for each relevant fiscal year How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  42. Treaty with United kingdom Article 22: Teachers • An individual who visits UKfor a period not exceeding two years for the purpose of teaching or engaging in research at a university, college or other recognised educational institution in UK, and who was immediately before that visit a resident of India, shall be exempted from tax by UK. CAN BE A CASE OF “DOUBLE NON TAXATION” How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  43. Treaty with United kingdom Article 23 : Other Income • Subject to the provisions of para 2 of this Article, items of income beneficially owned by an Indian resident, wherever arising, other than income paid out of trusts or the estates of deceased persons in the course of administration, which are not dealt with in the foregoing Articles of this Convention, shall be taxable only in India. • Notwithstanding the provisions of para 1 & 2, income of an Indian resident not dealt with in the other Articles, and arising in UK may be taxed in UK How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  44. Treaty with United kingdom Article 24: Elimination of Double Taxation • Credit for the tax on the income doubly taxed: Allowed • Underlying tax credit allowed only in UK and not in India. (DTAAs of Mauritius and Singapore with India provide for underlying tax credit in India also) • Tax sparing: allowed in source??? country How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  45. Treaty with United kingdom Article 25: Partnership • This Article has been deleted w.e.f. April 1, 2013 How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  46. Treaty with United kingdom Article 26: Non-discrimination • “Nationals” and “enterprises” of other Country shall not be subjected to taxation in the source country, which is more burdensome than that of nationals and enterprises of the source country. • Discrimination of individuals on the basis of residence is permitted. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  47. Treaty with United kingdom Article 27: Mutual Agreement Procedure • Standard Clause as per UN Model How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  48. Treaty with United kingdom Article 28: Exchange of Information • This Article has been amended by the New Protocol wef 1st April,2013 and made more stringent in the following respects: • The two countries can exchange information which is “foreseably relevant “ as against info which is “necessary” as per the old Article • If information is requested by Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The standard imitations in Para 3 shall not be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information. • The standard limitations in Para 3 shall not be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  49. Treaty with United kingdom Article 28A: Tax Examination Abroad • Inserted by New Protocol w.e.f. 1st April,2013 For instance in case Indian tax authorities request for examination of a UK Resident • The representatives of India may request the competent authority of UK to interview a UK Citizen and examine records with prior written consent of the persons concerned. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

  50. Treaty with United kingdom Article 28B: Assistance in Collection of Taxes • Inserted by New Protocol w.e.f. 1st April,2013 • Contracting States shall lend assistance to each other in the collection of revenue claims in respect of taxes covered by the Convention • “Revenue claim" means an amount owed in respect of taxes covered by this Convention as well as interest, administrative penalties and costs of collection or conservancy related to such amount. • Claim of a contracting state owed by a resident of the other contracting state may, at request of such contracting state, be collected by the other contracting state as collection of its own taxes as if the revenue claim were a revenue claim of that other state. • When a Contracting State may, under its law, take interim measures of conservancy by freezing of assets before a revenue claim is raised against a person, the competent authority of the other Contracting State, if requested by the competent authority of the first mentioned State, shall take measures for freezing the assets of that person in that Contracting State in accordance with the provisions of its law. How To Read A Tax Treaty - By CA SushilLakhani 13/09/2013

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