The Issue on Jurisdiction regarding Double Taxation Avoidance

Agreements: An overview
In today’s fast growing developments, employee mobility has become a way of
life. With such mobility, double taxation of income both in the country of
residence and the host country becomes an important consideration. The main
reasons to double taxation are:

(I) Source based taxation, under which is the income is subject to tax in the
country where the source of such income exists i.e. where the services
are rendered
(II) Residence based taxation, under which the income is taxed on the basis
of residential status of the employee.

The domestic tax laws and the DTAA entered into a country generally provide
relief to a taxpayer from such double taxation by way of exemption or tax credits.
Under the Income Tax Act, 1961, Section 90 and 91 have been incorporated to
provide relief to incomes which has suffered tax burden in India as well as in a
foreign jurisdiction.

The preeminent jurisdictional issue on the DTAA arises when it is questioned

“who can tax the income”? It is essential to primarily find out which country can
tax any particular income. If one country has entered into a DTAA with any other
foreign country then the question arises as to who will tax the particular income:

 The country where the income comes

 The country where taxpayer resides

The rules of the DTAA depend on the mutual agreement of the two states or
countries, i.e. determining which country is the “source country” and which is the
“country of residence”. To answer the above question, if it is provided in the
Double Taxation Avoidance Agreement in the case of immovable property, the
country where the property is located has the right to tax. In a case where the
owner of the property shall have the claim “credit in the country where he resides
for the tax paid in the country where the property is located”, such incomes is
taxed by the country where the owner resides. In cases relation to “business
profits”, the country of residence has the jurisdiction to tax any such profits
derived from the business house; unless such business is carries out in other source
state and has a permanent established location. To simplify it, when two countries
have signed the DTAA then the “source country” gets the right to tax by using the
relevant provisions of the taxation law of that country and thereafter “the country
of residence” grants “credit” for tax also applies to low tax rate. In the case of CIT
vs. V.R.S R.M Firm & Others, the Madras High courts held that when it is stated
that tax can be charged for a certain income by state then he other contracting state
has no right to tax on the same income. The same was held in CIT vs. R.M.
Muthaiah by the Karnataka High court. In general, both the contracting states have
the right to tax income in respect of “dividend and interest”; but the taxation right
is vested in the state where the party resides but it’s also stated that such income
“also” be taxed in the source state.

Currently India has signed double taxation with 98 countries, which is effective for
taxpayers who has income in other countries other than here he resides. A tax
payer can choose to be governed either by provisions of the tax treaty or the
domestic tax website. Section 90 of the Income Tax Act, allows taxpayers to claim
credit of foreign taxes paid in overseas countries as per the provisions of the tax
treaties entered by India with such other country. Whereas, Section 91 of the
Income Tax Act, allows for unilateral relief in India for taxes paid in such foreign
jurisdiction. The tax treaty specifies the methods to eliminate double taxation and
such methods are different in their own way. Certain tax treaties provide relief by
exempting the doubly taxed income while others may provide credit of taxes paid
in the source country while computing taxes in the resident country.

Under the tax credit method, the resident country retains the right to tax the foreign
income and allows credit for the taxes paid in source country. The resident country
would determine the resident’s worldwide income and compute the tax liability
thereon. From the tax liability so computed, credit is granted, subject to certain
limits, of the foreign taxes paid on such foreign sourced income.

PROCEDURE FOR CLAIMING RELIEF FROM DOUBLE TAXATION

The procedure which is required to claim relief from double taxation are as stated
below:
1. First, it is necessary to find out which the “country of residence” is and
what are the respective provisions in the DTAA between the two countries.
2. Then, it is mandatory to check that the person who claims “tax exemption”
and “tax credit whether he paid tax in “the source country”. For this he has
to submit the following documents to the tax- authorities as evidence. These
documents are:-
 Tax residency certificate
 Self-attested Xerox of8 Pan card
 Self-declaration and Identity form
 Self-attested Xerox of passport and visa.
In short to get the benefits of the DTAA, a person who lives outside of India; that
is any foreign country should apply for “tax residency certificate” from “tax
authorities”. Finally he/she has to submit “a self-declaration form” and also Xerox
of PAN, TRC, PASSPORT, VISA to the “tax authorities”. In short to get the
benefits of the DTAA, a person who lives outside of India; i.e. any foreign country
should apply for “tax residency certificate” from “tax authorities”. Finally he/she
has to submit “a self-declaration form” and also Xerox of PAN, TRC, PASSPORT,
VISA to the “tax authorities.”
THE MISUSE OF DOUBLE TAXATION AVOIDANCE AGREEMENT AND ITS
EFFECTS:

