There has been an
increase in the movement of labor between countries and the geographical
barriers, as far as employment/trade opportunities are concerned, are
diminishing. In these cases, which country should levy taxes if an organization
has its head office in one country and conducts business in other countries too?
Read on to find out.
What is double
taxation?
Double taxation means
imposing tax on the same amount of income or gain twice. This happens when
income is earned in one country and is paid to entities of another country. In
such cases, tax laws in both countries require levy of tax on the income/profit.
This occurrence is common in multinational companies or when employees are
deputed abroad for employment. But it doesn’t seem fair for a taxpayer to bear
the burden of tax in both countries on a single income.
Double taxation
treaties
With an increase in the
international trade and cross-border movement of labor, there was a need for an
amicable solution to the problem of double taxation. Countries had to agree to
look above their domestic tax laws and agree on the tax treatment of such
incomes or gains. These agreements between countries are called Double Taxation
Treaties. The objective of double taxation agreements between two countries is
to avoid profits or incomes earned in one country and paid to entities of
another country from being taxed more than once. Tax treaties bifurcate tax
rights that each country has by its domestic laws over the same income. This
avoids any confusion or disagreements over levy of taxes.
Double Taxation Treaties in
India
India has signed over
sixty-six double taxation agreements with different countries. The objective is
to encourage foreign investments in India and making foreign markets available
to Indian entities. The India- Mauritius Double Taxation Avoidance Agreement is
one of them. This agreement has contributed to almost 37% of foreign direct
investments in India during August, 1991 and December, 2005.
Very recently, India
has signed a Double Taxation Avoidance Treaty with Luxembourg. According to this
agreement, any Indian company in Luxembourg is exempted from paying taxes in
India on income generated from activity in Luxembourg. The agreement is expected
to encourage Indian companies to set up businesses in Luxembourg as the tax
rates are lower there. This is also an opportunity for Indian companies to
explore European markets.
India has also signed a
treaty with the United Arab Emirates. By virtue of this treaty, the residents of
UAE have to pay taxes in India on short-term capital gains arising from
investments in India.
India has also signed
double taxation treaties with Malta, Greece, Cyprus, Armenia, Indonesia, and
many other countries
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