28744579 International Taxation Transfer Pricingl

7/31/2019 28744579 International Taxation Transfer Pricingl

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International Taxation and

Transfer Pricing

Mayank KalsanSrishti Tulsyan

Naveen Pachisia


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Roadmap

Introduction

Initial concept

Types of taxes

Tax burden

Tax administration system

Foreign tax incentives

Taxation of Foreign Source Income & Double Taxation

Foreign Tax Credit

U.S Taxation of Foreign Source Income

Tax Treaties


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Continued

Tax Planning Dimensions

Subpart F Income

Offshore Holding Companies

Foreign Sales Corporations

International Transfer Pricing

Transfer Pricing Methodology

Determining arms length prices

Transfer Pricing In India


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Introduction

Decisions on where to invest, what form of business organization to employ, how

to finance, when and where to recognize elements of revenue and expenses, and

what transfer prices to charge are typical decisions strongly influenced by tax

considerations.

Management has little control over tax.

National tax systems are complex and diverse. The definition of the taxable

income, tax rates, incentives etc could be different International tax agreements, laws and regulations are constantly changing.


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Initial concept

The laws and regulations that governs the taxation of foreign corporations

and profit earned abroad rests on a few basic concepts.

Among these are the notions of Tax equity and tax neutrality

Tax equity- means that taxpayer who are similarly situated should besimilarly treated

Tax neutrality

1. Domestic neutrality- a foreign subsidiary is simply a domestic concern that

happens to be operating abroad2. Foreign neutrality-hold that, domestic affiliates abroad should be looked

upon as foreign companies that happens to be owned by domestic residents


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Types of taxes

A company operating abroad encounters variety of taxes

Direct taxes such as income taxes are clearly recognizable and

normally disclosed on most companies financial statements Indirect taxes such as consumption taxes are not so clearly

recognized or frequently disclosed


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Earning effects of direct vs.

indirect taxesdirect indirect

Revenues 250 250

Expenses 150 190Pretax income 100 60

Direct taxes(40 %) 40 -0-

After tax income 60 60


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Continued.

are those imposed by governments on dividends,interests and royalty payment to foreign investors. These taxes are

typically withheld at source by the paying corporation

this tax is typically levied at each stage of

production and distribution but only on the value added at thatparticular stage

value added tax are often the basis of border taxes. Like

import duties border taxes generally aims at keeping domestic

goods prices competitive with the imports

Taxes assed on imports is parallel to excise and other indirect

taxes paid by domestic producer of similar goods

this tax is imposed on transfer of items betweentax a ers. It is an indirect tax.


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Tax administration systems

National tax assessment systems also affects relative tax burdens.Several major systems are currently in use

- under classical system, corporate income taxes on taxable

income are levied at two levels, at corporate level and the shareholder

level

A corporation is taxed on income measured before the dividends are

paid and shareholders are than taxed on their dividends.

The dividend income paid to the shareholders is effectively taxed twice


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Corporate income 100

--Income tax at 33% 33

= net income 67

Dividend 67

--Personal income tax @ 30% 20.10

= net income 46.90

Total tax paid (33.0+20.10)= 53.10


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Continued

under integrated system , both corporateand shareholders taxes are integrated

Split rate system- A lower tax is levied on distributed income

than on retained earnings. While corporate income is stillsubject to double tax but the lower rate on distributed income

results in a lower tax burden than classical rate system.

Tax credit or Imputation System- in this system, a tax is leviedon corporate income, but part of the tax paid can be treated as

a credit against personal income taxes when dividends are

distributed to shareholders.


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Foreign tax incentives

Many countries offer tax incentives to attract foreigninvestments

Incentives includes tax free cash grants applied towards the

cost of fixed assets of new industrial undertakings or relief from

paying taxes for certain time periods

Temporary tax relief includes , reduced income tax rates, tax

deferrals and reduction of various indirect taxes


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Continued.

Some countries, particularly those with few natural resources,

offer permanent tax inducement

These so called tax havens includes the followings

The Bahamas, Bermuda and the Cayman islands which have

no tax at all

The British virgin islands which have very low taxes

Hong Kong , Liberia and Panama, which tax locally generated

incomes but exempt income from foreign sources


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Main characteristics of tax havens No or low taxes on all or certain types of income and capital.

