All About the Double Taxation Relief

Introduction

Double taxation occurs when a person or company is taxed twice on the same income in two different countries. This often happens when a person or company conducts business in more than one country, and each country has its tax laws. To prevent this from happening, most countries have double taxation agreements in place. These agreements are designed to provide relief to taxpayers who are subject to double taxation.

Double taxation relief (DTR) is a method used by countries to eliminate or reduce the amount of double taxation that occurs when a person or company earns income in more than one country. Double taxation relief can take several forms, including credit relief, exemption relief, and deduction relief.

Credit Relief:

Credit relief is the most common form of double taxation relief. This method allows taxpayers to claim a tax credit in one country for the taxes paid in another country. For example, if a US resident earns income in Canada and pays taxes on that income to the Canadian government, they can claim a credit for that tax paid when filing their US tax return. The credit is usually limited to the amount of tax that would have been paid in the resident’s home country on that income.

Exemption Relief:

Exemption relief is another form of double taxation relief. This method exempts income from taxation in one of the two countries where the income was earned. For example, if a US resident earns income in the UK, and that income is exempt from UK tax, the income is only subject to US tax. This method is less common than credit relief.

Deduction Relief:

Deduction relief is a method of double taxation relief that allows taxpayers to deduct foreign taxes paid from their taxable income in their home country. This method is less common than credit relief or exemption relief.

Double taxation relief is a crucial aspect of international trade and commerce. Without DTR, companies and individuals would be hesitant to engage in business outside of their home country due to the risk of double taxation. The existence of DTR makes it easier for companies to expand globally and promotes economic growth.

Double Taxation Agreements:

Double taxation agreements are treaties between two countries designed to prevent double taxation. These agreements determine which country has the right to tax certain types of income, provide relief for double taxation, and ensure that taxpayers are not taxed twice on the same income. Most double taxation agreements are based on the Organisation for Economic Co-operation and Development (OECD) model tax convention.

The OECD model tax convention provides a framework for countries to develop their double taxation agreements. It covers topics such as the definition of residency, the treatment of business profits, the taxation of dividends, interest, and royalties, and the prevention of tax avoidance and evasion.

What is Double Taxation Relief (DTR)?

A system known as double taxation relief (DTR) aims to eliminate or lessen the effects of double taxation on taxpayers who earn income in multiple nations. A taxpayer may be subject to double taxation if they are taxed on the same income in two distinct nations, each of which has its tax laws. By providing relief to taxpayers who are subject to double taxation, DTR contributes to the prevention of this.

Credit relief, exemption relief, and deduction relief are all examples of double taxation relief. Taxpayers can use credit relief to offset taxes they owe in one country against taxes they paid in another. Income earned in one country is exempt from taxation in the other. This is known as exemption relief. Taxpayers can deduct foreign taxes paid from their taxable income in their home country thanks to deduction relief.

The reduction of taxpayers’ tax burden as a result of international trade and commerce is the goal of DTR. Taxpayers would be reluctant to invest or conduct business outside of their home nation without DTR, which could hinder economic expansion. Double taxation agreements, which are treaties between nations governing how income earned in one country is taxed in another, include DTR as an essential component. Agreements preventing double taxation serve as a framework for the implementation of DTR and aid in preventing it.

Types of Double Taxation

Double taxation is a situation where an individual or a business entity is taxed twice for the same source of income or asset. In India, double taxation can occur at various levels, such as within the country, between states, or between India and other countries. Here are the types of double taxation in India:

1. Domestic Double Taxation:

Domestic double taxation occurs when an individual or a business entity is taxed by both the central government and state government for the same source of income or asset. This type of double taxation can occur in cases where both central and state governments have the authority to levy taxes on a particular source of income or asset. For example, an individual can be taxed on their income by both the central government, which levies an income tax, and the state government, which levies a state-level tax on the same income.

2. International Double Taxation:

International double taxation occurs when an individual or a business entity is taxed twice for the same source of income or asset in two or more countries. This type of double taxation can occur when a person or a business has a source of income or asset that is taxed in one country and also taxed in another country where they are a resident or have a business presence. This can happen because different countries have different tax laws, and the same source of income or asset may be taxed differently in each country.

