International Taxation

International Taxation

Introduction

The majority of individuals, business enterprises, societies, federations, and institutes derive their income from within the country and hence they follow the normal direct and indirect taxation procedures while paying their respective taxes. Although even if less than the majority, what about the people who all have their income source in different nations? Which country’s rules and regulations will they abide by? and To which country are they supposed to pay their tax?

The study and determination of taxes levied upon a taxable person or business taking into account the tax laws of different countries or simply the taxes beyond our national borders is called International Taxation.

Table of Contents

• Residency
• NRI - Tax Exemption
• TDS - Tax Deducted at Source
• What is DTAA?
• Benefits of DTAA
• Computation of NRIs’ Income (Section 115D)
• Investment Income and Long–Term Capital Gains (Section 115E)
• Capital Gains on Transfer of Foreign Exchange Assets (Section 115F)
• Foreign Exchange Asset
• Section 115H

Residency

Residency plays a very important role in International Taxation. Most jurisdictions impose and classify taxes based on the residency of the individual/business. It is based on the place of the main residency of a person and the number of days that the person is present in the country. For example, in India, if a person stays in India for less than one hundred and eighty-two days then he/she is considered to be an NRI (Non-Resident Indian).

This residential status describes the taxability of a person while for an NRI, the income that he/she earns in India on his/her behalf or arises here is Taxable in India. As per the Income Tax Act,1961, there are certain provisions that are considered to be deemed in India even though they have been living abroad. They are as follows,

1. Income through business connections in India

2. Income through any property holdings or any source of income in India.

3. Any income from the salary earned in India is considered. That is if any service is rendered in India then it is considered income from India.

4. If a person obtains capital gains from assets that are situated in India.

5. Salary paid to an individual by the government of India even if those services are all carried out out of India.

6. All the dividends that the Indian companies pay for those out of India

7. All the income based on fees/salary for services rendered, or in a way of interest or loyalty will also be considered.

NRI – Tax Exemption

Usually, NRI’s tax regime is the same as the one that is carried out for all Indians who are below the age of 60. NRI’s who are above the age of 60 also follow the same as above. There are two ways where NRIs are exempted by filing taxes.

• If a taxable income of an NRI is based on investment incomes or on gains from long term capitals.
• When on such income, TDS has been applied.

NRIs also have certain sources of income that are not taxable and are recognized by the IT department.

• Interests that are earned by an NRI on Saving Certificates or Non-Resident (Non-Repatriable) [NRNR] deposits.
• Interests earned from foreign currency, [(FCNR B)] bank deposits continued until maturity even if the NRI decides to come back for employment, business or vacation.
• Dividends, Mutual Funds, and notified bonds are also exempted.
• Long-term capital gains that arise from the transfer of equity shares traded on recognized Stock Exchange and equity scheme of mutual funds are exempt from tax, provided security transaction tax is paid.
• Interests on notified bonds.
• Fee or remuneration received by non-citizen/non-resident/citizen but not resident consultants, for providing technical consultancy in India under the approved program including remuneration of all their employees.

TDS - Tax Deducted at Source

According to the Finance Act of 2008, a new sub-section (6) to section 195 effective from April 1st, 2008 was inserted which basically requires that a person responsible for making payment to an NRI must definitely include it while filing their returns. This has to be done before making a remittance. The Central Board of Direct Taxes (CBDT) prescribed a new rule 37BB under the Income Tax rules of 1962. It prescribes Form 15CA and Form 15CB to be filled in relation to the remittances of non-residents under section 195(6) of the Income Tax, 1961.

The process to be followed before any remittance is made is mentioned below.

• A certificate must be obtained from a CA, form number 15CB.
• However, this is only required only if the remittance exceeds Rs.5 lakhs for a financial year.
• If exceeded, then the information must be entered in the Form 15CA.
• Uploaded Form 15CA digitally on the designated website
• Take a printout of Form 15CA and sign it.
• Finally, the money can be remitted to the Non-Resident.

What is DTAA? (Double Taxation Avoidance Agreement)

It is common for a Non-Resident to pay his/her taxes to the country of residence. For example, there is a person who is an Indian and has income sources in a different country. He will have to pay taxes to the Indian government and the country in which he currently resides will also demand tax which results in paying taxes for two countries. This leads to double taxation which basically means paying tax twice for the same income. A solution to this problem is DTAA (Double Taxation Avoidance Agreement).

An agreement is signed between two countries/ nations to avoid double taxation and for more transparency with less tax evasion. This is known as DTAA (Double Taxation Avoidance Agreement). This is a vital part of International Taxation and India has this agreement with more than 88 countries worldwide.

A nation/ country will have its own rules and regulations on taxation for both its own residents and also for non-residents of their country. DTAA would help them gain taxes from people belonging to other countries.

Benefits of DTAA

Apart from double taxation avoidance, DTAA offers various other benefits.