: Many tax havens developed a dual currency control system, under

which residents are subjected to both local and foreign currency controls and non-residents,

only to the local currency controls. Companies set up in a tax haven are treated as non-

residents for exchange control purposes and their operations conducted outside the tax haven,

in foreign currency, are not subjected to exchange controls.

: In tax havens, the banking sector gives different treatment toresidents and non-residents, suppressing or smoothing controls and imposing lighter or no

taxation on the latter.

: Tax havens must be accessible physically and have facilities to deal with

information. Thus, it is necessary an infrastructure that provides good means of transportationand networks such as post, telephone, cable and satellite communication, which are especially

important to financial and banking activities in tax havens.

: political and economic stability, existence of a tax treaties and double tax

agreements, and availability of competent professional advisers, such as accountants and

lawyers


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Use of tax havens Residence principle : taxing the income of the residents

Source principle : capital income to be taxed by the country where

that income is generated and not by the country where the funds

for the invested capital originated, thus ignoring whether the

receiver of the incomes is a resident or not

But when countries different methods, the problem of doubletaxation arises. To tackle this, the countries must have double tax

agreements.


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Use of tax havens contd. Tax havens have been used for reducing tax liabilities purposes and are

particularly attractive for individual taxpayers from high-tax countries who

would be subject to high marginal tax rates on reported incomes in their

countries.

Earnings are channelled to tax havens where they are subject to zero or very

low tax rates and if the residence principle is fully applied, these earnings

might end up escaping taxation almost completely, leading the countrywhere the financial capital originated to lose tax revenue.

Hence, it is the combination of tax havens with the application of the

residence principle that brings about depressing effects on the world rate of

taxation on capital income


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TAX HAVENS AS A MEANS OF TAX

AVOIDANCEa) In countries with a relatively high level of

taxation, taxpayers may be tempted to avoid being subjected to domestic taxes by

moving their residence to a tax haven country.

b) : For tax purposes, the most important function of a base company

set up in a tax haven jurisdiction is to collect and shelter income from high

taxation in the taxpayers country of residence

The base company, be it a holding company, an investment company, a finance

company or a trade company, is an entity with its own legal personality and is

recognized as such in the country of residence, so that the income is no longer

subject to the normal taxation regime of his country of residence.


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Example: the company T, resident in country R, has developed

a new product. It is patented in favor of a base company in a

tax haven country which gives license do third parties incountry S. The income arising from the source country S can

be sheltered in the tax haven country or lent to company T

against the payment of interest which is deducted from Tstaxable profits.


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c) : Some companies are established with the only

objective of serving as a channel for the income. Such a company is

used by a taxpayer resident of one country to direct flows of income

originated in a third country, through a tax haven which has a suitable

network of bilateral tax conventions. The objective is to benefit from amore favorable tax treatment in the source countries made available by

the tax treaties.

As conduit companies are set up in countries benefiting from double

tax treaties, which levy no or little tax on receipts of foreign-source or

passive investment income, dividends and other payments they receive

pay low withholding taxes at source due to the treaty and are usually

transmitted to a base company in a low-tax country.


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Example:

A company Z is a parent company with wholly-owned subsidiary in the

source country S. The country of residence of Z has no treaty with

source country S. Z transfers its participation in C to a conduit

company in the tax haven country A. The dividends received are notsubject to a tax because of a participation exemptions or a system of

indirect credit existing in the tax haven country. Exemption from

withholding taxes in the source country S is claimed on the basis of the

treaty network of the tax haven country A. The dividends are reinvested

by Z in new subsidiaries.


