Application and interpretation of Tax treaties Flashcards
What are the connecting factors that lead to double taxation?
The taxability of a foreign entity in any country depends upon two distinct factors, namely, whether it is doing business with that country or in that country - Namely either residence rule will be applicable or source rule will be applicable to the said person
if a company is doing business with another country (i.e. host/source country), then it would be subject to tax in its home country alone, based on its residence link since the company is not engaged in carrying on the business in the territory of source country (example export of goods).
However, if a company is doing business in a host/source country, then, besides being taxed in the home country on the basis of its residence link, it will also be taxed in the host country on the basis of its source link as the company would be heavily engaged in doing business in the territory of other country
What does a tax treaty or Double taxation conventions seem to avoid by invoking the provisions under these sections? - AKA juridical double taxation
In order to avoid such double taxation, a company can invoke provisions of Double Taxation Avoidance Agreements (DTAAs) (also known as Tax Treaty or Double Taxation Convention–DTC) with the host/source country, or in the absence of such an agreement, an Indian company can invoke provisions of section 91, providing unilateral relief in the event of double taxation.
Under the juridical method of eliminating double taxation, what are the approaches specified as per the UN model conventions?
- Exemption method - Article 23A - Tax exemption may be available in the residence state.
- Credit method - Article 23B - Tax credit may be available in the residence state for taxes deducted in the source state.
- As we can see the above two methods are unilateral reliefs provided and does not solve the issue of economic double taxation in any way.
- The only way to solve the above problem is to do so by way of bilateral negotiations.
What does a tax treaty or Double taxation conventions seem to avoid by invoking the provisions under these sections? - AKA economic double taxation?
‘Economic double taxation’ happens when the same transaction, item of income or capital is taxed in two or more states but in hands of different persons (because of lack of subject identity)
That is one state it is taxable as capital gains and in the other state it is taxable as business income, even though of the same nature.
What is the meaning of distributive rule or classification and assignment rules when it comes to taxing double taxable income?
According to this principle, “to the extent that an exemption is agreed to, its effect is, in principle, independent of whether the Contracting States imposes a tax, in the situation to which the exemption applies, and irrespective of whether the State actually levies the tax”
The point here is that having agreed to give the right of tax to the other state, that state may or may not levy tax and if the state in whose favour right to tax is devolved, chooses not to tax such income, then, it may result in double non-taxation
The argument in favour of double non-taxation is that income would be subject to tax in the exempt state as and when the exemption is withdrawn or tax is levied. Thus, this rule ensures that double taxation does not arise in future also, if the source state decides to levy tax.
What are certain other considerations to be kept in mind by the government before entering into these tax treaties?
- Ensuring non-discrimination between residents and non-residents
- Resolution of disputes arising on account of different interpretation of tax treaty by the treaty partner.
- Providing assistance in the collection of the fair and legitimate share of tax.
What are certain other principles which must be considered by countries in tax treaties?
- Equity and fairness: Same income earned by different taxpayers must be taxed at the same rate regardless of the source of income.
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Neutrality and efficiency: Neutrality factor provides that economic processes should not be affected by external factors such as taxation. Neutrality is two-fold.
(a) Capital export neutrality and
(b) Capital import neutrality (CIN). - Promotion of mutual economic relation, trade and investment: In some cases, it is observed that avoidance of double taxation is not the only objective. The other objective may be to give impetus to a country’s overall economic growth and development.
What is the meaning of Capital export neutrality and Capital import neutrality (CIN)?
- Capital export neutrality (CEN) provides that business decision must not be affected by tax factors between the country of residence and the target country;
- whereas CIN provides that the level of tax imposed on non-residents as well as the residents must be similar.
What is the general rule of interpretation in the Vienna convention on law of treaties?
What is the meaning of external aids to interpretation of a tax treaty and what according to Prof Starke is a scenario where one may resort to following extrinsic aids to interpret a tax treaty provided that clear words are not thereby contradicted?
- According to Article 32 of the Vienna Convention, the supplementary means of interpretation include the preparatory work of the treaty and the circumstances of its conclusion.
- When as per Prof starke we can follow extrinsic aids
- Interpretative Protocols, Resolutions and Committee Reports, setting out agreed interpretations;
- A subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions [Art. 31(3) of the VCLT];
- Subsequent conduct of the state parties, as evidence of the intention of the parties and their conception of the treaty;
- Other treaties, in pari materia (i.e., relating to the same subject matter), in case of doubt
Name one or more of the extrinsic aids which can be used to interpretation of the tax treaty?
- Provisions in Parallel Tax Treaties
- International Articles/Essays/Reports
- Protocol
- Preamble
- Mutual Agreement Procedure [MAP]
What is the meaning of liberal construction of tax treaties?
It is a general principle of construction with respect to treaties that they shall be liberally construed so as to carry out the apparent intention of the parties.
In John N. Gladden v. Her Majesty the Queen, the principle of liberal interpretation of tax treaties was reiterated by the Federal Court, which observed that “contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties
The Court further recognized that “we cannot expect to find the same nicety or strict definition as in modern documents, such as deeds, or Acts of Parliament, it has never been the habit of those engaged in diplomacy to use legal accuracy but rather to adopt more liberal terms.”
