A Presentation on Cross Border Transactions with special reference to India

1. Presentation on Withholding
Taxes
Vikram Singh Sankhala

2. Tax
 Financial Charge
 Imposed on an Individual or a Legal Entity
 By a State

3. Purpose
 To fund Government expenditure

4. Categorization
 Direct Taxes
 Indirect Taxes

5. Direct Tax
 Where the person from whom the Tax is
collected is the same as the person who
bears the ultimate economic burden of the
Tax.
 Here the incidence of Tax is on the person
from whom it is collected
 Example Taxes on Income ,Wealth and
property

6. Indirect Tax
 Where the person from whom the Tax is collected is
different from the person who bears the ultimate
economic burden of the Tax
 Example Sales Tax, Service Tax, Excise and VAT
 These taxes are usually on the value of the
transaction and are passed on to the end user
though they may be collected at any point in the
chain.

7. Income Tax
 One of the important kinds of Direct Taxes
 It is levied on the income of an individual or
specified entities
 An income normally arises as a result of a
transaction
 However the term income has no
significance without the entity to whom it
belongs

8. Income Tax ( Continued)
 Therefore it is charged to tax levying the
charge on the entity who owns this income

9. Income Tax ( Continued)
 Therefore are therefore two critical factors for
income Tax
 The nature of the Transaction that gives rise
to the income
 And the nature of the entity that owns the
income and is charged to Tax on it

10. Income Tax ( Mode of Collection)
 A transaction has an entity which pays the
money and an entity which receives the
money
 Normally the entity which receives the money
is the owner of the income and the collection
of Tax therefore normally takes place from
the receiving entity

11. Income Tax ( Mode of Collection)
 There is another mode of collection where
tax is collected from the paying party or the
source entity
 Though this tax is collected from the paying
party, it is on behalf of the party to whom the
income belongs
 This is because the tax is on the income

12. Income Tax ( Mode of Credit)
 The receiving entity, who owns the income, is
deemed to have paid this tax
 The paying party issues a Certificate that the
tax on the income has been paid on behalf of
the party to whom the payment is made.
 The receiving party, in turn claims credit for
this tax paid on its behalf

13. International transactions
 Normally in most transactions the paying and
receiving entities belong to the same Tax
jurisdiction
 However in transactions involving cross
border sale or provision of services, the two
entities are in separate Tax jurisdictions

14. International transactions
 Since income arises from the paying party,
its tax jurisdiction is called the jurisdiction of
source
 However the income belongs to an entity that
is not within this tax jurisdiction

15. International transactions
 The jurisdiction of the entity to which the
income belongs, is called the country of
residence.
 This is because it is based on the entity in
whose hands the tax can be charged

16. International transactions
 Since the income originates from the country
of source , the source country would like to
bring it to tax in its hands
 Since the entity who owns such income is the
resident of another tax jurisdiction, the
country of residence would like the income
taxed in its jurisdiction

17. International transactions
 Since the income is the same, if it is taxed
both in the country where it originates and
the country in which it is received, it would
amount to economic Double Taxation
 This would discourage cross border trade
 Hence most countries have provisions to
deal with this issue

18. International transactions
 We would need to start with the country
where the income originates
 Since the entity to which the income belongs,
is outside the tax jurisdiction of the source
country, it has only one means of levying and
collecting this tax
 That is Tax collection at source, from the
entity in its jurisdiction that makes the cross
border remittance

19. International transactions
 To mitigate the issue of double taxation most
countries have entered into bilateral treaties
with other countries called Double Taxation
Avoidance Treaties
 These treaties derive their sanctity from a
multilateral convention called the Vienna
convention on the law of treaties of 1969
 The convention has been ratified by 105
countries

20. International transactions
 The treaties categorize the transaction giving
rise to the income under various heads.
 Each head is dealt with by a separate article
of the treaty
 The right to tax is either assigned or
apportioned between the country of source
and the country of residence based on
various considerations within each such
article

21. International transactions
 The treaties are usually recognized by the domestic
tax laws of the countries entering into them
 Besides this, most jurisdictions would also have
provisions to deal with such transactions as a part of
their domestic Law.
 Usually the assessee has the privilege to take the
benefit of whatever is beneficial to him – the
provisions of the treaty or those of the Domestic Law

22. International transactions Country of
Source)
 The country of source collects its share of the
tax from the paying entity which is in its Tax
jurisdiction
 The collection is at Flat rates and on a gross
basis

23. International transactions Country of
Resident)
 Since the tax is collected on behalf of the entity,
whose tax liability is in the country of residence ,
there are methods by which this entity gets credit for
the tax paid in another tax jurisdiction, in its own
jurisdiction
 This is done by the issue of Certificates of Tax
deduction at source from the entity deducting the tax
and depositing it in its own jurisdiction
 This is called the method of Tax Credit

24. International transactions (Country of
Source)
 Another method, though not widely adopted ,
is where the receiving entity does not offer
for tax, such portion of its income, that has
been already brought to tax in the country of
source.

