4.9.2013 - CA Ganesh Rajgopalan - Treaty Entitlement- CTC 4Sep13- Final.pptx

8/14/2019 4.9.2013 - CA Ganesh Rajgopalan - Treaty Entitlement- CTC 4Sep13- Final.pptx

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Article 1

Restricted scope

OECD & UN MC identical, while US MC different

Heading changed to Persons Covered fromPersonal Scope

Earlier treaties applied to Citizens or taxpayers

ExceptionsNon discrimination, Exchange ofInformation

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This Convention shall apply topersonswho areresidentsof one or both of the Contracting States.


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Article 3(1)(a)Person

OECD Model: The term person includes anindividual, a company and any other body ofpersons.

Indian Judicial Precedents on person

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Abdul Razak Meman* Issue

o Whether NRI residing in UAE entitled to Treaty in respect ofdividends, interest and capital gains

Assesseescontentionso Residence certificates of UAE authorities proof of residence

under Treaty

Rulingo Individual not a taxable unit under the UAE Decreeo expressions "resident of the other contracting State" not definedo Means a person residing, dwelling or having an abode in UAE or a

person staying regularly in UAEo For dividends/interest lower rate, residential status of the recipient

not relevanto For capital gains, assessee not a Treaty Subject, not entitled to

Treaty

*[2005] 146 TAXMAN 115 (AAR - NEW DELHI)

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UAE Treaty

Article 3(1)Person (e) the term "person" includes an individual, a company, and any

other entity which is treated as a taxable unit under the taxation lawsin force in the respective Contracting States

Article 10 - Dividends1. Dividends paid by a company which is a resident of a

Contracting State to a resident of the other Contracting Statemaybe taxed in that other State.

2.However, such dividends may also be taxed in the ContractingState of which the company paying the dividends is a resident andaccording to the laws of that State, butif the recipient is thebeneficial ownerof the dividends, the tax so charged shall not

exceed.. Article 13Capital Gains

3. Gains from the alienation of any property other than thatmentioned in paragraphs 1 and 2 shall be taxable only in theContracting State of which the alienator is a resident.

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Person as per different DTAAs

India USA :the term person includes an individual, an estate,a trust, a partnership, a company, any other body of persons,or other taxable entity

India UK:the term person includes an individual, a

company and any other entity which is treated as a taxableunit under the taxation laws in force in the respectiveContracting States, but, subject to paragraph 2 of this Article,does not include a partnership;

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Article 3(1)(a)

Which States law to apply?

Taxable Unit under the taxation laws of respectiveContracting States

Klaus Vogel on Persono Source State to classify a foreign entity as per its own tax laws regardless

of classification in its Home State.

o Source State will force foreign entity into one or the other category of

taxpayers based on

the foreign laws legal characteristics of the entity in order

the similarity of civil and commercial laws of the states concerned

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Person - Case Study A Singapore Company establishes a branch in Philippines as a

Regional Headquarters (RHQ)to serve its Group in APAC regionunder the Omnibus Investment Code of 1987.

A RHQ can be established under the Code by a foreign company ora group of foreign companies. The RHQ is allowed to derive income

in the Philippines by performing some qualifying services for itsaffiliates, subsidiaries or branches in the Philippines, the Asia Pacificregion and other foreign markets.

The RHQ is treated as a Resident Foreign Corporation in Philippinesand is taxed @ 10% on its income.

RHQ derives income in the nature of fees for technical services fromIndia. Is the RHQ entitled to protection under India-Philippines Treaty?

