In the era of globalization, where international trade has softened the borderlines of business, a country needs to safeguard its tax interest. This scenario has prompted professionals and chartered accountants to protect their country’s economic climates while complying with international tax laws. The ICAI, the national accounting body of India, has included final papers on International taxation that equip every chartered accountant on this taxation process governed by international laws.
Devised below is a comprehensive guide on international taxation and its current system of functioning.
International Taxation
Before diverging into the topics of International tax, one must understand the concept of the Double Tax Avoidance Agreement (DTAA). The DTAA is an agreement signed between India and another country (or any two/ multiple countries) that assists taxpayers in avoiding double tax on the income earned from a residence country and a foreign country. If a double tax scenario is not prevented, it could cause the reduction of income of a taxpayer carrying out economic activity in two states. Thus, it could lead to a discouraging trade and flow of goods. Hence International taxation laws:
- Safeguard the tax interests of the country
- Avoid double taxes
- Free flow of international trade
- Introduce rational tax laws for the taxpayer
International laws govern the norms of international taxation. The models of tax treaties for international taxation are either of the below-mentioned models or partial adoption of these models. The tax treaty models are:
- OECD
- UN model
- US Model
Indian tax treaties between countries have accepted some of the ideas conceived in these models and have also included clauses specific to the country’s Income Tax Acts.
Applicability of DTAA
Before delving further, let’s first look at the definition of residency under DTAA. Residency is defined differently for an individual and a legal entity/ corporation.
Individual
An individual is liable to tax based on his domicile, residence, place of management, etc.
A person who is a resident to two countries is said to have dual residency. For such people, the confusion that arises is on which state should tax the global income. In this case, the individual’s residency is assigned to a nation through a tie-breaker test.
Legal Entity/Corporation
A legal entity’s residence is defined through the place of corporation or place of legal management. In the current scenario where the management of the business is spread across multiple countries, the place of the corporation is a definitive measure of residence.
The DTAA for International Taxation is applied through the following steps:
- Determining the nature of income for the individual according to the articles of DTAA
- Determining the tax liability of a non-resident
- If any specific section for taxation applies to the entity/ individual, then income tax is taxed accordingly
- If a non-resident has a permanent setup in India, then the general taxation rules are applied
- Administer section income-tax section 90 and its subsection and determine whether the Acts or treaty are more liable.
Transfer Pricing in International Taxation
Entities can avoid or save tax (not tax evasion) by utilizing the law and staying within the law through means such as Transfer Pricing. Through Transfer Pricing in India, corporations located in a high tax jurisdiction can move their income to a low tax jurisdiction for avoidance or reduction of tax.
Role of a Chartered Accountant
In the era of globalization and increased cross-border transactions, the whole world has transformed into one global market. Entities and individuals operate across globes; Chartered accountants must be competent enough to provide advice on the nuances of tax while complying with tax laws. It will reduce financial scams and facilitate international trade while safeguarding the tax interests of the nation.
