International Tax

7/23/2019 International Tax

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FAQ On TAX

1. What is constitutional provision of tax?

List 1 of seventh schedule entry 8 under !hich "nion #overn$ent is havin%the po!er to tax inco$e and !ealth other than &nco$e on A%riculture.

&nco$e and !ealth tax other than on a%riculture is levied under this section.List 1 of seventh schedule entry 8' under !hich "nion #overn$ent is havin%

the po!er to tax &$port and export. Thus (usto$s duty is levied )y "nion

#overn$ent.

List 1 of seventh schedule entry 8* under !hich "nion #overn$ent is havin%

the po!er to tax $anufacture other than $anufacture of alcohol for hu$an

consu$ption and narcotics called as +xcise ,uty.

List 1 is called as Union List.

List of seventh schedule entry -* tate #overn$ent has exclusive po!er to

tax sales/ thus state %overn$ent levies sales tax. This is called as state

list.

List ' of seventh schedule is called as concurrent list in !hich )oth

(entral and state %overn$ent can le%islate. ta$p duty falls in this cate%ory.

. What is tax plannin%?

Tax plannin% is availin% incentives in tax la!s to pay $ini$u$ tax/ !hich is a

le%iti$ate exercise. This is )ased on principles esta)lished )y 0ouse of Lords

in West$inster case.

'. What is tax avoidance?

Tax avoidance is usin% colora)le sche$es not to pay tax. +ven thou%h they

co$ply !ith the letter of la!/ they do not co$ply !ith spirit of la!/ so it !ill

)e follo!ed )y a$end$ent to la!.


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&n a$sey2s case 0ouse of Lords decided that colora)le devices cannot )e

e$ployed for tax avoidance/ !hich !as follo!ed )y &ndia in 3c,o!ell2s case.

Thus )lurrin% the distinction )et!een tax avoidance and evasion.

*. What is Tax +vasion?

Tax +vasion is ille%al/ it is a%ainst la!.

-. What is the advanta%e of a sole proprietary )usiness?

ole proprietary )usiness still they reach tax audit turnover need not do T,

4Tax ,educted at source5/ disadvanta%es are unli$ited lia)ility/ interest on

capital and salary for proprietor not allo!ed/ )ut they are su)6ect to sla) rate/

no surchar%e/ no 3AT.

7. What are the advanta%e and disadvanta%e of artnership for$ of )usiness?

&n artnership salary to partners and interest on capital allo!ed su)6ect to

li$its/ not su)6ected to surchar%e or 3AT/ )ut the disadvanta%e are unli$ited

lia)ilities/ 9at rate of tax. &n " partnership is treated as tax pass throu%h

entity and tax is levied only in the hands of partners.

:. What are the advanta%es and disadvanta%es of co$pany for$ of )usiness?

alary of directors is allo!ed !ithout any li$its. Li$ited lia)ility/ )ut

disadvanta%es are surchar%e/ 3AT and dividend !ill )e su)6ect to dividend

distri)ution tax and 9at rate.

8. What are various principles of ;AT?

Tax at sin%le rate/ tax at lo! rate/ tax at every point/ don2t %ive any

exe$ption/ don2t %ive incentive throu%h tax la!s/ tax value addition/ rely on

records of assesses/ tax real inco$e.


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la) rate is responsi)le for $uch tax avoidance li=e clu))in% of inco$e/

conse>uent a$end$ents and co$plications/ for all entities if 9at rate of tax

is adopted/ these co$plications can )e avoided to a lar%e extent. &nco$e tax

has $any )asic exe$ption li$it for $en/ !o$en/ senior citien/ super senior

citien/ special rate for lon% ter$ capital %ains/ short ter$ capital %ains forsale of share/ 3AT/ ,ividend distri)ution tax/ leadin% to co$plications and tax

ar)itra%e.

[email protected] at lo! rate?

0i%h rate of tax on certain %oods li=e sin %oods %ives incentives for avoidance

and evasion these can )e avoided if all %oods are taxed at reasona)le rates.

11.,on2t %ive tax exe$ptions?

&f certain ite$s are exe$pted then it %ives scope for tax ar)itra%e/ !here)y

people clai$ $ost of the inco$e is derived fro$ exe$pted source li=e

a%riculture leadin% to tax evasion. Thus no source should )e exe$pted

there)y !idenin% tax )ase.

1.Tax at every point?

&f at one sta%e duty is taxed then transaction !ill )e valued artiBcially lo! at

char%ea)le point and !ill )e valued hi%h at exe$pted point. Thus ;AT as=s

transactions to )e taxed at every point.

1'. ,on2t %ive incentives throu%h tax la!s?