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Schellenberg Wittmer* (1/2)

Factso Switzerland based law firm, all partners Swiss residents.

o Under Swiss law, partnership not separate entity

o Partnership income assessed in the hands of the partners

Taxpayers argumentso A partnership a 'company' or 'body of persons'.o Actual taxation in Switzerland is not necessary; Switzerland has

the right to tax partnership.

o All partners resident in Switzerland, entire income taxed inSwitzerland

o

Fiscal domicile of the partnership lay in Switzerland .o OECD Comm Art 4 para 8.7 relied upon

Where partnership denied treaty, partners to be entitled

*[2012] 24 taxmann.com 299 (AAR - New Delhi)

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Schellenberg Wittmer (2/2)

Art. 3(1)(d) Person in India-Swiss Treatyincludes an individual, a company, a body of persons, or anyother entity which is a taxable unitunder the laws in force ineitherContracting State

Rulingo receiver of income & person taxed not the same

o no definition of person in Swiss law

o If a body of individuals or any other entity is not a taxableentity in the concerned state, it will not be a person.

o India not accepted OECD Commentary that partnerships will

be considered as persons either as company or body ofpersons.

o Necessary that body of individuals is taxable in Switzerland

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Linklaters LLP

Partnership Example: UK LLP established in UK. A & B, partners of

UK LLP, are residents of UK. UK LLP earns royalties from India. CanUK LLP access the India-UK Tax Treaty?

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UKLLP

A B

UK India

FTS

Held Fact of taxation in the UK rather than its modality, relevant The entire income is liable to tax in the UK

Hence the recipient of income is treaty resident


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Chiron Behring GmbH & Co.* (1/2)

Factso Assessee a limited partnership in Germany

o Partners taxed on income in Germany

o Assessee liable for trade tax

Revenues argumentso Trade tax a turnover tax not tax on income

o Assessee not liable to tax in Germany

o Assessee not entitled to Treaty

Assesseescontentionso Assessee liable to trade tax in Germany

o Trade tax covered under Art. 2

o Assessee entitled to Treaty

*[2008] 24 SOT 278 (MUM.)

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Norsk,Bahamas

Crown Forest Industries*

CanadianIncome

US Branch

Ruling The basis of Norsksliability for taxation

in the United States emanates fromthefact that it conducts a trade or businesswhich is effectively connected with the USand has income arising from that

business. Although the fact thatits "place of

management"is located in the UnitedStates is one factor contributing to the

finding that its trade or business is

connected with the United States, it doesnot constitute the basis for Norskstaxliabilityin the first place.

A factual proposition which merelyinforms domestic tax liability cannotconstitute a residency criterion.

Norsk s claimed to be entitledto Canada- US Treaty forconcessional tax

*(1995) 2 SCR 802


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Art. 4(1)Resident1stSentence

Literal meaningo Non-source taxationo by reason of connecting factors

OECD MC Comm.o Comprehensive (full-tax) liability to tax [Para 8 , Comm on Art. 4]

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For the purposes of this Convention, the term resident of aContracting State means any person who, under the laws

of that State, is liable to taxtherein by reason ofhisdomicile, residence, place of management or any other

criterion of a similar nature, and also includes that Stateand any political subdivision or local authority thereof.


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Article 4(1)First Sentence

Liable to tax - Indian judicial precedents

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M A Rafik

NR paid tax in India, andhence he is an IndianResident

TVM Ltd.

Mauritian Co. Entitled toDTAA if it has paid tax inMauritius

Cyril Pereira

As no income-tax law onIndividuals in UAE, theycannot access DTAA

ABA

Liability to tax is legalsituation, Payment of taxis fiscal situation

Abdul Razak Memon

UAE individual cannotaccess the DTAA, but areentitled to lower tax fordividends/interest

Green Emirates

UAE Residents can availDTAA as there is apotential liability to tax

Linklaters LLP

Income of the firm istaxed in UK. Firm hasfiscal domicile in UK -thus resident

Meera Bhatia

UAE Individuals canaccess the DTAA as thereis a potential liability totax


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Article 4(1)Liable to tax

Can the following access their States tax treaty?

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An Indian Resident, earning onlyagricultural income.

Exempt Income

An Indian Charitable Organisation,paying no tax on its income.

Exempt Entity

An NRI, not liable to tax within India.Potentially

taxable

A RNOR, taxed only on sources withinIndia.

