Introduction – Interpretations of Treaties - International Taxation - Income Tax

Introduction Interpretations of Treaties The International Court of Justice acts as a world court. The court s jurisdiction is twofold: It decides, in accordance with International Law, disputes of legal nature that are submitted to it by States. It gives advisory opinions on legal questions at the request of the organs of the United Nations or specialized agencies. Article 38(1) of the International Court of Justice (ICJ) provides that the court shall apply the following in deciding on a particular matter International Conventions Establishing rules expressly recognized by the contesting states. International Customs Serving as evidence of general practice accepted as law. General Principles Recognized by civilized nations. Judicial decisions and teachings of highly qualified publicists of various nations Serving as subsidiary means for determination of rules of law. Approach to Treaties - The interpretation of DTAAs require a different approach than the interpretation of domestic tax laws as the latter is based on interpretative principles set out by the national courts, whereas the DTAAs are an international agreement between the government of two countries. The treaties are interpreted in light of the customary principles set out under the Vienna Convention of the Law of treaties (VCLT). Origin of International Tax Law Multinational International Agreements (MIA) Agreement signed by more than two countries is called as Multinational International Agreements (MIA). Ex- Vienna Convention Law of Treaties (VCLT) is a multilateral treaty signed and ratified by several countries, which codifies the customary international law for interpretation of tax treaties. Double Taxation Avoidance Agreement (DTAA) It includes Protocols, memorandum of understanding, and exchange of information. Etc., forming part of DTAA which enable the interpretation of DTAA. Customary International law and general principles of law - Customary international law is the aspect of international law that derives from customs and conventions. Along with general principles of law and treaties, custom is also considered by the International Court of Justice, jurists, the United Nations, and its member states to be among the primary sources of international law. For example, Principles of law recognized by civilized nations in their national legal systems, customary law and judicial decisions and the practices of International Organizations. Factors which lead to Double Taxation- The taxability of a foreign entity in any country depends upon whether it is doing business with that country or in that country. There are two types of connecting factors to determine the jurisdiction, namely, Residence and Source . It means a company can be subject to tax either on its residence link or its source link with a country. It means a company can be subject to tax either on its residence link or its source link with a country. If a company is doing business with another country (i.e host/source country), then it would be subject to tax in its home country only, based on its residence link. However, If a company on the basis of its residence link, besides being taxed in the home country on the basis of its residence link, it will also be taxed in the host country on the basis of its source link.- Jurisdictional Double Taxation - When source rules overlap, double taxation may arise i.e., tax is imposed by two or more countries as per their domestic laws in respect of the same transaction, income arises or is deemed to arise in their respective jurisdictions. This is known as juridical double taxation . In order to avoid such double taxation, a company can invoke provisions of Double Taxation Avoidance Agreements (DTAAs) (also known as Tax Treaty or Double Taxation Convention DTC) with the host/source country, or in the absence of such an agreement, an Indian company can invoke provisions of section 91, providing unilateral relief in the event of double taxation. Economic Double Taxation - Economic double taxation happens when the same transaction, item of income or capital is taxed in two or more states but in hands of different persons (because of lack of subject identity) Example : Suppose John Plc (UK Co.) distribute dividends and paid DDT in UK same dividend is received by Indian resident is taxed in India. In this Case, sma e income is taxed in hands of John Plc. as well as Indian resident Types of DTAA: Limited DTAA : Limited to certain types of Income only. Ex; DTAA between India and Pakistan is limited to aircraft profits only. Comprehensive DTAA : They cover almost all types of incomes covered by any model convention Ex: Sometimes, a treaty covers wealth tax, gift tax, etc.,