&ncentives li=e accelerated depreciation and !ei%hed deduction for scientiBc

research/ deduction for infrastructure leads to !ide spread corruption. ;AT

!ants these incentives to )e %iven outside tax syste$/ !hile tax la!s should)e =ept si$ple.

1*.What is cascadin%?


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(ascadin% $eans the sa$e ite$ )ein% taxed $ore than once/ since ;AT

!ants tax to )e levied at every point and tax on tax.

1-. What is taxin% value addition?

To avoid cascadin% due to $ultipoint taxation/ ;AT !ants tax to )e done on

value addition. ince in a developin% country li=e &ndia !here taxin% value

addition !hich involves ela)orate record =eepin% is not possi)le/ vat follo!s

alternate syste$ of input credit. ;AT does not !ant artiBcial restrictions !hich

prevail li=e pecial additional duty cannot )e ta=en as credit )y service

provider.

17. What are three $ethods of input credit under ;AT?

The three $ethods of input credit are consu$ption variant / tax on $aterial

used in $anufacture of product as !ell capital %oods used in $anufacture of

the product are allo!ed as credit/ !hile in product variant / only tax on

$aterial used in $anufacture of product is allo!ed as credit and not tax on

capital %oods used in $anufacture of product/ !hile in &nco$e variant tax on

$aterial used in $anufacture of product is allo!ed as deduction/ !hile tax

on capital %oods is allo!ed in $ore than one period.

1:.What is taxin% real inco$e?Today there are $any ite$s li=e capital expenditure/ capital loss/ ille%al

expenses/ penalty paid for infraction of la! are disallo!ed/ !hile capital

receipts !hich are not at all an inco$e is dee$ed as inco$e and taxed. ;AT

!ants these artiBcial concepts to %o and !ants real inco$e to )e taxed.

18. elyin% on records =ept )y assesses?

;AT does not !ant the authorities to prescri)e any separate records for tax

purpose and to rely on the records =ept )y assessee for collectin% tax. ;AT isa trust )ased syste$. ;AT !ants fe! returns to )e Bled and that too )y

electronic $eans to avoid fre>uent contacts )et!een assesses and tax

oCcials/ !hich is the source of corruption. &t also !ants eDpay$ents. Thus &T

infrastructure and eD%overnance are i$portant part of tax syste$.che$es li=e self assess$ent and tax audit increases trust ele$ent in tax.


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!hile su)6ect to tax at nor$al tax rate at resident co$pany / )ut the tax paid in

source country is allo!ed as credit.

&nco$e fro$ )usiness !hich is taxed at nor$al rate at source country/ for !hich

credit is %iven in resident country.

*. What is !ithholdin% tax?

Whenever pay$ents are $ade to non residents tax is char%ed on the entire a$ount

paid and not on inco$e at lo! rates/ this is called as !ithholdin% tax/ since it is

!ithheld at the ti$e of pay$ent and paid to source country. (redit is %iven in

resident country for !ithholdin% tax a%ainst tax char%ed )y it.

-. What is To)in2s Tax?

&t is usually levied on Bnancial transaction on the entire value of transaction at avery lo! rate it is paid )y the payer and not !ithheld fro$ a$ount paid. ince it is

paid on entire a$ount no credit %iven in resident country/ recent Bnancial

transaction tax !hich is a To)in2s tax proposed to )e levied in +uropean "nion is

opposed )y Bnancial centers li=e London/ Eetherlands.

7. What is tax haven?

Tax haven is a country !ith lo! tax or no tax li=e 3auritius/ (ay$an &sland/ &sle of

3an/ Leichesterin/ !iterland etc. "sually ,TAA !ith tax havens are )ased on tax

exe$ption $ethod/ !here the source country exe$pts the inco$e !hile resident

country taxes the sa$e. &n reality resident country either taxes the inco$e at nil

rate or very lo! rate/ there)y exe$ptin% practically !hole of inco$e. Another

i$portant attri)ute of tax haven is a)sence of sharin% of infor$ation clause/

there)y the tax authorities cannot re>uest the tax authorities of tax haven countries

to disclose infor$ation/ leadin% to secrecy and tax evasion.

Tax havens )ein% countries of s$all sie %ets their revenue throu%h Bnancial

char%es than taxes.

:. What is treaty shoppin%?

"sually treaties !ith tax haven do not contain Li$itation of Treaty eneBt 4LT5

clause/ !hich restricts the )eneBt of ,TAA to residents of )oth the countries. This


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leads to residents of third country ta=in% advanta%e of the treaty usin% conduit

co$panies in tax havens this is called as treaty shoppin%.

8. What is national treat$ent?

Eational treat$ent clause is found in ,TAA accordin% to !hich a forei%ner should

not )e su)6ect to any diGerential treat$ent as per tax la!s co$pared to citiens of

the country.


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'*. What is proBt split?

