TAXATION LAW

Provision related to avoidance of double taxation and Provision of fiscal

evasion with reference to Nepal.

Tax is the liability paid by each bread earner- Individual or corporate, which can’t be
escaped legally. Every taxpayer is subject to follow the taxation policy of the country of
which s/he/it is resident of. However, many times the same income is taxed twice by the
same government or by the different government which is termed as Double Taxation.

Double taxation is a tax principle referring to income taxes paid twice on the same
source of income. It can occur when income is taxed at both the corporate level and
personal level. Double taxation also occurs in international trade or investment when the
same income is taxed in two different countries.Double taxation often occurs because
corporations are considered separate legal entities from their shareholders. As such,
corporations pay taxes on their annual earnings, just like individuals. Double taxation is
often an unintended consequence of tax legislation. It is generally seen as a negative
element of a tax system, and tax authorities attempt to avoid it whenever possible.

Most tax systems attempt, through the use of varying tax rates and tax credits, to have
an integrated system where income earned by a corporation and paid out as dividends
and income earned directly by an individual is, in the end, taxed at the same rate.
When a business earns profit, initially it is subject to be taxed as corporate tax paid by
the company, and when the after tax profit generated is distributed to employees, it is
again subjected to be taxed as income tax paid by the individuals. When the same
income is subject to taxation by the same government but by two different tax payers, it
is Economic Double Taxation. Similarly, when a taxpayer is resident of one country and
earns income from the other, it becomes subject to tax liability for both the countries.
Tax subject to be paid twice by the same taxpayer but to a different government means
Juridical Double taxation.

Juridical double taxation is further classified as:

• Source based Jurisdiction: As per this taxation principle, importance is given to the
source/ country where income is generated. Individuals who are residents of one
country can be earning income in another country. In such cases, the country which is
providing opportunity and facility to generate income or profits should also have power/
right to collect the tax.
• Residence based Jurisdiction: As per this principle, one is liable to pay tax in the home
country regardless of source of income. If an individual holds citizenship or if a
corporation is incorporated/ registered in a country, they are defined as residents of the
country and are liable to pay tax to the country when income is repatriated irrespective
of its source country.

International businesses are often faced with issues of double taxation. Income may be
taxed in the country where it is earned, and then taxed again when it is repatriated in
the business' home country. In some cases, the total tax rate is so high, it makes
international business too expensive to pursue.

To avoid this issue of double taxation, governments sign an agreement with each other
known as Double Taxation Avoidance Agreement (DTAA) to ensure that tax is not paid
twice in the same income. Both the governments agree to provide some exemptions,
provide tax credits and lower the withholding taxes on different types of income earned
by taxpayers whenever any business is done between them. However, the primary idea
behind the DTAA agreement is to boost up economic growth and minimize the
opportunity for tax evasion for taxpayers, as taxpayers try to escape the burden of tax
payments obliged to make in both the countries.

Nepal signed its first Double Taxation Avoidance Agreement with the neighboring
country India way back in January 18, 1987. Prior to that, the provision of giving
deduction in foreign tax already existed through the Income Tax Act, 1974 but the
provision of foreign tax credit has been introduced through tax treaties with various
countries thereafter. After India, a second tax treaty was signed with Norway in 1996.
Further, a bilateral tax treaty has already been signed with nine other countries till date
which are Thailand, Sri Lanka, Mauritius, Austria, China, Qatar, Bangladesh, Korea and
Pakistan, among which Bangladesh being the most recently agreed country i.e. on
March, 2019. So, till date Nepal is in agreement with a total of 11 countries. As per the
Inland Revenue Department (IRD) report, the negotiation work is in process with other
countries like: Singapore, Malaysia, UK and Oman.den of tax payments obliged to make
in both the countries.

Likewise the term tax avoidance refers to the use of legal methods to minimize the
amount of income tax owed by an individual or a business. This is generally
accomplished by claiming as many deductions and credits as are allowable. It may also
be achieved by prioritizing investments that have tax advantages, such as buying
tax-free municipal bonds. Tax avoidance is not the same as tax evasion, which relies on
illegal methods such as underreporting income and falsifying deductions.ax avoidance
is a legal strategy that many taxpayers can use to avoid paying taxes or at least lower
their tax bills. Taxpayers can take advantage of tax avoidance through various credits,
deductions, exclusions, and loopholes, such as families often have a difficult time
making decisions about retirement, savings, and education because the tax code
changes every year. Businesses especially suffer the consequences of a tax code that
constantly evolves, which can affect hiring decisions and growth strategies.

