Tax Treaty – Overview - International Taxation - Income Tax

Tax Treaty Overview Role of Tax Treaties The Treaty represents various compromises agreed upon by the respective contracting states depending upon the economic expediency of a particular country. Tax Treaties attempt to eliminate double taxation and try to achieve balance and equity. Double Tax Avoidance Agreement comes into play to mitigate hardship caused by subjecting the same income to double taxation. Directive Principle set out by Article 51 of Indian Constitution to be followed by the state in the context of International Agreements. The State shall endeavor to Promote International peace and security; Maintain just and honourable relations amongst nations; Foster respect for international law and treaty obligations in the dealings of organized people with one another; and Encourage settlement of international disputes by arbitration. Need of Tax Treaties Allocating taxing rights Elimination of double taxation Ensuring non-discrimination between residents and non-residents Resolutions of disputes arising on account of different interpretation of tax treaty. Providing assistance in the collection of the fair and legitimate share of tax. Further, in addition to above, there are some other principles which must be considered by countries in tax treaties Equity and fairness: Same income earned by different taxpayers must be taxed at the same rate regardless of the source of income. Neutrality and efficiency: Neutrality factor provides that economic processes should not be affected by external factors such as taxation. Neutrality is two-fold. Capital export neutrality and Capital import neutrality (CIN). Capital export neutrality (CEN) provides that business decision must not be affected by tax factors between the country of residence and the target country; whereas CIN provides that the level of tax imposed on non-residents as well as the residents must be similar. Promotion of mutual economic relation, trade and investment: In some cases, it is observed that avoidance of double taxation is not the only objective. The other objective may be to give impetus to a country s overall economic growth and development.