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INTRODUCTION

With the increase in liberalization and globalization, the cross border transaction takes place among the different economies of the world. Integration between the countries is increasing because of the liberal trade practices which are common to all the countries. In such scenario, the earning person is not only restricted to its national boundary but there are certain prospects which paves the way for earning internationally also.

The concept of international taxation solely deals with the cross-border transactions which involves the domestic tax laws of the particular country affecting the cross-border transactions. It covers both the direct taxes and the indirect the provisions of non-resident income, the avoidance of double taxation, the concept of transfer pricing etc.

 

JURISDICTION OF TAXATION

Residence and Source are considered to be the fundamental principles of taxation. They have the specific implication in domestic as well as the treaty law. In the residence state, the person resides in the same state where he is earning the income where as the source state is a state from where the income of a person has been originated. In the case of cross border transaction where there is a movement of income and capital, then the two or more states may exercise their own domestic laws. But if the state implies its unilateral tax laws without any agreement with the corresponding state then such policy would create the hindrance in the free trade because the same income would be taxed again.

Therefore, the double taxation should be avoided and minimized at the possible extent. According to the OECD Commentary, “its harmful effects on the exchange of goods and services and movements of capital, technology and persons are so well known that it is scarcely necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between the countries.”  

With the introduction of double tax avoidance convention which mentions about the taxing rights of the state of source and residence in relation to the different classes of income.

There are certain type of income upon which the right to tax is conferred upon a single contracting state for different types of income.  Therefore, the problem of double taxation is resolved by the other contracting state prevented from being taxed twice on the same income. As far as other forms of income are concerned, the contracting states have the exclusive right to tax.

 

DOUBLE TAXATION AVOIDANCE AGREEMENT

The concept of double taxation is used by different countries in the cases where the tax payer has connections with more than one company. The person earning the income has to pay tax in the source country where the income is earned and in the resident country where he resides. Therefore, the person is liable to pay the tax in both the countries. To mitigate such hardships of double taxation, the member countries of Organization for Economic Co-operation and Development (OECD) have entered into the model agreement termed as Double Taxation Avoidance Agreement (DTAA) which came in 1977 and amended in 1992 and 1995. It is commonly referred as the bilateral agreement between the two member countries for the exclusion of double taxation policy. The DTAA between India and the other member countries generally include the person who is a resident of India or the other contracting state but in case if the person is neither a resident of India nor from the contracting state then he would not be benefited under DTAA.

The DTAA promotes the exchange of goods and services and the capital investment among the countries and helps in reducing the burden of the international taxation among the different countries of the world. Further, it guarantees the fair and equal treatment of tax payers who are the having different residential status and also resolves the differences among the tax payers relating to the capital and income. It also encourages the free flow of international trade and investment and the technology transfer.

The DTAA upon the contracting state is applicable upon the dividend, interests, royalties, technical service fee, permanent establishment etc. received by the residents of one country. In case the total exemption is not granted under DTAA and such income is taxed in both the countries then the tax paid by the person in the other country would be credited.

 

INCOME TAX ACT, 1961 AND DTAA

The provisions of Double Taxation Avoidance Agreement have been entered into the Section 90 of the Income Tax Act, 1961 in conformity with the Central Government. In case, where there are no specific provisions given by the agreement, the provisions of Income tax Act will be applicable.

As per Section 90(2) of the Act, the assessee is given the option to be governed either by DTAA or by the provisions of the Income Tax Act whichever is more beneficial. There are two methods given under Sections 90 for granting the relief. These are:

1. Exemption Method
2. Tax Credit Method

Under Exemption Method, the income is taxed in one of the countries and is exempted in the other country. For example, income earned on dividend, interest, royalty and for technical services then it will be taxed in India only. But if the same income earned in the other country then the same income would be taxed in that country and will not be taxable in India.

But in case of Tax Credit Method, the income is taxed in both the countries as per the treaty and the country of residence will be credited for the tax charged in the source country.

In terms of Bilateral Agreement with a foreign country under section 90 of the Act, the assessee is given an option to be taxed as per the Double Taxation Avoidance Agreement or as per the normal provision of the Income Tax Act.

As per section 91 of the Act, the person can relieved from double taxation by the Government irrespective of the provision that there exist DTAA with India and the other country. Such relief is granted to the resident only and not to the non-resident. Unilateral relief to a tax payer is offered in the cases where the person or the company is the resident of India in the previous year or where there is no tax treaty between India and the another country, in that case the income should have been taxed or the person has paid the tax under the laws of the foreign country which is in question.

 

THE PROVISIONS RELATED TO NON-RESIDENT UNDER INCOME TAX

The person is taxed in India based on the residential status of India. With respect to the non-resident taxation, the income which is received or deemed to be received in India or on his behalf and the income which is accrued or arises or deemed to accrue or arise in India. For example in case of rent of any property which is situated in India, any income arises from the investment in India.

Under Section 9 of the Income Tax Act, there are certain deeming provisions given under which the income will be deemed to accrue or arise in India:

1. Income received from the business connection in India.
2. Income received from the property, asset or source of Income in India.
3. Income on the basis of the Capital gains from any transfer of any capital asset situated in India.
4. Income received from the salary in India- in case the service is rendered in India
5. Income received from the salary paid by any department under Government of India to an Indian citizen even though the service provided outside India.
6. In case the dividend paid by the Indian Company which is outside India
7. Income received through interest in some situation
8. Income received through royalty in some situation
9. Income received by way of Fees for the technical services

Therefore, the main test is done for the taxation of income which is broadly on the basis of the deemed provisions. The details are as under:

INCOME RECEIVED FROM THE BUSINESS CONNECTION IN INDIA

The income arises outside India, by virtue of a Business Connection in India, is deemed to have been accrued or arises in India.

