2. Tax Treaties
Many countries have entered into tax treaties.
Such treaties may cover a range of taxes
including income taxes, inheritance taxes, value
added taxes, or other taxes. Besides bilateral
treaties, multilateral treaties are also in place.
Tax treaties tend to reduce taxes of one treaty
country for residents of the other treaty country to
reduce double taxation of the same income.
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3. Tax Treaty Provisions
The provisions and goals vary significantly, with very
few tax treaties being alike. Most treaties
define which taxes are covered and who is a
resident and eligible for benefits.
provide procedural frameworks for enforcement
and dispute resolution.
define circumstances in which income of individuals
resident in one country will be taxed in the other
country, including salary, self-employment,
pension, and other income.
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4. Tax Treaty Benefits
provide for exemption of certain types of
organizations or individuals, and
limit tax of one country on business income of a
resident of the other country to that income from a
permanent establishment in the first country.
reduce the amounts of tax withheld from interest,
dividends, and royalties paid by a resident of one
country to residents of the other country.
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5. Tax Treaty types
Based on number of countries
o Bilateral Tax Treaties
o Multilateral Tax Treaties
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6. Bilateral Tax Treaties
It is the agreement between 2 countries
Example : India and Mauritius have tax
treaty to avoid double taxation. This
resulted in establishment of many
investment bankers in Mauritius to
operate in Indian stock markets through
participatory notes.
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7. Multilateral Tax Treaties
It is the agreement between more than 2
countries
Example
European Union (EU) countries are parties to
a multilateral agreement with respect to
value added taxes under auspices of the EU,
while a joint treaty on mutual administrative
assistance of the Council of Europe and
the Organisation for Economic Co-operation
and Development (OECD) is open to all
countries.
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8. Tax Treaties Types
1. Foreign Tax Credit
2. Tax Neutrality
3. Double Taxation Relief
4. Permanent Establishment
5. Priority of Law
6. Tax Harmonization
7. Limitation on Benefits
8. Provisions Unique to Inheritance Taxes
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9. 1. Foreign Tax Credit
This is a type of tax credit method
A non-refundable tax credit for income taxes
paid to a foreign government as a result
of foreign income tax withholdings.
The foreign tax credit is available to anyone who
either worked in a foreign country or has
investment income from a foreign source.
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10. 2. Tax Neutrality
In its most common usage, tax neutrality refers
to tax provisions that conform to an
ideal tax system. A tax provision that is
consistent with such an ideal system is described
as neutral.
Tax that does not cause individuals or firms to
shift their economic choices, such as to choose
among different goods, inputs, locations, etc.
It doesn’t favor certain kind of economic activity
over others
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11. 3. Double Taxation Relief
Taxation in two countries for the same
income of capital gain is avoided.
They are also called double taxation
avoidance agreements (DTAs) with other
countries to avoid or mitigate double
taxation.
India has DTAAs with several countries given
in the link below with priorities ranging from
exports to investments.
https://www.incometaxindia.gov.in/pages/international-taxation/dtaa.aspx
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12. 4. Permanent Establishment
A foreign company non-resident is treated as
having a Permanent Establishment in India.
It is defined as per Article 5 of the Double
Taxation Avoidance Agreements entered into
by India with different countries
The said non-resident or foreign company
carries on business in India through a branch,
sales office etc.
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13. 5. Priority of Law
Priority law in India is reflected in Absolute
Priority Rule (APR)
The Insolvency and Bankruptcy Code
(Amendment) Act, 2019 has moved towards
recognizing APR.
This rule suggests that in an insolvency
resolution, the claims of a class of creditors must
be paid in full before any junior class of creditors
may receive or retain any property in satisfaction
of their claims, unless the more senior class
consents to such a departure.
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14. 6. Tax Harmonization
It is adjusting tax systems of different
countries towards common policy
objectives.
This is more observed in economic unions
This avoids competition among the tax
levying countries
The cooperating countries do not compete
over capital by reducing tax rates
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15. 7. Limitations on Benefits
(LOBs)
This provision limits the benefits of favorable tax treaties.
It is an anti-treaty shopping provision intended to prevent
residents of third countries from obtaining benefits under
a treaty.
It is to prevent abuse of treaty benefits and treaty shopping,
countries have revised their tax treaties to include an anti-
abuse provision called the limitation of benefit clause, herein
after referred to as LOB clause.
a resident in Mauritius could avoid tax on capital gains in India
(the source state) as it was not a resident in India as well as
avoid tax on capital gains in Mauritius (residence state)
because in Mauritius, residents were not taxed on capital
gains.
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16. 8. Provisions Unique to
Inheritance Taxes
In many countries, the heir must pay Inheritance
Tax for inheriting any such property or assets from
your parents or grandparents or any other relative
or friend. In India, however, the concept of
levying tax on inheritance does not exist now.
In fact, the Inheritance or Estate Tax was abolished
with effect from 1985.
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17. Other Treaties
• Mutual Enforcement
• Tax Information Exchange
Agreement
• Tax Residency
• Tax Exemptions
• With Holding Taxes
• Dispute Resolution
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