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Mauritius is not a tax haven, but a low tax jurisdiction. The corporate tax rate for

domestic and non domestic activities is 15%. With tax incentives for certain

sectors, this is reduced to 3% for offshore companies, and to 0-5% for some ICT

activities

No withholding tax on payments made to shareholders and on loan interest paid

No capital gains tax

No minimum capital

Minimum number of shareholders: one

No need for shareholder(s) to be resident in Mauritius No exchange control

Effective regulation by the Financial Services Commission (FSC)

Strict anti-money laundering legislation

Source:INDIA OPPORTUNITY HSBC Bank (MAURITIUS) Ltd November 2007


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Year US$ billion

2004-2005 3.7

2005-2006 5.5

2006.2007 15.7

of last years total FDI inflows came from Mauritius.

Mauritius accounted for US$10 billion out of a total of US$ 25 billion in FDI inflows that

India has been able to attract in the last three years, starting 2004-2005.

In 2008, Mauritius and Singapore were the top source of FDI into India, while inflows

from Cyprus was more than that from Germany, Japan, Netherlands and France.

The total FDI from these three tax havens during 2007-08 was Rs 60,187 crore which was

around 61% of the total FDI inflows into India.

Source:INDIA OPPORTUNITY HSBC Bank (MAURITIUS) Ltd November 2007


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Taxation of Foreign Source

Income & Double Taxation

Exempt from taxation the income of resident corporations and citizens

generated outside their borders Foreign Tax Neutrality

Tax resident corporations and citizens on income earned within andoutside their borders

Domestic Neutrality


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Foreign Tax Credit

Due to Worldwide principle of taxation, foreign earnings of a

domestic company is subject to full tax levies of both home and

host country

Treat foreign taxes paid as a credit against the parents

domestic tax liability or as a deduction from taxable income.


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Taxdeduction

Tax Credit

Foreign Taxable Income $1000 $1000

Foreign tax paid $200 -

Taxable income ( U.S. purpose) $800 $1000

U.S. tax @ 35% $280 $350

Less foreign tax credit $200

Resultant U.S. tax $150

Total tax burden $480 $350

Effective Tax rate 48% 35%

Economic Effect of claiming Foreign Tax Credit

and Deduction


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U.S Taxation of Foreign

Source IncomeWithholding taxes on royalty and dividend payments = 15 % in

Countries A, C & D

Income tax rates = 30 % in Country B

Income tax rates = 40 % in Country C

Indirect sales tax = 40 % in Country D

Foreign Indirect Tax Credit =

Royalties Branch Subsidiary Subsidiary


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Royaltiesfrom A

Branchin B

Subsidiaryin C

Subsidiaryin D

Before tax earnings 100 100 60

Foreign Income Taxes 30 40 nil

After Tax earnings 70 60 60

Dividend Paid 30 30

Other foreign income 20

Foreign withholding taxes (15%) 3 0 4.5 4.5

U.S. Income 20 100 30 30

Dividend gross-up 20

Taxable Income 20 100 50 30

U.S. Tax (35%) 7 35 17.5 10.5

Foreign Tax Credit

Paid (3) (30) (4.5) (4.5)Deemed Paid (20)

Total (3) (30) (24.5) (4.5)

U.S tax (net) 4 5 (7) 6

Foreign Taxes 3 30 24.5 40

Total taxes of U.S Taxpayer 7 35 17.5 46


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Limits to Tax CreditMaximum tax liability will always be the higher of the host

country and home countrys tax rate

Limit on the amount of foreign taxes creditable in any year

Foreign Tax credit limit =

Foreign Source Taxable Income x U.S tax before credits

Worldwide taxable income


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Tax Treaties

Profits earned by a domestic enterprise in the host country shall

not be subject to its taxes unless the domestic entity maintains a

permanent establishment there.

Tax treaties affect withholding taxes on dividends, interest and

royalties paid by the enterprise of one country to foreign

shareholders

They usually grant reciprocal reduction in withholding taxes on

dividends, and exempt royalties and interest from withholding

entirely.


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International tax agreements have a number of objectives like elimination of double

taxation, the allocation of taxes between treaty partners, the encouragement of trade

and investment between the Contracting States, the prevention of international tax

avoidance and evasion.

With industrialised and developed countries, they cover all sources of income

arising out of inflow of technology industrial equipment and direct investment in

India, besides programmes for exchange of teachers, research workers, students and

artists as also provisions relating to avoidance of taxes.