Total proBt on the transaction can )e split )et!een seller and )uyer )ased on FA.

FA $eans functions perfor$ed/ Asset e$ployed and is= ta=en.

'-. What is transaction net $ar%in $ethod?

&n the case of intan%i)les li=e patent/ trade $ar= !here volu$e !ill )e less

transaction !ise proBt is ascertained unli=e on overall )asis in the case of %oods

and services !here volu$e is hi%h !here proBt split is e$ployed on overall )asis

)ased on FA $ethod.

'7. What is tax sparred $ar%in?

Tax sparred $ar%in is a clause usually found in Hapanese ,TAA. &n this credit is %iven

at resident country at statutory rate/ i%norin% eGective rate at !hich tax is char%ed

at source country )y i%norin% incentives %iven.

':. What is round trippin%?

3oney leavin% the country )y ille%al $eans co$in% )ac= in a tax exe$pted activity

to %et le%iti$acy. That is !hy ;AT never !ants any inco$e to )e exe$pted.

'8. What is (ontrolled Forei%n (o$pany?

(ontrolled Forei%n co$panies are entities in !hich residents of a country has

controllin% interest. &n such cases " and "I enacted la! to tax earnin% to the

extent of share holdin% of residents irrespective of the fact !hether dividend is

declared or not. &n ,T( (F( provision is there. These are only applica)le to entities

situated in lo! tax re%i$e.

&n " only unearned inco$e of (F( is taxed/ !hile in "I total inco$e of (F( is

taxed.

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To avoid the per$anent esta)lish$ent pro)le$ $any nonresident carry )usiness in

other countries throu%h dependent a%ent. Those dependent a%ents are treated )y

tax la!s as per$anent esta)lish$ents. ,ependent a%ents are persons !ho have no

other )usiness other than the )usiness of principal.

*1. What is )usiness connection?

&ndian &nco$e Tax act calls dependent a%ent as )usiness connection.

1. &f a person ha)itually enters into contract on )ehalf of non residents

. &f a person ha)itually stores %oods on )ehalf of non residents

'. &f a person ha)itually purchases %oods for one or $ore non residents

&t is called as )usiness connection. roBt attri)uta)le to )usiness connection is

taxa)le in the hands of non residents in &ndia.

usiness connection includes professional connection.

*. What is resourcin%?

&f say Tata has

A Factory in outh Africa and derives inco$e fro$ Ei%eria/ in this case outh Africa

Ei%eria ,TAA not applica)le since Tata is neither resident of outh Africa or Ei%eria/

in this case !here the inco$e !ill )e taxed !ill )e )ased on resourcin% clause in

,TAA.

*'. What is safe har)our clause?

To prevent harass$ent of non residents )y application of co$plicated procedures as

non tariG )arrier/ provisions are $ade for chec=in% the extent of taxa)ility of

transactions entered )y non residents li=e if transfer pricin% deter$ined )y $ore

than one $ethod are diGerent a -J variation is allo!ed..

**. What is treaty override clause?

Treaty override clause says that tax la!s enacted su)se>uent to treaty !ill override

the treaty to avoid $isuse of treaty provisions for tax avoidance. ut treaty override

unilaterally !ithout the consent of other party is violative of ;ienna conventions.

*-. What is loo= throu%h clause?


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Loo= throu%h clause in treaties say that the national authorities can lift the

corporate veil to see the real nature of transactions. This assu$es si%niBcance in

vie! of nu$)er of shares of &ndian co$panies transferred oG shore )y ;s

incorporated in tax havens.

*7. What are t!o $ethods of taxin% as per international taxation?

T!o $ethods of taxin% as per international taxation are +cono$ic and Huridical.

*:. What is 6uridical $ethod?

&n this $ethod the approach adopted for taxin% dividend received fro$ su)sidiary is

le%alistic !hich treats holdin% and su)sidiary co$pany are treated as t!o diGerent

entities and dividend is taxed in resident country at nor$al rates and !ithholdin%

tax paid to host %overn$ent is %iven credit to.

*8. What is +cono$ic 3ethod?

&n this the econo$ic reality of holdin% and su)sidiary co$pany is treated as sin%le

entity. retax proBt out of !hich dividend is declared )y su)sidiary is taxed in ho$e

country a%ainst !hich tax paid )y su)sidiary to host country as !ell as !ithholdin%

tax are deducted and )alance to )e paid to resident country. &n this the tax lia)ility

to ho$e country is $uch less co$pared to 6uridical $ethod. This $ethod is called

as i$puted $ethod of taxation.

*


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.

-1. What is exe$ption for free trade one and +O"?