Eliminating or reducing tax avoidance is at the core of most proposals seeking to

change the Tax Code. People often confuse tax avoidance with tax evasion. While both
are ways to avoid having to pay taxes, they are very different. Tax avoidance is very
legal while tax evasion is completely illegal.

Tax avoidance can be a legal way to avoid paying taxes. For instance, you can avoid
paying taxes by using tax credits, deductions, exclusions, and loopholes to your
advantage.

Tax avoidance can be illegal, though, when taxpayers make it a point to ignore tax laws
as they apply to them deliberately. Doing so can result in fines, peTax avoidance is
generally a legal way that taxpayers can avoid paying taxes. They can do so by using
tax credits, deductions, exclusions, and loopholes that are part of the tax code to their
advantage. Using these strategies can help them either avoid paying taxes altogether or
lower their tax liability. Tax avoidance can be illegal if a taxpayer abuses these
strategies and doesn't follow tax laws.

International double taxation occurs when two countries impose taxes on a taxpayer in
the same period for the same income or capital transactions. The situation of rights. The
source country i.e., where the income was earned, has the right to levied because it is
earned within its borders. On the other hand, the residence country where the income
the earner resides is entitled to tax income because it is earned by one of its residents.
Hence, DTA also creates an enabling environment to attract FDIs by sending credible
signals to investors about stability, fairness, and acquiring international recognition.
Additionally, it is observed that “treaties allocate to the source country the primary
income plays an active role, such as a branch or subsidiary; in contrast, they grant the
residence country the primary right to tax ‘passive’ income, which the recipient earns
without being actively involved, such as royalties for the use of its intellectual property”.
There are both conventional and critical perspectives over why developing countries
should sign bilateral tax treaties. According to conventional thought, bilateral tax treaties
like DTA alleviate double taxation, thus facilitating the reallocation of capital from
developed countries into developing countries.

Nepal has entered into a number of Double Taxation Avoidance Agreements (DTAAs)
with other countries, including India, China, and Austria. These agreements are
designed to avoid double taxation on income earned by residents of Nepal in other
countries, and to prevent fiscal evasion.

One of the key provisions of DTAAs is the method for eliminating double taxation. This
method typically involves one of the following:

● Credit method: The country of residence (Nepal) allows a credit for taxes paid in
the source country (India), up to the amount of tax that would have been payable
in Nepal on the same income.
● Exemption method: The country of residence (Nepal) exempts income from
taxation if it has already been taxed in the source country (India).

In addition to the method for eliminating double taxation, DTAAs also typically include
provisions on:

● The definition of resident

● The taxation of dividends, interest, and royalties
● The taxation of capital gains
● The exchange of information

The DTAA between Nepal and India, for example, also includes a provision on fiscal
evasion. This provision allows either country to deny benefits under the agreement to a
person who is resident of the other country and who is engaged in activities that are
considered to be fiscal evasion.The DTAAs between Nepal and other countries play an
important role in promoting economic cooperation and investment between Nepal and
these countries. By avoiding double taxation and preventing fiscal evasion, these
agreements help to create a more favorable environment for businesses and investors.

Here are some of the key provisions of DTAAs with reference to Nepal:

● The method for eliminating double taxation: Nepal uses the credit method to
eliminate double taxation. This means that if a Nepali resident earns income in
 another country, they can claim a credit for the taxes they paid in that country
against their tax liability in Nepal. The amount of the credit is limited to the
amount of tax that would have been payable in Nepal on the same income.
● The definition of resident: The DTAAs with Nepal typically define a resident as a
person who is domiciled in Nepal or who has a permanent establishment in
Nepal. This means that if a Nepali citizen works in another country, they may still
be considered a resident of Nepal for tax purposes.
● The taxation of dividends, interest, and royalties: The DTAAs with Nepal typically
provide for a reduced rate of tax on dividends, interest, and royalties paid to
residents of the other country. For example, the DTAA with India provides for a
withholding tax rate of 10% on dividends paid to Nepali residents.
● The taxation of capital gains: The DTAAs with Nepal typically provide for a limited
exemption from capital gains tax for gains on the sale of shares or other
securities that are listed on a stock exchange.
● The exchange of information: The DTAAs with Nepal typically provide for the
exchange of information between the tax authorities of the two countries. This
allows the tax authorities to track down and collect taxes on income that has
been earned in one country but not declared in the other country.

The DTAAs between Nepal and other countries play an important role in promoting
economic cooperation and investment between Nepal and these countries. By avoiding
double taxation and preventing fiscal evasion, these agreements help to create a more
favorable environment for businesses and investors.

Here are some of the benefits of DTAAs for Nepal:

● Attract foreign investment: DTAAs can help to attract foreign investment by

providing investors with certainty about their tax liability. This is important
because investors are more likely to invest in a country where they know that
they will not be double-taxed on their income.