With the communist bloc countries which do not have a tax system similar to that

of European and capitalist countries the agreements cover only international

maritime and air traffic; and

With the developing countries the agreements are structured to encourage the flow

of technology, equipment and professional services which India is capable to

transfer and offer.

Double tax agreements help to create an environment of fiscal certainty which

encourages trade and investments between countries.


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Armenia

Australia

Bangladesh

Brazil

Canada

China

Cyprus

Turkey

UAE USA

Uzbekistan

Vietnam

Zambia

Afghanistan

Bulgaria

Czechoslovakia Ethiopia

Saudi Arabia

Switzerland

UAE

Yemen

Arab Republic

African NationalCongress Mission

Income-tax(Double TaxationRelief) (Aden)Rules, 1953

Income-tax

(Double TaxationRelief)(Dominions)Rules, 1956


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Treaties withholding Tax rates in United States

Country

Australia

Dividends

15

Interest

10

Royalty

5

Austria 15 10 10

Barbados 15 5 5

Belgium 15 15 0

Canada 15 10 0

Cyprus 15 10 0

Czech Republic 15 0 10

Denmark 15 0 0

Egypt 15 15 0

Estonia 15 10 5

Finland 15 0 5

France 15 0 5

Germany 15 0 0

Greece 30 0 0

Hungary 15 0 0

Iceland 15 0 0

India 20 15 10

Source:IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (January 2006).


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Treaties withholding Tax rates in India

Country Dividends Interest RoyaltyAustralia 15% 15% 15%

Canada 25% 15% 15%

China 10% 10% 10%

Germany 10% 10% 10%

Malaysia 20% 20% 30%

New Zealand 15% 10% 10%

Singapore 15% 15% 15%USA 20% 15% 10%

Non treaty countries Nil 20% 10%

Source: Income Tax Department, 2007


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Tax Planning DimensionsMultinationals have a distinct advantage over purely domestic

companies because they have more geographical flexibility in

locating their production & distribution systems

Two caveats

Tax considerations should never replace business strategy

Constant changes is tax laws constrain the benefits of long term

tax planning


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Organisational ConsiderationsBranch

Income consolidated with that of the

parent company

Fully taxed in the year earned

whether remitted or not

If initial operations are forecast to

generate losses - advantageous

Subsidiary

Option not available for a subsidiary

Earnings not taxed until remitted

When turn profitable - advantageous


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Subpart F Income The U.S taxes shareholders of controlled foreign corporations (CFC) on

certain undistributed income of that corporation

A CFC is a corporation in which more than 50 % of the combinedvoting power or fair market value is owned directly or indirectly by a

A U.S. shareholder is a U.S. person who owns directly, indirectly,

10% or more of foreign corporation, such as U.S. corporations, citizens

and residents of U.S.


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Subpart F IncomeSubpart F income comprises various types of income such as:

Passive investment income

Net gains on foreign exchange or commodities

Gains from the sale of investment property

Income from shipping operations in foreign commerce

Income from transporting or distributing oil or gas.


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Offshore Holding CompaniesA holding company is a company of which the business activity

is holding shares in other companies.

A parent company incorporated in a high tax country may

form a subsidiary company in a low tax or tax free offshore

area

This can give rise to opportunities for deferring tax and for

more effective cash management.


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Foreign Sales CorporationsForeign-Sales Corporations (FSC) is a foreign corporation

created by a "parent" shareholder (usually a corporation)

It exempts a portion of income derived from the export of U.S.

products from U.S. income taxation.


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Introduction

A multinational enterprise has facilities of many types located

in many locations in the world

The profits of each portion of business are structured throughintercompany transactions like sales, licensing, leasing etc.

Transfer pricing is a field of analysis that reflects the price of

goods, services or intangible transfers between entities.

The regulations require related parties to deal with each other

at arms length i.e. as they would with unrelated parties.


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International Transfer Pricing

About 40% of all international trade consist of transfer between

related business entities

Cross country transactions expose MNC to many environmental

factors that both create and negate the options for increasingprofits

Some factors are:

Taxes

Tariffs Competition

Inflation risks

Performance evaluation considerations


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Corporate profits can be increased by setting transfer pricesso as to move profits from subsidiaries in high tax countries

towards subsidiaries in low tax countries

Eg:

A and B are wholly owned subsidiaries of Global Enterprise in UK

and USA.