The term Business Connection also includes the Profession Connection. It generally includes a person who has the authority to conclude the contracts on behalf of non-residents. 

• The person having an authority to conclude contracts on behalf of non-resident.
• An individual who maintains the stock of goods or merchandise in India and delivers the same on behalf of non-resident.
• An individual who safely keep the orders for the non-resident. Such orders may be wholly or mainly which signifies that the major proportion of the total activity carried by the person should be for the non-resident.

But in case the person who is non-resident carries his business through the broker or the agent who is acting in the ordinary course of business shall not be considered as a business connection.

Exception –Activities which are not considered to be a business connection:

• If the goods are purchased from India and is exported to a non-resident.
• The news and the views in India are collected and transmitted out of India by the non-resident who is engaged in the business of running a news agency or publishing news papers, magazines or journals.
• Shooting of any cinematography film in India by non resident who is not a citizen of India or any partner of a firm who is not a citizen of India or company in which the shareholder is not a citizen of India or a resident in India.

In case, the business where all the activities are not carried out in India and the income which is deemed to have accrued or arises in India shall be attributable up to the activities carried out in India. Such apportionment shall be made on the rational basis not on the arbitrary basis.

If any permanent establishment is made in India and profits are earned out of those establishments then such profits shall be taxable in India but the non-resident individual has to verify that he has the permanent establishment in India and is earning out of that business connection.  

INCOME RECEIVED THROUGH INTEREST IN SOME SITUATION

Income received from the interest shall be taxable as per the Act depending upon the use of funds by the person who is paying the interest. There are certain situations which have to be considered for the taxation on interest income:

• If such interest is paid by the Government of India to a non resident, then it shall be taxable.
• If such interest is paid by a person who is resident of India to a non-resident and the funds are borrowed for the carrying out the business/profession outside India or a person is earning any income from the source outside India, then in that case, such income shall not be taxable in India. But in case the funds are only used for carrying out the business or profession in India then in that case, such income shall not be taxable.

 

 

INCOME RECEIVED THROUGH ROYALTY AND FEES FOR TECHNICAL SERVICES

With respect to the Royalty and Fees for technical services, the income earned is taxable depending upon the purpose of the payments made.

• If royalty and fees for technical services is paid or payable by the government of India to a non-resident in India, is taxable in India.
• If the royalty and fees for Technical Services is paid or payable to non-resident person and where the right, property or information of services are utilized for carrying out the business activities by such person outside India or for making or earning the income, then such income shall not be taxable as per the Act.

For the purpose of taxation in respect of non-resident income, income exempted under section 10 of the Act, provisions relating to the DTAA under section 90 of the Act.

 

FOREIGN COUNTRIES DOING BUSINESS WITH INDIA

With the increase in the globalization and liberalization of the country, the large numbers of foreign companies are setting up which is accelerating the Indian economy at the high rate. A foreign company can initiate their operations in India by incorporating under Indian Companies Act, 2013 either through Joint ventures with an Indian Company or through wholly owned subsidiaries or by Limited Liability Partnership. In case the foreign company commences their operations as a Foreign Company, then in that case it may be set up as Liason office, branch office or by Project office.

Further, a foreigner can become a director of an Indian Company. There is no need of any permission is required. It is also possible that only foreign citizen can act as the director of the company. As per Section 149(3) of the Companies Act, 2013 is concerned, it is mandatory that every company to have a director must have stayed in India for at least 182 days in the previous calendar year. It may also be noted that such a resident director is not to be a citizen of India.

A foreign national has the option to take help from legal professional or local business associate for the first year of doing business in India. During that period, if such national becomes the resident of India, then in the next year it is not essential to take the service from such professionals. A Foreigner who is appointed as a director may have the option to live outside India and can conduct his business while living abroad. As per Schedule V of the Companies Act, 2013 read with Section 196 of the Act make it mandatory that an individual who is appointed as Managing Director/ Whole time Director of a company is resident of India.

 

NEED FOR OBTAINING A TAX NUMBER FOR FOREIGN COMPANIES

As per the Notification by the Ministry of Corporate Affairs, it is mandatory for foreign national incorporating the Company in India to possess PAN who comes under the provisions of Income Tax 1961.  But the foreign individual who is an intending director is not required to possess the PAN, he can only furnish the passport number along with the undertaking stating that there is no applicability of Pan for the concerned person.

 

EXEMPTION FOR NRI TAX

The tax on NRI in exempted in the cases where the income is earned on the dividends from the equity shares and equity mutual funds. The interest on Non-Resident External Account and the Foreign Currency Non Resident Bank are also considered as the tax free income as per section 10 (4) of the Income Tax Act. In case of long term capital gain from the transfer of equity shares as traded on recognized on the Stock Exchange and units of equity schemes of mutual fund shall be exempted from but the security transaction tax has to be paid. Remuneration which is received by non-resident who is assigned the duties from Government of foreign state for rendering the technical consultancy and projects upon the agreement between the Central Government and the government of foreign state shall be exempted.

 

Therefore, with the increase in the cross border transaction, the individuals and companies are investing and competing the international marketplace. The free movement of goods and services across the globe has the implications for both direct and indirect taxation. Therefore, the application of double taxation gives rise to the international trade among the different countries of the world.

13th October 2015

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