1@A and 1@ exe$pts inco$e of +O" and FTK. ractically this lead to tax evasion in

the for$ of procurin% duty free $aterial )y these units and divertin% the sa$e for

do$estic use and also $ost of the activities !ere perfor$ed in ,o$estic TariG Area

Bnally the export !as done )y FTK and +O" unit. "lti$ately the FTK sche$e and

+O" sche$es !ere a$ended to exclude tradin% activities.

-. What is ;AT stance on exe$ptions and deductions?

;AT is principally a%ainst exe$ptions and deductions and !ants tax on all activities

at every point at a sin%le rate )ut at a lo! rate.

.

.

.

-'. What is tax ar)itra%e?

When $ultiple rates are there tax ar)itra%e $eans %ettin% taxed at lo!er rate )y

arran%in% transaction in such a $anner. For exa$ple pro$oters of (o$pany ta=in%

dividend instead of salary since dividend %et taxed at 17.7:J/ !hile salary at

'@.


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+arlier it !ill )e custo$ary for a $erchant !ho visits a country to carry so$e %ifts

for the ruler. This has $ade the duty on i$ported %oods as custo$s duty.

--. What is 0E/ !hat is the purpose of sa$e and !ho desi%ned it?

0E is 0ar$onied yste$ of Eo$enclature/ the purpose is to %et unifor$ syste$

of classiBcation for the %oods !orld!ide/ it is desi%ned )y World (usto$s

Or%aniation head >uartered in russels.

-7. Ea$e various types of (usto$s ,uties?

asic (usto$s ,uty/ counter vailin% duty/ special additional duty/ safe%uards duty

and antidu$pin% duty.

-:. What is )asic custo$s duty?

asic (usto$s duty is !hat is called as custo$s duty.

-8. What is countervailin% duty?

&f si$ilar %oods are $anufactured in &ndia !hat excise duty !hich !ill )e levied on

sa$e is called as countervailin% duty. &nternationally countervailin% duty is used to

oGset any su)sidy %iven in the host country.

-8. What is pecial Additional ,uty?

pecial Additional ,uty is levied in lieu of sales tax !hich !ould have )een levied if

the %oods are sold in &ndia.

-uantities are i$ported.

71. Which are (envata)le duties?

(ountervailin% duty and special additional duty are cenvata)le if the %oods are used

in or in relation to $anufacturin% %oods.

7. What is &ndia?


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&ndia not only includes the land $oss/ )ut also the air space as !ell as the territorial

!ater.

118. What is territorial !ater?

Territorial !ater consists of 1 nautical $iles fro$ )ase line. +ach nautical $ile !ill

)e 1.1- $iles.

7'. 0o! federal taxes are shared?

Federal taxes are shared as per the reco$$endations of Finance (o$$ission/ !hich

is a constitutional )ody constituted once in Bve years. +ven thou%h plannin%

co$$ission plays an i$portant role it is an extra constitutional )ody.

7*. What is $eant )y 3ost Favored nation?

(ountries throu%h )ilateral treaties can declare another country as $ost favored

nation and extend concessions )ilaterally. After WTO all $e$)ers of WTO are

treated as $ost favored nations. That $eans any concession %iven to one nation/

auto$atically %ets extended to other nations. &n ,TAA $ost favoured nation clause

$eans/ any concession extended in su)se>uent treaties/ !ill auto$atically apply to

the treaty.

7-. 0o! the $ultilateralis$ pro$oted )y WTO %ets violated in practice?

WTO per$itted )ilateral treaties in the for$ of e%ional Trade a%ree$ents/ to

pro$ote nei%h)orin% counties cooperatin% !ith each other. For such a%ree$ent

$ost favored nation clause is not applica)le. This a%ree$ent is $isused )y nations

enterin% into as $any as *@@ TAs even a$on% nations !hose %eo%raphies are far

a!ay fro$ each other to violate $ultilateralis$ li=e " Thai / " &srael trade

a%ree$ents/.

77.

What is (usto$s !ater?

(usto$s !ater involves * nautical $iles fro$ the )ase sea line. &ndian (usto$s

oCcer can order any vessel to stop in &ndian (usto$s !ater/ he can enter into it

and exa$ine it/ if it contains any provisions to conceal %oods are it actually

conceals %oods/ he can conBscate the vessel and arrest the $aster of the vessel. &f

the vessel does not o)ey his order to stop/ he can Bre on the sa$e.


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7:. What is exclusive econo$ic one?

+xclusive econo$ic one is up to @@ nautical $iles fro$ )ase line/ !hich can )e

exclusively used )y &ndia for econo$ic activities. Any)ody !ho !ants to use this for

activities li=e oil exploration should ta=e prior per$ission of #overn$ent of &ndia.

78. What are hi%h seas?

Anythin% )eyond @@ nautical $iles fro$ )ase line is called as hi%h seas/ !hich is

international !aters.