A sells its product(500,000) to B at $6 per piece

B sells in market at $12 per piece

Tax rate in UK16.5% and in USA is 35%


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A(UK) B(USA) Globalenterprise

Sales $3000,000 $6000,000 $6000,000

Cost of sale $2100,000 $3000,000 $2100,000

Gross margin $900,000 $3000,000 $3900,000

Operating Exp. $500,000 $1500,000 $2000,000

Pre tax income $400,000 $1500,000 $1900,000

Income tax $66,000 $525,000 $591,000

Net income $334,000 $975,000 $1309,000


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A(UK) B(USA) Globalenterprise

Sales $4250,000 $6000,000 $6000,000

Cost of sale $2100,000 $4250,000 $2100,000

Gross margin $2150,000 $1750,000 $3900,000

Operating Exp. $500,000 $1500,000 $2000,000

Pre tax income $1650,000 $2500,000 $1900,000

Income tax $272,200 $87,500 $359,750

Net income $1377,750 $162,500 $1540,250


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Tariffs on import goods also affect the transfer

pricing policies.

Company exporting goods to a subsidiary domiciled

in a high tariff country could reduce the tariff

assessment by lowering the prices of merchandise

sent there.


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To facilitate the establishment of a subsidiary abroad, parent

company could supply the subsidiary with inputs invoiced at low

prices

Excess profits earned in one country could subsidize the penetrationof another market

To improve the foreign subsidiaries access to local capital markets

This may call forth anti-trust actions by host government or

retaliatory actions by host government.


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The risk of high inflation in a country may call for high transfer prices

on goods provided to a subsidiary facing high inflation.

It will remove as much cash from subsidiary as possible and avoid

eroding the purchasing power of firms cash


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Transfer prices are a major determinant of corporate

performance

It is difficult for decentralized firms to set transfer price that

both

(a) motivate managers to make decisions that maximize their

units well being and are congruent with companys goal

(b) provide an equitable basis for judging the performance ofmanagers and units of the firm.


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Arms Length Price

Section 482 of Internal Revenue Code, USA, requires that

pricing of intra company transfers be based on arms length

pricing

It is the price that an unrelated party would receive for the

same or similar goods under identical or similar situations


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Transfer Pricing Methodology

Market based transfer prices

Cost based transfer prices


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Market Based Transfer PricingThe subsidiary supplies the products at the market price of

that product

Efficient use of the firms scarce resources

Use is consistent with decentralized profit centre orientation

Consistent with arms length method


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Often there is no intermediate market for products or

servicesIf there is a market, still it would not be perfectly

competitive or internationally comparable.

Does not allow a firm to adjust prices for competitive

purposes


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Cost based systemsIn this system the subsidiary sell its products to the parent

or other subsidiary at its cost

Advantages

Simple to use

Based on readily available data

Easy to justify before tax authorities


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Provide little incentive for sellers to control their price

Production inefficiencies may simply be passed on to buyers

as inflated prices

The problem of cost determination is compounded

internationally, as every country has different cost

accounting concepts


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If any person who is resident in India in any previous year proves that

in respect of his income which accrued or arose to him during thatprevious year in Pakistan he has paid in that country, by deduction or

otherwise, tax payable to the Government under any law for the time

being in force in that country relating to taxation of agricultural

income, he shall be entitled to a deduction from the Indian income-tax

payable by him - (a) Of the amount of the tax paid in Pakistan under

any law aforesaid on such income which is liable to tax under this Act

also; or

(b) Of a sum calculated on that income at the Indian rate of

tax; whichever is less.


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Transfer Pricing In India


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Transfer Pricing Regulations

The Finance Act 2001 introduced the detailed TPRw.e.f. 1st April 2001

The Income Tax Act

AS-18

Other Relevant Acts


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Related Parties Requires disclosure of any elements of the related

partytransactions necessary for an understanding ofthe financial statements.