Limited taxation


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Article 4(1)Liable to tax

non-taxability through-o loss adjustments

o personal allowances deduction/exemption

o specific item of income exempted

o certain types of activity exempted

o certain types of person exempted

o complete exclusion of a persono Absence of tax legislation

Non-taxability through which method depends ondomestic law but determines treaty entitlement

At which point the liable to tax not satisfied?

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Article 4(1)2nd Sentence

Absent in MC 63, introduced in MC 77

Aimed at diplomats and consular officialso To prevent diplomats from treaty benefits from both Home and Host State

Extended to conduit companieso [Para 8.2 (1st sent.) MC Comm. through 1992 Update]

Extended to apply for effect of other treatieso [Para 8.2 (2nd sent.) MC Comm 2008 Update]

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This term, however, does not include any person who isliable to tax in that State in respect only of incomefrom

sources in that Stateor capital situated therein


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A A

State R1 State R2

Cumulative effect of treaties

State S

Income

State S to limit its taxation as per bothR1-S and R2-S treaties.

Income

A

Income

State S1 State S2

State R to limit its taxation/grant reliefas per both R-S1and R-S2treaties.


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State R2

Income

Effect of other treaties

Can R2-S Treaty apply?

A ceases to be fully liable to tax inState R2by application of R1-R2Treaty

A may continue to be residentunder State R2s domestic law(exceptions e.g. UK, Canada)

Under R2-S Treaty, A not liable tocomprehensive taxation in State R2

(effect of application of R1-R2Treaty)

State S

A A

State R1

Winner Loser


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Article 4(1), Second Sentence

A mere clarifying statement? [Klaus Vogel m.no. 31,Art.4]o Treaty residence does not apply to non-residents with limited-tax liability

o Aimed at diplomats & consular officials [para 8.2 MC Comm.(1977)

Who are considered residents of Receiving State though they do not

live there permanently

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Art. 4(1), Second Sentence

As an exception to 1st sent.o Diplomats

exemption from all taxes, except taxes on private income having its

source in the receiving State [Art 34(d) Vienna Convention on

Diplomatic Relations]

Under the laws of that Stateo laws vs. law

o Monist/Dualist States - different results?

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Art. 4(1), Second Sentence

Sources in that State - Undefinedo Ordinary meaning

Point of origin

o Treaty meaning

Income arising in the other State according to distributive ruleshas its source in that state

o Domestic meaning

Domestic source (for taxation of non-residents)

Foreign source (for providing relief to residents)

Para 8.1 Comm. uses Treaty meaning

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State R2

Income

Meaning of SourceA is resident of R1after tiebreaker under

R1-R2Treaty

Income sourced in State Sbuttaxed in State R2.

For example, shipping profits

earned by enterprise of R2(havingits POEM in R1) may be sourcedfrom outside State R2.

State R2taxes A (say, since A isincorporated there) on incomesourced in State S

Application of R2-S Treaty?

State S

AA

State R1

Winner Loser

PE

d E l


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Swiss

Federation

Concertperformance

Fragmented Treaty EntitlementAznavour case*- Source State taxation inFrance

UK Co earns income from As performance inFrance and is taxed in the UK. A is not taxedin Switzerland on performance income as itaccrues to UK Co. France taxes performance

income in the hands of A and not UKCo.Both UKCo and A are tax residents of UKand Switzerland respectively.*Conseil dEtat, 28thMar, 2008, No. 271366, IBFD

France

UKCoA

UK

Held: A taxed on income under domestic law Swiss-France Treaty examined, Art. 17(1) allowed France to tax the income

UK Co.s entitlement to access Treaty considered irrelevant Whether Switzerland taxed A also not found relevant

Where one persons owns the income and liability to tax is imposed on anotherperson; a potential claim for treaty entitlement is fragmented between twopersons


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Thank you!

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Documents

4.9.2013 - CA Ganesh Rajgopalan - Treaty Entitlement- CTC 4Sep13- Final.pptx