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:'. What is ill of +ntry?

ill of +ntry is a docu$ent Bled )y i$porter for i$portin% %oods/ self assessin% duty.

:*. What is the exchan%e rate for convertin% i$ported value?

+xchan%e rate is the rate on !hich )ill of entry is Bled the rate is as notiBed )y

(entral #overn$ent.

:-. What are hi%h seas sales?

0i%h seas sales are sale )efore the %oods cross (usto$s Frontier (ourts have

interpreted (usto$s Frontier as (usto$s )arrier. &f sale is $ade )efore %oods cross

custo$s )arrier they are not su)6ect to sales tax/ )ut they are taxed at the value of

such sales.

:7. 0o! to deter$ine the rate of custo$s.

asic (usto$s duty is 1@J/ (;, !hich is a duty in lieu of excise duty is char%ed at

8.*J on value M custo$s duty/ !hich is


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8@. What is duty dra!)ac=?

,uty dra!)ac= is provided in (usto$s Act/ under !hich the (usto$s duty paid on

i$ported inputs and excise duty paid on local inputs can )e clai$ed as refund.

81 What is advance authoriation?

"nli=e in the case of dra! )ac= !here duty has to )e paid Brst and ta=en as refund

after exports/ in advance authoriation $aterial re>uired to )e i$ported for exports

can )e i$ported !ithout (usto$s.

8 What is +(#?

+(# is export pro$otion capital %oods under !hich capital %oods re>uired for

export production can )e i$ported duty free su)6ect to export o)li%ation.

8' What is dee$ed exports?

,ee$ed exports are nothin% )ut i$port su)stitution resultin% in forei%n exchan%e

savin%s.

8* What is (usto$s !arehouse?

(usto$s !arehouse are places !ere i$ported $aterial can )e stored !ithout

pay$ent of duty. There are pu)lic and private !arehouses.

8- What is +O"?

+O"s are export oriented units !hich !or= under custo$s )ond and supervision.

They can %et i$ported and local $aterial duty free for producin% for exports. -@J of

$aterial can )e sold in do$estic $ar=et after payin% -@J (usto$s duty as excise.

87 !hat is +K?

+K is a land !ithin country !hich is treated as forei%n territory. Any exports to +K

are an export and sale fro$ +K to &ndia is i$ports. This concept !hich !as a %reat

success in (hina ended up as land %ra))in% exercise in &ndia.


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8: What is the )i%%est tax levied?

i%%est tax levied is in9ation !ithout authority of la!. &t is hi%h ti$e that

%overn$ent %ives & sin%le tar%et of in9ation $onitorin% and cuts its o!n

pro9i%acy as pointed )y #eetha Irishnan (o$$ittee on expenditure to tri$ Fiscal

deBcit.

88 What is sta%9ation?

Once econo$ics tau%ht us that in9ation is a necessary evil for %ro!th/ )y sho!in%

the lin= )et!een in9ation and %ro!th/ )ut durin% seventies A$erica suGered lo!

%ro!th !ith hi%h in9ation called as sta%9ation. This ter$ !as coined )y Eo)el

Laureate a$uelson.

8< What is Bscal and $onetary policy?

Fiscal policy is )ud%etary policy/ in the olden days $oney !as )ac=ed )y %old/ after

1


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uer and it is i$ple$ented )y an= of

+n%land/ !hile the i$ple$entation is $onitored )y 3onetary olicy (o$$ittee/

!hich consist of independent econo$ist and industrialist.


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A shell co$pany esta)lished in a tax haven only for avoidin% tax.

1@@. What is loo= throu%h clause?

The la! !hich %ives po!ers to court to i%nore the corporate for$ of (onduit

(o$pany and %o )ehind the purpose is called as loo= throu%h.

1@1. What is participatory note?

articipatory note is a derivative issued )y F&& to invest in &ndia/ the identity of

su)scri)er of participatory note need not )e revealed.

1@. A$on% O+(, $odel and "E 3odel !hich $odel is revie!ed and updated

periodically?

A$on% these t!o $odels O+(, $odel is revie!ed and updated periodically.

1@'. What is the test of residence?

3any countries deter$ine residence of natural persons )ased on nu$)er of day of

their stay in the country durin% Bscal year/ )ut so$e countries deter$ine residence

of natural person throu%h do$icile and citienship.

&n the case of 6uridical persons residence is deter$ined )ased on place of control

and $ana%e$ent/ )ut in fe! cases residence is deter$ined )ased on place of

incorporation/ situation of e%istered oCce and head oCce.

1@*. What are various types of +s?

(onstruction +/ A%ency +/ (onsultancy + / &nsurance + are various types of +.

1@-. What do not constitute +?