Control by ownership

50% of the voting right

Control over composition of board of directors

Power to appoint or remove the directors Control of substantial interest

20% or more interest in the voting power


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Income Tax Act and TP Finance Act 2001 substituted the old section of 92 of

the ITA by sections 92,92A to 92 F.

These sections are the backbone of Indian TPR.

These sections define the meaning of related parties,international transactions, pricing methodologies etc.


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Associate Enterprise: 92A Direct Control/Control through intermediary

Holding 26% of voting power

Advance of not less than 51% of the total assets ofborrowing company.

Guarantees not less than 10% on behalf of borrower

Appointment of more than 50% of the BoD

Dependence for 90% or more of the total raw material orother consumables


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Methods for determining arms length

prices Sec 92OECD ( Organisation for economic cooperation and

development ) identifies several broad methods:

Comparable uncontrolled pricing method (CUP)

Resale pricing method (RPM)

Cost plus pricing method (CPM)


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Comparable uncontrolled pricing

methodTransfer prices are set by reference to prices used in

comparable transactions between independent companies or

between the corporation and an unrelated third party

Differences in quality, trademark, brand names makes the

direct comparisons difficult


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Resale pricing method

The price at which the item can be sold to an independent

customer is takenAppropriate mark up associated with expense,

And normal profit margin is deducted from the price to

derive the intra company transfer price

The problem with this method is deciding the appropriate

mark up


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Cost plus pricing methodA markup is added to transferring affiliates costs in local currency

The markup includes:

Financing costs related to export inventory, receivables, assets employed

A percentage of cost covering manufacturing, distribution, warehousing

and other related costs to export operations

Adjustments are made to reflect the government subsidy, if any


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Other Pricing MethodsComparable profits method

Comparable uncontrolled transaction method

Profit split method (PSM)

Transactional Net Margin Method (TNMM)

Powers of Assessing Officer

Consequences of recomputation of income


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Comparable uncontrolled transaction method

Applicable to intangible assets

Identifies a benchmark royalty rate referencing transactions

in which same or similar intangibles are transferred

This method relies on market comparables


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Profit split method

The operations of two or more parties are highly integrated, making

it difficult to evaluate their transactions on an individual basis

The first step is to determine the total profit earned by the parties

from a controlled transaction

The second step is to split the profit between the parties based on the

relative value of their contribution considering the functions

performed, the assets used, and the risks assumed by each


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Transactional Net Margin Method

The net profit realised by the enterprise from an international transaction entered with an

associated enterprise is computed in relation to costs incurred or sales effected or assets

employed or to be employed by the enterprise or having regard to any other relevant base

The profit margin realised by the enterprise or by an unrelated enterprise from a comparable

transaction or a number of such transactions is computed having regard to the same base

The net profit margin referred to as above arising in comparable uncontrolled transactions is

adjusted to take into account the differences, if any, between the international transactions and

the comparable uncontrolled transactions which could materially affect the amount of net profit

margin in the open market.

The net profit margin thus established is then taken into account to arrive at an arms length

price in relation to the international transaction.


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Choice of Most Appropriate Method

Even though it is not possible to standardize the selection of Most AppropriateMethod, the following can be stated as suggestive guidelines

Comparable uncontrolled price method is relevant in case of transactions of

loans, royalties services, transfer of tangibles

Resale price method is relevant in case of marketing operations of finished goods

Cost plus method is used where raw materials or semi-finished products are

sold.

Profit spilt method is required when transactions involved provisions ofintegrated services of more than one enterprise

TNMM is used in most of the cases including transfer of semi-finished goods,

distribution of products where RPM appears to be inappropriate .


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International Transactions: 92B

Transaction between two or more AE of which either both or anyone isa non-resident.

Transactions:

Purchase/Sale/Lease

Provision of service

Lending or borrowing


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Some Transactions subject to ALP

Purchase at little or no cost.

Payment for services never rendered.

Sales below MP/ Purchase above MP

Interest free borrowings

Exchanging property

Selling of real estate at a price different from MP

Use of trade names or patents at exorbitant rates even after their

expiry.