3. Double Taxation of Dividends:

Double taxation of dividends occurs when a company pays out dividends to its shareholders, and both the company and the shareholders are taxed on the same income. In India, the company paying out dividends is required to pay a dividend distribution tax (DDT) of 15% to the government, and the shareholder is also required to pay tax on the dividends received, which is added to their income and taxed as per their income tax bracket.

4. Double Taxation of Capital Gains:

Double taxation of capital gains occurs when an individual or a business entity sells an asset and is taxed on the gain twice. In India, capital gains tax is levied by the central government when an asset is sold, and the gain is added to the individual’s income and taxed as per their income tax bracket. However, when the asset is sold by a non-resident of India, the gain is also taxed in their home country, resulting in double taxation.

5. Double Taxation of Royalties and Fees for Technical Services:

Double taxation of royalties and fees for technical services occurs when an individual or a business entity receives payments for the use of intellectual property or technical know-how and is taxed on the same income in two or more countries. In India, royalties and fees for technical services are subject to withholding tax, which is deducted from the source of payment. The withholding tax rate can be reduced under tax treaties between India and other countries to avoid double taxation.

Double taxation is a complex issue that can occur at various levels and can have a significant impact on individuals and businesses. It is important to understand the various types of double taxation in India and take steps to mitigate them, such as availing tax benefits under tax treaties or taking advantage of tax credits available in certain cases.

Double Taxation Relief on Double Corporate Taxation in India

Double taxation of corporate income occurs when a company is taxed twice on the same income or profits. In India, double corporate taxation can occur when a company is taxed by both the central government and the state government, or when a company’s income is taxed in India and also in another country where it operates. To avoid this double taxation, India has entered into Double Taxation Avoidance Agreements (DTAAs) with various countries and also offers relief under domestic tax laws.

Here is how Double Taxation Relief works in India for Double Corporate Taxation:

1) Tax Treaties and DTAAs:

India has signed DTAA agreements with more than 90 countries to avoid double taxation of corporate income. The DTAA agreement allows for tax credits or exemptions for companies operating in multiple countries. Tax credits are used to offset taxes paid in one country against taxes owed in another country, while exemptions eliminate the need to pay tax on certain types of income or profits.

For example, suppose an Indian company has a subsidiary in the United States, and both countries tax the company’s income. In that case, the DTAA agreement between India and the US can provide tax credits or exemptions to avoid double taxation.

2) Foreign Tax Credit:

India’s domestic tax laws also provide for foreign tax credits (FTC) to relieve double taxation on corporate income. Under FTC, the Indian company can claim a credit for the taxes paid in a foreign country against its Indian tax liability on the same income.

For example, suppose an Indian company has a subsidiary in Singapore and pays a corporate tax of $10,000 in Singapore. The Indian company can claim a foreign tax credit of $10,000 against its Indian tax liability on the same income. The foreign tax credit is limited to the Indian tax liability on the same income.

3) Relief under Domestic Tax Laws:

India’s domestic tax laws also provide for relief from double taxation of corporate income. For example, the Indian Income Tax Act provides for relief under Section 91 and Section 90A. Under Section 91, relief is provided for taxes paid in a foreign country on income that is not included in the Indian company’s total income. Under Section 90A, relief is provided for taxes paid in a foreign country where there is no DTAA agreement between India and that country.

For example, suppose an Indian company has a subsidiary in France, and both countries tax the company’s income. However, India does not have a DTAA agreement with France. In that case, the Indian company can claim relief under Section 90A of the Indian Income Tax Act for the taxes paid in France.

Conclusion

In conclusion, double corporate taxation can be a significant issue for companies operating in multiple countries, including India. However, India has taken several steps to avoid double taxation, including signing DTAA agreements with various countries, providing foreign tax credits, and offering relief under domestic tax laws. Companies need to understand these relief measures and take advantage of them to minimize their tax liabilities and avoid double taxation.