● Increase tax revenue: DTAAs can help to increase tax revenue by ensuring that
taxes are paid in the correct jurisdiction. This is because DTAAs make it more
difficult for businesses and individuals to avoid paying taxes by moving their
income to another country.
 ● Promote economic cooperation: DTAAs can help to promote economic
cooperation by facilitating trade and investment between countries. This is
because DTAAs make it easier for businesses to operate across borders and for
investors to invest in other countries.

Overall, DTAAs are an important tool for Nepal to promote economic development and
attract foreign investment.

Now onto the legal provision of the Income Act Nepal,2058 regarding the tax avoidance
and Fiscal evasion are as follows:

Article 2: Taxes Covered: This article defines the taxes that are covered by the
agreement. These include income tax, capital gains tax, and withholding tax.

Article 3: Resident: This article defines who is considered a resident of either country
for the purposes of the agreement. A resident is someone who is domiciled in that
country or who has a permanent home in that country.

Article 4: Source of Income: This article defines the source of income for the purposes
of the agreement. Income is considered to have its source in a country if it is derived
from that country.

Article 5: Permanent Establishment: This article defines what constitutes a

permanent establishment in either country. A permanent establishment is a fixed place
of business through which a business is wholly or partly carried on.

Article 6: Income from Immovable Property: This article provides for the taxation of
income from immovable property. Income from immovable property is taxed in the
country where the property is located.

Article 7: Business Profits: This article provides for the taxation of business profits.
Business profits are taxed in the country where the business is carried on.

Article 10: Dividends: This article provides for the taxation of dividends. Dividends are
taxed in the country where the company that pays the dividends is resident. However, a
resident of the other country may also be taxed on the dividends, but only to the extent
of the amount that is attributable to the resident's share of the company's profits.

Article 11: Interest: This article provides for the taxation of interest. Interest is taxed in
the country where the creditor is resident. However, a resident of the other country may
also be taxed on the interest, but only to the extent that the interest is paid in respect of
a debt that is connected with a permanent establishment that the resident has in the
other country.

Article 12: Royalties: This article provides for the taxation of royalties. Royalties are
taxed in the country where the right or property that is the subject of the royalties is
situated. However, a resident of the other country may also be taxed on the royalties,
but only to the extent that the royalties are paid in respect of a right or property that is
connected with a permanent establishment that the resident has in the other country.

Article 13: Capital Gains: This article provides for the taxation of capital gains. Capital
gains are taxed in the country where the property that is disposed of is situated.

Article 14: Independent Personal Services: This article provides for the taxation of
income from independent personal services. Income from independent personal
services is taxed in the country where the services are performed.

Article 15: Dependent Personal Services: This article provides for the taxation of
income from dependent personal services. Income from dependent personal services is
taxed in the country where the services are performed.

Article 16: Directors' Fees: This article provides for the taxation of directors' fees.
Directors' fees are taxed in the country where the company that pays the fees is
resident.

Article 17: Artistes and Sportsmen: This article provides for the taxation of income
from activities of artistes and sportsmen. Income from activities of artistes and
sportsmen is taxed in the country where the activities are performed.

Article 18: Pensions: This article provides for the taxation of pensions. Pensions are
taxed in the country where the recipient is resident.

Article 19: Government Service:This article provides for the taxation of income from
government service. Income from government service is taxed in the country where the
services are performed.

Article 20: Students: This article provides for the taxation of income of students.
Income of students is taxed in the country where the students are resident, but only to
the extent that the income is not derived from activities that are performed in the course
of the students' employment.

Article 21: Other Income: This article provides for the taxation of other income. Other
income is taxed in the country where the recipient is resident.
Article 22: Methods for Elimination of Double Taxation: This article provides for the
methods that can be used to eliminate double taxation. These methods include the
exemption method, the credit method, and the split-income method.

Article 23: Non-Discrimination: This article provides that nationals of either country
shall not be discriminated against in the other ways.

Similarly, here are some additional provisions related to the avoidance of double
taxation and the prevention of fiscal evasion in Nepal:

Article 24: Exchange of Information: This article provides for the exchange of
information between the tax authorities of the two countries. This information can be
used to enforce the provisions of the agreement and to prevent tax evasion.

Article 25: Mutual Agreement Procedure: This article provides for a mutual
agreement procedure between the tax authorities of the two countries. This procedure
can be used to resolve cases where there is double taxation or where there is a
disagreement about the interpretation of the agreement.

Article 26: General Provisions: This article provides for general provisions, such as
the entry into force of the agreement, the termination of the agreement, and the
settlement of disputes.

Thus, these are the following legal provisions in the context of Nepal.