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Framing Of Transfer Pricing Rules

Transfer pricing rules were introduced by the Government about five

years back to check likely losses in revenue while estimating the

value of transactions in goods and services between an entity in India

and a related party abroad.


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Indian Transfer Pricing Regulations Intra-group cross-border sale, purchase, lease or cost sharing transactions

involving intangible property are inter-alia covered by the new Transfer

Pricing code.

Methods prescribed (by section 92C) for the determination of the Arms

Length Price (ALP) of a transaction may not be adequate for valuation of

intangibles.

It may be necessary to apply other internationally applied valuation methods

for the valuation of intangible assets.


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Indian Transfer Pricing Regulations

(Contd) Use of such Other methods is permissible under laws of other countries

like US, UK, etc, and is also allowed by the OECD Guidelines.

OECD Guidelines recognize that the general ALP and methods can be

difficult to apply to transactions involving IP.

Indian rules also need to recognize these internationally applied valuationmethods/approaches and adopt a consensual approach for dealing with such

transactions.


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Transfer Pricing Penalties

In order to ensure compliance with the arm's length principle, the I-T Act has prescribed stiff penalties

Transfer Pricing "adjustments" in India are now treated as

concealment of income, deserving harsh penalties of up to 300 percent.

The Indian TP regulations are broadly based on OECD guidelines.

These guidelines are internationally applied by various countries for

resolving TP issues.


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Burden of ProofThe burden to establish that an international transaction

is carried out at arms length price is on the tax payer

who is to disclose all the relevant information and

documents relating to prices charged and profit earned

with related and unrelated customers.


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Double Taxation ReliefA DTAA is an agreement entered between two countries

in order to avoid taxing the same income twice.

The double taxation is of two kinds:-

: a person is taxed on the same

income in different contracting states.

: the same income is taxed in

the hands of different persons in different countries

Thus in order to avoid the burden of being taxed twice,the


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Thus in order to avoid the burden of being taxed twice,the

country may frame laws to grant relief.

Double taxation relief is of 2 types :-

Unilateral Relief

Bilateral relief

In case of unilateral relief, the country of which the tax payer is

resident provides relief to the tax payer through its domestic tax

laws irrespective of the country from which the tax payer earned

his incomeSec 91

In case of bilateral relief , the two countries negotiate the double

taxation relief provisions as part of DTAA.


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Sec 90Agreement with Foreign

countries The CG may enter into an agreement with any foreign government for grantingrelief in respect of

(a) Income on which tax has been paid both under the IT Act and income tax in that

foreign country.(b)For the avoidance of double taxation of income under this Act and under the

corresponding law in force in that country, or

(c) For exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that

country, or investigation of cases of such evasion or avoidance,(d) For recovery of income-tax under this Act and under the corresponding law in

force in that country, and may, by notification in the Official Gazette, make suchprovisions as may be necessary for implementing the agreement.


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(2)Where the Central Government has entered into an

agreement with the Government of any country outside

India under sub-section (1) for granting relief of tax, oras the case may be, avoidance of double taxation, then,

in relation to the assessee to whom such agreement

applies, the provisions of this Act shall apply to the

extent they are more beneficial to that assessee.


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Sec 91- Relief when there is no DTAA

1.If any person who is resident in India in any previous year proves

that, in respect of his income which accrued or arose during that

previous year outside India (and which is not deemed to accrue or

arise in India), he has paid in any country with which there is noagreement under section 90 for the relief or avoidance of double

taxation, income-tax, by deduction or otherwise, under the law in

force in that country, he shall be entitled to the deduction from the

Indian income-tax payable by him of a sum calculated on suchdoubly taxed income at the Indian rate of tax or the rate of tax of

the said country, whichever is the lower, or at the Indian rate of

tax if both the rates are equal.


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Some Cases Peico Electronics & Electricals Ltd. Parent: Phillips Netherlands and its subsidiaries

Asea Brown Boveri

Parent: ABB Switzerland and its subsidiaries

Videocon Group

Collaborators: Toshiba Co., Mitsubishi Co


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Thank You!

Documents

28744579 International Taxation Transfer Pricingl