Any place !hich are used for stora%e of $aterial/ any place used for stora%e of

$aterial only for processin%/ any place used only for procurin% $aterials or

collectin% infor$ation for non residents/ any preparatory/ auxiliary activities carried/

a su)sidiary of forei%n co$pany 6ust )ecause it is a su)sidiary/ an independent

a%ent do not constitute +.

1@7. What is $onistic syste$?


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A syste$ under !hich the tax treaty entered itself !ill constitute la! and there is no

need to pass la!s to enforce tax treaty/ for exa$ple France.

1@:. What is dualistic yste$?

,ualistic yste$ is follo!ed in &ndia/ for exa$ple a separate la! is to )e enacted to

enforce tax treaties/ to avoid cu$)erso$e procedure for approachin% parlia$ent

every ti$e section


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11-. 0o! the inco$e of actors/ entertainers and sports persons are taxed?

They are taxed in the country in !hich service is rendered.

117. Who is responsi)le for avoidin% dou)le taxation?

esident country is responsi)le for avoidin% dou)le taxation.

11:. Where pensions are taxed?

&f pensions are paid )y #overn$ent or #overn$ent )ody then it is taxed at source

country/ else it is taxed at resident country.

118. 0o! $any days construction + to )e $aintained to )e reco%nied as +?

"nder O+(, rule construction + should )e for $ini$u$ 1 $onths to constitute

+/ !hile under "E $odel it is 7 $onths.

11uired to constitute consultancy +.

1@. &n !hich state re$uneration for service to %overn$ent is taxed?

ervice to %overn$ent is taxed in source state.

11. &n !hich state a$ount received )y students !ill )e taxed?

"sually a$ount received )y students !ill )e taxed in state of residents. +ven

thou%h the article is silent on Teachers $any &ndian ,TAA has provisions for taxin%

teacher2s re$uneration up to t!o years in resident state.

1. Which is the state in !hich other inco$e is taxed?

Other inco$e in the a)sence of per$anent esta)lish$ent is taxed in resident state.

1'. What is %randfatherin% clause?

That the ne! la! !ill not )e applica)le to existin% activities is called as

%randfatherin% clause.

1*. What is notional expense clause?

&n the case of )ranch !hich is not a le%al entity/ expenses paid to head oCce li=e

royalty/ fees for technical service/ interest are considered not as expense and

disallo!ed. ut ne! a$end$ent to O+(, treaty allo!s so$e of these expenses/

1-. What is structurin%?


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tructurin% is an activity !here)y the co$panies are located in various places to

avoid inco$eN !ithholdin% taxes. For exa$ple since Eetherland neither has

!ithholdin% tax/ treaty !ith other countries also do not provide for !ithholdin% tax/

$any transactions are routed throu%h co$panies in Eetherland/ it is called as ,utch

sand!ich.

17. What is secondary eGect of transfer pricin%?

As per transfer pricin% procedures if any a$ount is deter$ined to )e paid in excess/

then the ,TAA re%ards the excess pay$ent as dividends unless repatriated.

1:. What are the rules for transfer pricin% ad6ust$ents?

&f a pay$ent is considered excessive and disallo!ed in one country/ the sa$e is

ta=en as deduction fro$ receipts in other countries. ut this not applica)le as per

$any ,TAA/ if such overpay$ent is discovered )y tax authorities and su)6ect to

penalties. 3any a ti$e transfer pricin% ad6ust$ents leads to dou)le taxation.

18. What are (FN &(,?

(F is (ontainer frei%ht station and container frei%ht ter$inal !hich are treated as

extension of portN airport to avoid con%estion and facilitate containeriation

1


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o$e ti$e (usto$s can per$it stora%e of %oods in !arehouse !ithout treatin% the

sa$e as !arehousin% pendin% receipt of certain docu$ents or license this is called

as !arehousin% !ithout !arehousin%.

.

1'. What is presu$ptive tax?

,iCcult to tax sectors li=e s$all traders/ s$all transport operators and non

residents are taxed on presu$ptive )asis.

For exa$ple under **A, All )usiness !ith turnover up to s 1 crore and all

services up to turnover of s - la=hs 8J of turnover is presu$ed to )e inco$e and

su)6ect to tax.

Less than ** A+ inco$e of s$all transport operator holdin% up to 1@ vehicles is

taxed presu$ptively.

"nder ** Forei%n shippin% co$panies are taxed presu$ptively at : and J on

consideration received for transport of %oods and passen%ers fro$ &ndia and receipt

of frei%ht in &ndia.

** e>uip$ent leased for prospectin% notiBed $ineral inco$e is dee$ed to )e

1@J of receipt.

**A &nco$e of forei%n airlines is presu$ed to )e -J of frei%ht for carria%e of

%oods and passen%ers fro$ &ndian Air ports and of any frei%ht received in &ndia.