• It can prevent tax discrimination and also has tax credits/ relief.
• This agreement ensures certainty of their tax treatment to all investors which is much needed.
• It also has the exchange of information. For example, according to this India can request information that is needed for the implementation of taxation while other countries can request information if they require any information from our government.
• The taxes that are due can be identified and recovered easily.
• Using DTAA, investment can improve along with commerce and trade for all the countries.
• Countries will have a better understanding and have a mutual relationship between them.

Non-Residents who are residents in any country that their country has signed a DTAA will have benefits in two ways. They are,

• Credit Method:

In this type of taxation the individual has to pay taxes to both the governments. But the country of residence will give a tax deduction/ credit to foreign taxes.

• Exemption Method:

Here, a person will have to pay his/her taxes to either one country and not to both countries.

Computation of NRIs’ Income (Section 115D)

Section 115D deals with the computation of income of non-residents.

For the taxability of an NRI,

Note: There will be no deduction for the expenditure or allowance while computing their investment income.

If the assessee is an NRI,

(i) The gross total income will consist of their investment income or the way of income through their long-term capital gains or by both of these.

(ii) The gross total income will include any income mentioned above, then it shall be reduced to the amount of such income and deductions will be allowed if the reduced gross income is to be the gross total income of the assessee.

Investment Income and Long–Term Capital Gains (Section 115E)

If the total income of a person who is a Non-Resident includes any income from investments or income from long-term capital gains an asset apart from their specified asset.

The tax payable is as follows

• 20% of income tax is calculated on the income with respect to the investment.
• If the total income includes long-term capital gains then it will be at a rate of 10%.
• The amount of tax chargeable has the person’s income reduced by the rates mentioned above.

Capital Gains on Transfer of Foreign Exchange Assets (Section 115F)

A Non-Resident has profited from long-term capital gains from an asset, by transferring a foreign exchange asset while getting a sum from this exchange. If he/she then buys another asset by investing this amount of money within a period of six months then the capital gain will be dealt with as follows,

• Suppose the cost of the new asset isn’t less than the net cost consideration of the asset that was exchanged then under Section 45, the whole gain from long-term capital would not be charged.
• The proportion costs to the acquisition of the original asset of the net consideration will not be charged if the cost of the new asset is less when compared to the old one.

Foriegn Exchange Asset

Section 115C defines a foreign exchange asset as the asset got by a convertible foreign exchange which also includes shares from an Indian Company. Such specified assets are shares of an Indian company, deposits or debentures with an Indian Public Company, or any security of the Central Government.

Section 115H

If a Non-Resident Indian becomes an Indian resident with respect to the income of the subsequent year, the person has to furnish details to the Assessing Officer along with the writing of his/her income under Section 139 for the assessment year for which the person is assessable.

Conclusion

Hence, to conclude, International Taxation does not come under different laws nor has a different set of courts or groups to handle its matters of taxation. However, our current economy is rapidly changing and it is all the more challenging for Indian Tax Authorities to ensure that all international transactions pertain to the rules and regulations.

New challenges show up almost every day while chartered accountants competently deal with all the new and critical taxation issues.

Frequently Asked Questions:

1. What is International Taxation?

The study and determination of taxes levied upon a taxable person or business taking into account the tax laws of different countries or simply the taxes beyond our national borders is called International Taxation.

2. Is DTAA necessary and how many countries does India have agreements with?

Yes, DDTA is very much necessary to avoid double taxation which can lead to a lot of problems like tax evasion, less trade and commerce, and people having much less income on their hands after paying taxes. India has agreements with more than 88 countries.

3. What is DTAA?

An agreement is signed between two countries/ nations to avoid double taxation and for more transparency with less tax evasion. This is known as DTAA (Double Taxation Avoidance Agreement).

4. What is MAP?

MAP (Mutual Agreement Procedure) is when a taxpayer can raise issues to the government related to taxation while both the agreed countries can resolve the disputes related to International Taxation.

5. What is AEOI?

AEOI (Automatic Exchange of Information) is when both the related countries/ nations automatically send their information to the taxpayers without any specific request for it.

6. Are there countries with no tax?

Yes, there are such countries, and such countries/ nations with comparatively very less or no tax are known as tax havens. Tax avoidance schemes may take advantage of tax havens to avoid paying taxes.

7. What is transfer pricing?

Enterprises under common ownership also need rules for pricing. Such pricing of transactions between such entities under accounting and taxation is called transfer pricing.

8. Is International Taxation an entirely separate law?

No, international taxation is not separate law and it also comes under the general Income Tax. The difference is that it includes taxation over our national borders.

9. What is a credit method in International Taxation?

In this type of taxation, he/she will have to pay taxes to both governments but the country that he resides in will give a tax deduction/ credit to foreigners.

10. What is the exemption method?

In this method, both the nations involved would mutually come to an agreement and the taxpayer only needs to pay his/her taxes to any one of the governments and not to the both of them.