International Taxation is
concerned with taxation of cross border transaction in goods, services,
transfer of technology and capital. It defines the right and obligations of non-residents
in the host country.
Most countries follow residence-based system of taxation. A residence-based
system taxes the worldwide income of the residents of that country. When a
resident of that country (residence country) ventures out to another country
(source country) and earns income in source country, the source country would
charge tax on the income earned within its jurisdiction. The residence country
would again tax the income taxed in source country since a person who is resident
within residence country’s jurisdiction has earned that income. This gives rise
to what is commonly known as ‘doubly taxed income’.
Double taxation is harmful for
movement of capital, technology and people. Principle of avoidance of Double
Taxation is to share the revenues between two countries. Each country gets its
share of tax revenues and the bilateral and multilateral trade grows. Trade
flourishes when there is free flow of goods and services. Overall tax
collection increases and both countries tend to benefit. Prosperity comes not
by levy of tax; it comes by trade, commerce and cross border investments.
Methods of eliminating Double
Taxation:
1. Exemption
Method
The
income arising in the source country is exempted by the country of residence.
As a result, the income arising in the source country is taxed only in the
source country. Such Income is thus taxed only once.
2. Credit
Method
The home
country gives credit for the tax paid in the host country (source country) on
the income arising in the host country. Credit is given at the rate of tax
prevailing in the home country (country of residence) or the rate of tax paid
in the host country, whichever is lower.
What are DTAA?
A Double
Taxation Avoidance Agreement (DTAA) is an agreement entered into between two
countries for avoidance of double taxation on the same income in the hands of
the same person. Double Taxation Avoidance Agreements (D.T.A.A) are entered into
after protracted negotiations. Methods are evolved to ensure that double
taxation is mitigated by exempting the income already taxed or by giving credit
for the tax paid by the business entity in the host country. As a result, the
business entity effectively pays tax only once.
Objectives of DTAA
To
allocate fiscal jurisdictions so as to eliminate double taxation.
To
provide certainty to the taxpayer.
To
prevent tax evasion through exchange of information.
To
promote trade, business and investment between the two countries
To
eliminate discrimination in taxation between the subjects of the two countries.
To share
the tax revenue.
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