** 1@J of receipt of consideration for any civil construction for approved po!er

pro6ect )y forei%n co$pany is dee$ed as inco$e.

"nder 11- A 4154a5 interest paid )y %overn$ent or resident )y !ay of forei%n

)orro!in% !ill )e taxed at -J

"nder 11-A 4154)5 fess for technical service paid to non residents !ill )e taxed at

1@J

"nder 11-A inco$e of oGshore funds fro$ investin% in units of &ndian $utual fund

!ill )e taxed at 1@J

"nder 11- A( inco$e of any #, or )orro!in% )y pu)lic sector co$pany !ill )etaxed at 1@J

Less than 11- A(A #, allotted to an e$ployee of &ndian su)sidiary of forei%n

parent inco$e !ill )e taxed at 1@J/ !hile capital %ains also !ill )e taxed at 1@J

"nder 11- A, inco$e of forei%n institutional investor !ill )e taxed at @J for lon%

ter$ capital %ains and '@J for others.


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"nder 11-A inco$e of forei%n sports person !ill )e taxed at 1@J

"nder 11-( to & inco$e of nonresident &ndian fro$ any shares of &ndian co$pany/

de)entures and deposits of &ndian pu)lic co$pany / central and state %overn$ent

securities/ other notiBed securities !ill )e taxed at @J !hile capital %ains !ill )e

taxed at 1@J/ the tax on capital %ains !ill not )e applica)le if the sa$e arereinvested in a)ove $entioned securities !ithin a period of six $onths.

1''. What are various rules for classiBcation under excise and custo$s la!?

#oods !ill )e classiBed as per chapter notes or section notes.

&f this is not possi)le follo!in% rules are follo!ed in se>uence

A unBnished %oods !hich retains the essential characteristics of Bnished %oods !ill

)e classiBed as Bnished %oods.

peciBc description is preferred to %eneral description

&n a $ixture the $aterial !hich %ives predo$inant characteristics deter$ines

classiBcation

&f )oth $aterial %ives/ predo$inant characteristics later the )etter.

&f all these test fails trade parlance test.

1'*. 3a=e a study of +uropean and A$erican yste$ of taxes?

&n +urope ;at is levied !hich is consu$ption )ased and corporate taxes are $uchlo!er/ !hile in " ori%in )ased sales tax is levied/ corporate taxes are $uch hi%her/

" tax code runs to 1:@@@ pa%es !ith : la=h !ords and as per & itself it !ill need

'.8 $illion fullti$e e$ployees to co$ply !ith tax code/ thus $a=in% tax co$pliance

the )i%%est industry. A$ericans spend 7/ -@/@@@ $illion hours for co$plyin% !ith

tax related $atters. A$erica should s!itchover to territory )ased rather than

residence )ased taxation.


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+ven thou%h " tax to #, ratio is 7J co$pared to +" s '


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What is su)sidy for poor is called as incentives for rich/ )oth co$plicates tax

syste$.

1'< What is FAT(ANT0AA?

They are la!s enacted )y us to prevent tax avoidance in "

FAT(AP Forei%n Account Tax (o$pliance Act

T0AAP top Tax 0aven a)use Act.

1*@. 0o! to evaluate + inco$e?

"nder direct $ethod each per$anent esta)lish$ent is treated as separate

functional entities and proBts are deter$ined )ased on ar$s len%th transfer prices/as per latest O+(, $odel notional expenses li=e royalty/ technical service are

deter$ined for transaction )et!een parent and )ranch.

"nder indirect $ethod overall proBts of )usiness entities are allocated to each unit

)ased on certain criteria li=e percenta%e of turnover.

1*1. What is ;odophone case?

0utchinson entered into &ndia throu%h 0utchinson Teleco$$unication &nternational

Ltd 40T&L5 incorporated in 0on% Ion% a country !ith !ho$ &ndia doesn2t have ,TAA.

This !as done in 1


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&t refused to apply loo= throu%h clause since the sa$e !as not incorporated in act

or in ,TAA.

;odophone cannot )e treated as a%ent for non resident since it is not a resident.

+ven thou%h section 1


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+ven =eepin% tax oCce of other country as !ell as presence of tax oCcial of other

country durin% exa$ination of any persons are allo!ed under this.

1*7. What is $utually a%reed procedures?

3utually a%reed procedures are if resident of a treaty country feels that the treaty is

violated in practice )y other country he can approach the authorities of other

country and the dispute can )e settled on $utually a%reed procedures )y

authorities of )oth countries. 3any countries no! incorporate ar)itration clause to

speed up $utually a%reed procedure. The assessee should a%ree to )e )ound )y

these rulin%s.

