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  • Shivam Sharma

Concept of International Taxation

This blog post has been authored by Shivam Sharma, a 4th year law student of IME Law College, Delhi NCR. ​21st century World Economy, is not only more complicated and dynamic, but highly integrated. National economies have moved closer and become virtually borderless due to rapid movement of resources from one country to another because no country is self-sufficient in all resources to produce all goods and services. There is simultaneous movement of goods and services across borders. It won’t be an exaggeration to call the world a “global village”. The concept of cross-border transactions, Multinational Corporations (MNCs) and Non Residents has gained popularity and practical relevance. This free movement of goods, services and capital has important implications for both direct and indirect taxation which led to the emergence of “International Taxation”. What is International Taxation? International Taxation is an aspect of Public International Law. There is no definite concept of “International Taxation”. However, attempts have been made to define the term. Kevin Holmes described International Taxation as “the body of legal provisions of different countries that covers the tax aspects of cross-border transactions.” It is concerned with Direct Taxes and Indirect Taxes. In other words, it is an area of knowledge pertaining to the International aspects of tax laws and global tax treaties. At the onset, it is important to note that there is no codified International Tax Law. There are no generally accepted taxation laws by all countries. Further there is no separate Court to interpret International tax regime. There are provisions in domestic taxation laws of the countries to handle Cross-Border direct and indirect taxes. Nations make attempts to reconcile domestic taxation laws for cross-border transactions by way of taxation treaties. What is “Taxation Treaty”? OECD (Organization for Economic Co-operation and Development), in their glossary of terms, has defined “tax treaty” as “An agreement between two (or more) countries for the avoidance of double taxation. A tax treaty may be titled a Convention, Treaty or Agreement.” In simpler words, a tax treaty is a formally concluded and ratified agreement between the two nations (bilateral treaty) or more than two nations (multilateral treaty) on matters concerning taxation. There are a number of model tax treaties (Called Model Conventions), published by various national and international bodies, such as United Nations (UN), OECD etc. which forms the basis for large number of treaties. Three major MODEL CONVENTIONS are a. OECD Model Convention b. UN Model Convention c. US Model Convention India has entered into more than 90 Bilateral or Multilateral Tax Agreements with various countries. Income Tax Act, 1995 empowers the Central Government to enter into agreements with other nations with respect to taxation and its effects under section 90. Also, there is no requirement in India to incorporate a treaty into the domestic law to make it. Contained in the definition given by OECD, the primary purpose of Tax Treaty is avoidance of double taxation. However, there are various other purposes for having a taxation treaty in place, some of which are:- a. Reduction in tax rates of individuals and corporations b. Establishing procedure for easy recovery of Tax Dues c. Promotion of International trade and business d. Providing for Dispute resolution mechanism. How is International Taxation incorporated in Indian laws ? Two important principles associated with International Taxation are- Residence Principle (what is the residence of assessed) & Source Principle (What is the origin of assessee's income). In International Taxation, a country where a person generates income is very important to decide tax liability. Similarly, it is important that there is a connection between the country and its residents as the Government of a country cannot tax foreign sourced income of Non-Residents. In this regard, section 5, Section 6 and Section 9 of Income Tax Act, 1995 are of utmost importance for understanding the legal implications of International Taxation in Indian context. It is important to know the residential status of the assesses as scope of taxable income varies according to such status. Section 6 helps in determining the residential status of the Individual, Hindu Undivided Family and Other assesses (Companies, societies etc.). Furthermore,residential status for individuals can be divided into- Resident (Ordinary or Not Ordinary) & Non- Resident. Once, the residential status is determined, Section 5 comes into the picture. A careful reading of section 5 and 6, provides that the Act levies tax on those earnings of the overseas companies and Non-Residents, which are accumulated in India. Section 5(2) lays down that such Non-Resident is responsible to pay tax only on the income which is received or is deemed to be received in India or on behalf of such person or income which accrues or arises or is deemed to accrue or arise to it in India. Section 9 provides for different types of income that are deemed to accrue or arise in India under certain circumstances. Thus, only that income of Non-Resident which falls under the scope of Section 5 and Section 9 can be. Is “Environment Tax” the new innovation in International Taxation ? The global talks and mounting pressure on developed and developing states to tackle the problem of environmental pollution has been on the rise since the United Nations recognized pollution as a global threat to mankind. An innovative way of increasing the environmental responsibility of governments is to tax by imposing “Environment Tax” to target the pollutant or polluting behavior. OECD defines such tax as “a tax whose tax base is a physical unit (or a proxy of it) that has a proven specific negative impact on the environment. Four subsets of environmental taxes are distinguished: energy taxes, transport taxes, pollution taxes and resources taxes”. To ensure effective environmental taxes, OECD recommended the following guidelines while forming policies 1. The tax base must be carefully designed to target the pollutant or polluting behavior. 2. The scope of an environmental tax should be as broad as the scope of the environmental damage. For e.g. - Soil pollution affects lesser area as compared to air pollution. Thus, tax on soil pollution might be imposed at the local level and tax on air pollution can be imposed at global level. 3. Efforts should be made to apply such taxes uniformly with as few exceptions as possible. 4. The tax rate should commensurate with the environmental damage. However, environmental taxation has also been criticized and rightly so for the following reasons:- 1. Since it is as its initial stage, the actual impact of such taxation on desired result to reduce the pollution cannot be accurately ascertained. 2. Taxes alone cannot bring about the intended environmental outcome by ensuring awareness amongst the masses. Imposition of such taxes might be seen as a financial burden than as a social responsibility, especially in developing countries. 3. It is not always possible to ascertain the environmental damage with mathematical precision, nor is it possible to impose burden on accurately identified persons or entities. 4. It is yet to be seen how global organizations ensure that the governments of all countries fulfill their environmental responsibilities through “Environment Tax Policies”. Thus, in order to produce desired results, the taxes have to be properly designed and levied as close to the environmentally damaging pollutant or activity as possible. What are the Critical Issues in applying International Taxation & Conclusion? International law has always been criticized for being an imperfect law or soft law, as it is not consistent, codified and generally does not override domestic laws. It is no surprise, that being a subset of International law, International Taxation comes with its own problems. Some of the prominent issues are- 1. There is no uniformity in International Tax structure as it is governed by Tax Treaties. This makes such law highly complicated and unclear. 2. Tax treaties are written in complex manner and it is extremely difficult for a layman to understand the implications of such treaties. 3. Tax treaties create various disagreements and disputes which are to be tackled by domestic courts and tribunals. The main problem is the lack of availability of precedents to be followed due to difference in provisions of treaties. 4. Developed nations are in a better position to dictate their terms upon developing nations. This has often led to unfair, unjust and exploitative treatment of developing and under-developed nations. 5. International trade and business is highly dynamic in nature. In such a rapid commercial environment, treaties sometime fail to provide a solution for a peculiar taxation problem. It takes years to enter into agreements and treaties with other nations. 6. There are issues related to governance, transparency and adjudication which are yet to be solved by the International Organizations. To conclude, contemporary considerations for international taxation require smooth administration and revenue efficiency. Social justice and commercial factors must be balanced while designing International Taxation structure, especially by a developing nation like India. There should be equity, clarity and economy in international taxation structure for a particular.

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