There are two types of ways Double taxation avoidance agreements are misused,
they are

(I) DOUBLE NON TAXATION

In the case of Double Non Taxation, a specific income is not taxed in
the source country, because of “an incentive”, “exemption” or prevailing
in that country. Double non-payment of taxes in relation to DTAA
implies a person is not paying taxes in both countries i.e. the resident
country as well as the source country. For example, a foreign investor
from Singapore comes to India, and buys some shares and generates
 income in the form of capital gains. That income would be taxed in
accordance to the DTAA signed between India NAD Singapore and as
per that DTAA such capital gained or catered in India can be taxed and
paid in Singapore itself. But if the tax rate in Singapore for capital gains
is zero, the investor wouldn’t have to pay any taxes. So the investor
would neither pay taxes in India nor in Singapore. This is called double
non-payment of taxes.
For example:
If a person who lives in India has an immovable property in country X.
in country X the income which comes from immovable property maybe
tax in accordance with the DTAA but the law of country X does not
provide for any tax of income from such immovable property for some
specific reason, the such income will be “untaxed”; because of this
reason the country X does not impose any tax on the immovable
property.
But DTAA should not be interpreted in such a way that it allows double
non taxation to take place as the main objective of the DTAA id to avoid
double taxation not encourage double non taxation. So it can be
concluded that the country the resident ha “inherent right” to tax the
income of the resident. If it is so, then as per the above example, country
X would not impose tax on the income from immovable property; in that
case India can tax the same income as it is the country of residence. In
the well-known case of CTI v. Laxmi Textile Exporters Ltd, the assesse
is the Indian resident and in Srilanka he owns a business which is a
permanent establishment. That income is not considered as taxable
income in Srilanka. Yet, the Madras High scout held that India would not
tax any such income as it is the country of resident.

(II) TREATY SHOPPING

In order to obtain the benefit of DTAA between two countries it is necessary that
the person must be the resident of one of the country. When the resident of the
third country takes advantage of DTAA between two countries is called Treaty
shopping. The resident of third country obtains the residence of a country in order
to obtain the DTAA of that country with the other country.
In Indofood International Finance Ltd. V. JP Morgan Chase Bank it was stated
that “treaty shopping is the improper use of the tax treaty as they are contrary to
the objectives of the establishment of the treaty itself. It may occur where
taxpayers who are not residents of contraction states seek to obtain the benefits of
a tax treaty by organising a corporation or other legal entity in one of the
contracting states to serve as a conduit for income earned in other contracting
states”. For example: Indo-Mauritius Treaty
In India 40% of the total FDI comes through Mauritius, because according to the
Indo-Mauritius DTAA, tax levied on capital gain as per the ;aw of the country of
the residence of the assesse. But according to the tax on law on Mauritius there is
no tax imposed on capital gains, because of which all the investment in India from
the different country comes through the Mauritius.
In the case of Union of India v. Azadi Bachao Andolan, it was held that if the aim
of the DTAA was not to include a person of third country and restricts him/ her
from taking “the benefit out of the favourable terms” then there should be another
provision about it. The parliament has a duty to take care of it in this regard; and if
there is no specific provision and limitation mentioning DTAA; then “no one can
be denied benefit of the favourable tax provision in the belief that treaty shopping
is prohibited”.
Treaty shopping can be checked by two ways:
 By incorporating specific anti-treaty shopping article in the treaties like the
India and Singapore treaty or the India and Armenia Treaty and other
treaties.
 Through domestic legislation prohibiting the use of treaty shopping.
Domestic legislation ensures that the residents of third state could not take
the advantage of a treaty.