1. Methods for avoidance of double taxation
PRESENTATION BY
RAHUL CHARKHA
July 30, 2019

2. CONTENTS PAGE Methods of eliminating double taxation
Participation exemption
Limitations of credit relief
Exemption method
Foreign Tax Credit – India Context
Credit method
Tax sparing method
Points to ponder
Underlying tax credit

3. METHODS OF ELIMINATING DOUBLE TAXATION
Exemption method
Full exemption method
Exemption with progression method
Credit method
Full credit method
Ordinary credit method
Tax sparing credit
Underlying tax credit
Participation exemption

4. CASE STUDY Mr A, a resident of State R, earns income from State S
Particulars
Income (INR)
Rate of Tax
State R
80,000
30 percent on 80,000
35 percent on 100,000
State S
20,000
20 percent in Case I
40 percent in Case II
Total
100,000

5. CASE STUDY Tax liability of Mr A without any relief Case I (INR)
State R
35 percent on INR 100,000
35,000
State S
20 percent in Case I
40 percent in Case II
4,000
8,000
Total tax without relief
39,000
43,000

6. Level of tax in State S does not affect the tax forgone by State R
EXEMPTION METHOD
State R does not tax income which ‘may be taxed’ in State S
State R does not tax income which ‘shall be taxable only’ in State S
Two approaches
Full exemption method - Income taxed in State S is not taken into account at all by State R
Exemption with progression method - Income taxed in State S not taxed by State R, but State R takes into consideration the income for tax rate purposes
Level of tax in State S does not affect the tax forgone by State R

7. Rate of tax in foreign jurisdiction matters
FULL EXEMPTION METHOD
Tax liability
Case I
(INR)
Case II
State R
30 percent on INR 80,000
24,000
State S
20 percent in Case I
40 percent in Case II
4,000
8,000
Total tax with relief
28,000
32,000
Total tax without relief
39,000
43,000
Tax relief (notional)
11,000
Rate of tax in foreign jurisdiction matters

8. EXEMPTION WITH PROGRESSION METHOD
Tax liability
Case I
(INR)
Case II
State R
35 percent on INR 80,000
28,000
State S
20 percent in Case I
40 percent in Case II
4,000
8,000
Total tax with relief
32,000
36,000
Total tax without relief
39,000
43,000
Tax relief (notional)
7,000
Level of foreign source income matters

9. CREDIT METHOD
State R includes the income earned in State S for computing total tax liability in State R out of which credit is given for taxes paid in State S
Two approaches
Full credit method - State R allows deduction of total amount of tax paid in State S
Ordinary credit method - State R allows deduction restricted to that part of tax payable in State R which is appropriate to the income earned in State S
State R is not obliged to allow a deduction of more than tax due in State S

10. Foreign tax is credited to the extent it does not exceed State R taxes
FULL CREDIT METHOD
Tax liability
Case I
(INR)
Case II
State R
35 percent on INR 100,000
35,000
State S
20 percent in Case I
40 percent in Case II
4,000
8,000
Total tax credit (full tax in State S)
Total tax after relief
31,000
27,000
Foreign tax is credited to the extent it does not exceed State R taxes

11. ORDINARY CREDIT METHOD
Tax liability
Case I
(INR)
Case II
State R
35 percent on INR 100,000
35,000
State S (A)
20 percent in Case I
40 percent in Case II
4,000
8,000
State R tax on foreign source income (B)
35 percent of 20,000
7,000
Total tax credit (lower of A and B)
Total tax after relief
31,000
28,000
Tax credit is restricted to lower of State R tax or foreign tax on foreign income

12. DOUBLE TAXATION RELIEF METHODS – SYNOPSIS
Methods of eliminating
double taxation
‘shall be taxed
only in’
‘may be
taxed in’
Exemption
method
Article on
elimination of
double taxation
Other income
Dividend,
interest, royalties,
FTS
Credit method
Exemption
method
Credit method
Credit method

13. TAX SPARING CREDIT
Income exempt in State S as a measure to promote economic development therein (eg special economic zones)
Income taxable in State R but State R provides for deemed tax exemption or deemed tax credit of taxes so exempted by State S too
Domestic tax laws of countries generally do not provide for tax sparing credit
Some India treaties provide for tax sparing credit like India-Mauritius tax treaty; India-Singapore tax treaty
OECD Model Convention 2014

14. TAX SPARING CREDIT
Generally attached to income like dividend, interest, royalties, foreign branch /permanent establishment income
May provide for more or less credit than the State S tax waived (e.g. India-Cyprus tax treaty limits tax sparing credit on interest at 10 percent)