25. Some concepts pertinent to us
 The Indian Income Tax Act
 Model Tax Conventions
 Permanent Establishment
 Business Income
 Royalty and Fees for Technical Services
 Treaty Shopping
 Limitation of Benefits

26. The Indian Income Tax Act
 The Indian Income Tax taxes residents on a global
basis and it taxes non residents on that portion of
their income that accrues or arises in India.
 The term ‘accrues or arises in India’ has not been
explicitly defined under the Indian Income Tax Act.
 Section 9 lays down certain conditions for the
various heads of Income of non residents , which if
satisfied , such income is deemed to accrue or arise
in India.

27. The Indian Income Tax Act( Cont.)
 When the income of a non resident accrues
or arises in India, it becomes the obligation of
the payer, to deduct taxes at the rates in
force.
 The taxes are deducted under Section 195 of
the Indian Income Tax Act.
 The rates in force can be found in the first
schedule to the relevant Finance Act.

28. Model Tax Conventions
 Section 90 of the Indian Income Tax Act , also
provides sanctity to DTAAs entered into, by India , as
being an alternative basis for determining the tax
liability of the Income of non residents.
 It is a generally recognized principle , that the
assessee has the liberty to use the provisions of the
DTAA or those of the Indian Income tax Act for
determining the tax liability.
 He is at liberty to apply the provisions that are
beneficial to him

29. Model Tax Conventions
 India has DTAAs with – countries
 While the provisions of the DTAA vary from
country to country, they are broadly modeled
on a standard draft.
 There are three model Draft conventions
currently in practice.
 The are the US Model, the UN Model and the
OECD Model

30. Model Tax Conventions
 The DTAAs signed by India are modeled using the
OECD Draft Convention.
 The Draft model has different articles
 The articles broadly deal with the jurisdiction of the
DTAA, i.e. to whom it can be applicable, the concept
of a Tax resident, the concept of a permanent
establishment, the classification of the Incomes and
with their assignment.
 Many DTAAs undergo amendment from time to time.

31. Permanent Establishment
 If income is earned from the country of source,
through a fixed base available in the country of
source, such income is assigned under, both the
DTAA and the Indian Income tax Act, to the country
of source.
 Such fixed base is called a Permanent
establishment.
 However, what arrangements can be called a fixed
base, is a subject in itself.

32. Business Income
 Business Income in the absence of a
Permanent Establishment, is assigned for the
purpose of taxability ,entirely to the country of
residence
 However, if a Permanent establishment is
present , then the basis is changed and it is
assigned for the purpose of taxation, entirely
to the country of source.

33. Classificatory Rules
 The various articles of the DTAAs also deal
with rules of classification of the Income into
various heads
 Such classification is material for us,
because it would determine the allocating for
the purpose of Taxation and therefore the
Tax rate.

34. Royalty and Fees for Technical
Services
 One classification that is important for us is the
difference between whether an Income of the non
resident would be classified as Business Income or
come under the ‘Royalty and Fees for Technical
Services’.
 Normally in the absence of a permanent
establishment, Business Income attracts a NIL rate
of Tax while the rate on ‘Royalty and Fees for
Technical Services’, varies depending on various
conditions.

35. Software
 Worldwide there is a dispute as to whether software
comes within the ambit of ‘Royalty and Fees for
Technical Services’, or is in the nature of Business
income.
 The dispute usually arises because software
consists of a code, and the income is on account of
that code.
 The has many similarities with the concept of
copyright.
 Income on account of copyright is one among the
various ways in which Royalty is denoted.

36. Software
 In India too, the dispute as to whether
Payment for Software is in the nature of a
Business Income or in the nature of Royalty
has not been conclusively settled.

37. Treaty Shopping
 Since the assessee has the liberty of
applying the articles under the DTAA and
there are certain treaties where the
provisions are more favorable for certain
categories of Income, one method of
reducing withholding taxes, would be route
such payments through jurisdictions where
the treaties provide a favorable treatment.

38. Treaty Shopping
 These are done using conduits in such
jurisdiction
 While this is a method of tax planning that
does not explicitly violate the law, it is often
felt that this would be against the spirit of the
agreement

39. Limitation of Benefits
 The use of conduits is often called a method of treaty
abuse
 To check this , some treaties also incorporate
provisions to prevent the abuse of the treaty
 Restrictions are placed on the transactions to which
the treaty would apply
 This is usually done by the insertion of a clause
called the ‘ Limitations of Benefits Clause’
 An example would be the DTAA between India and
Singapore with specific reference to Income arising
from Capital Market Transactions.

40. And Finally
 People who complain about taxes can be
divided into two classes: men and women
- Unknown