15. TAX SPARING CREDIT (CONT)
Tax liability
Tax sparing credit absent (INR)
Tax sparing credit exists (INR)
State R (Income INR 80,000)
50 percent on INR 100,000
50,000
State S (Income INR 20,000)
normal rate 40 percent
special rate 10 percent (30 percent exempted
2,000
Tax credit
tax credit (tax charged in State S)
tax sparing credit (tax exempted in State S) -
6,000
Total tax credit
8,000
Total tax after relief
48,000
42,000

16. UNDERLYING TAX CREDIT
A mechanism to eliminate a form of ‘economical double taxation’
Attached to dividend income
Computation Methodology - co-relation of dividends to post tax profits of subsidiary
Requirement of substantial shareholding
Also applied under controlled foreign corporation regulations

17. UNDERLYING TAX CREDIT
Treaties may provide for underlying tax credit (e.g. India-Mauritius tax treaty; India-Singapore tax treaty)
Some countries specify upto how many layers, underlying tax credit can be claimed

18. UNDERLYING TAX CREDIT (CONT)
Particulars
MCO
ICO
Income
20,000
15,200
Add: tax withheld on dividend -
800
Add: corporate tax gross-up
4,000
Grossed-up income
Corporate tax rate
20 percent
30 percent
Corporate tax
6,000
Less: tax credit
- WHT credit
- Underlying tax credit
Net tax payable
1,200
Profit after tax
16,000
18,800
Dividend distributed to ICO
Withholding tax rate
5 percent
Tax withheld on dividend
Dividend net of taxes
MCO – 20%
ICO – 30%
Dividend
WHT – 5%
100%
India
Malaysia

19. PARTICIPATION EXEMPTION
Exemption from taxation to a shareholder on dividends received, and potential capital gains arising on the sale of shares
Dividend are distributed out of the post tax profits of a company
Shareholders may pay tax on the amount of dividend income received in absence of relief resulting in double taxation
A participation exemption provides that certain types of dividends or capital gains or both are not taxed in the hands of shareholders on satisfaction of certain conditions

20. PARTICIPATION EXEMPTION
A participation exemption may apply to qualifying shareholdings in overseas companies, domestic companies, or both
Exists in Netherlands, Belgium and Sweden

21. LIMITATIONS ON CREDIT RELIEF
Overall limitation
Per country limitation
Per ‘basket’ limitation (income type)
Attribution of expenses to foreign income

22. POINTS TO PONDER Detailed rules for implementation of relief?
Excess credits, excess limitations - carry forward
Timing of foreign tax liability - generally State R shall give relief irrespective of when State S levies tax on it
Computation of foreign tax attributable to dividends - both withholding tax and corporate tax?
Availability of credit in State R where tax amount in State S is pending payment /paid in a different year /is under litigation

23. POINTS TO PONDER
Tax credits and their availability when the States adopt differential treatments in:
classification of income
year of taxation
status of the tax payer (partnerships – pass through, etc)
Which taxes are creditable – federal, state?
Tax credits in triangular cases – income earned in State S by a PE (i.e. that is attributable to the PE) in State A, which is a resident of
State R

24. FOREIGN TAX CREDIT – INDIA CONTEXT
Meaning of foreign tax
In respect of the country with which India has entered into a DTAA - Tax covered under such DTAA; and
In respect of other countries - Income-tax payable under the applicable law of that country.
Year of availability of FTC
FTC shall be available to the taxpayer in the year in which the income corresponding to such foreign tax has been offered to tax in India; and
Where the income is offered to tax in multiple years, FTC shall be allowed across those years proportionately.
Tax against which FTC can be utilized
Available against
Tax
Surcharge
Cess
Minimum alternate tax
Alternate minimum tax
Not available against
Interest
Penalty
Fee payable under the Act
Any foreign tax disputed by taxpayer.

25. FOREIGN TAX CREDIT – INDIA CONTEXT
FTC available shall be lower of
Total available FTC shall be aggregate of FTC computed separately for each source of income arising from a particular country
Where foreign tax paid exceeds the amount of tax payable under the provisions of DTAA, such excess shall not be considered
The credit shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted
Documents required to avail FTC
To be furnished on or before the due date of filing of return of income under Section 139(1) of the Act:
Statement of foreign income offered to tax and foreign tax deducted and paid in Form 67;
Certificate or statement specifying the nature of income and foreign tax deducted or paid:
From the tax authority of the foreign country; or
From the person responsible for deduction of such tax; or
Signed by the taxpayer accompanied by proof of tax payment and/ or proof of deduction where tax has been deducted.
Tax payable under the Act on such income
Foreign tax paid on such income OR

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