1*:. What are the %eneral rules for taxation of forei%n shippin% co$pany?

roBts fro$ shippin% co$panies !ill )e taxed in place !here their eGective

$ana%e$ent is situated.

1*8. What is $eant )y territorial nexus?

upre$e (ourt has held that even if la! provides for taxation of inco$e of non

resident !hich has no territorial nexus !ith the country then such inco$e !ill )e

i%nored.

1*


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o$e countries provide the do$estic price should )e deter$ined )ased on J of

total volu$e/ !hile so$e others provide that it should )e )ased on 'J of total

volu$e/ this is called as de$ini$is clause.

1-'. What is E3+?

+cono$y li=e (hina is considered as Eon 3ar=et +cono$y and in such case

du$pin% is deter$ined )ased on cost data than do$estic sale price.

3any a ti$e anti du$pin% duty is used for protectionist purpose.

1-*. Why international taxation is i$portant?

Ada$ $ith !ith his a)solute advanta%e theory and ,avid icardo !ith

co$parative advanta%e theory and other su)se>uent theories proved that !ealth

can )e increased throu%h tradin%. 0i%h custo$s duty and discri$inatory direct

taxes prevent international tradin% WTO !as esta)lished to re$ove this )arrier.

1--. Why tax on capital is i$portant?

Hohn 3aynard Ieynes proved that $ove$ent of capital is i$portant for !ealth

creation/ thus $any ,TAA has )een fra$ed !ith the o)6ective of capital export and

i$port neutrality/ that is do$estic and forei%n capital !ill )e taxed si$ilarly.

1-7. What are transfer pricin% docu$ents?

Transfer pricin% docu$ents are to prove the correctness of transfer pricin%/ they are

docu$ents for usiness analysis/ strate%ic analysis and +cono$ic analysis.

usiness analysis analyses each associated enterprises fro$ the an%le of functions

perfor$ed/ assets e$ployed and ris= ta=en to arrive at the correctness of transfer

pricin%.

trate%ic analysis analyses transfer pricin% fro$ strate%ic an%le li=e s=i$$in%/

penetration pricin% )ased on diGerentiation or cost leadership.

&n +cono$ic analysis the econo$ic condition li=e )oo$ or recession is lin=ed to

transfer pricin%.

1-:. What is e>uita)le tax syste$?

oor are not su)6ect to tax / )ut %iven su)sidies this is considered as e>uita)le/

!hile even thou%h the statutory rates on )usiness is hi%h they pay very lo! rates

due to incentives/ it is called as eGective rates/ this is 6ustiBed due to $o)ility of

capital/ )ut this is cross su)sidied throu%h taxin% $iddle class !ho are salary

earners on %ross )asis !ithout allo!in% $uch deductions and i%norin% in9ation

)ecause la)our is not $o)ile. Tax e>uity !ants to tax capital and la)our ali=e.


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1-8. What are non tariG )arriers?

Quota/ exchan%e rate $anipulation/ hostile tax procedures for non residents/

restriction on 0u$an $ove$ents li=e visa/ phyto sanitary certiBcates. WTO is

successful in re$ovin% >uota.

ut excessive co$pliance cost for transfer pricin%/ restriction on 01 ;isa/ +uropean

nations protectin% their a%riculture )y !ay of phyto sanitary certiBcates/ Eations

li=e (hina $anipulatin% their exchan%e rates to =eep their international

co$petitiveness/ still re$ain as su)stantial non tariG )arrier.

1-


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17'. What are the co$plaints of forei%n corporate a%ainst &ndian tax syste$?

&ndian tax syste$ apart fro$ )ein% co$plicated/ is prone to hi%h pitched

assess$ents as evidenced )y 8@J of appeal Bled a%ainst revenue )ein% decided in

favour of tax payer/ even thou%h &ndia has %ood 6udicial syste$/ 6udicial delays are

ende$ic and it ta=es 1@ to 1- years to %et Bnality on disputes/ out of courtsettle$ent is not favoured in &ndia.

17*. What is ar$s len%th price?

Ar$s len%th price is price )et!een independent )uyer and seller !hich does not

involve any extra co$$ercial consideration/ unless the ;AT2s prescription of taxin%

at every point is follo!ed tax payer al!ays tries to increase value addition at non

taxa)le point/ leadin% to valuation disputes.

17-. What is Advanced ulin% Authority?

Advanced ulin% Authority is constituted to settle tax a$)i%uities for non residents

)efore the transaction is underta=en.

177. 0o! the forei%n co$pany can start operations a)road?

Forei%n co$panies can start it2s operations as )ranch or su)sidiary/ dependin% on

!hether it expects loss fro$ forei%n operation and forei%n tax rates/ if losses are for

$any years )ranch !hich is nothin% )ut the co$pany itself can oGset the losses

a%ainst parent2s proBts/ !hich is not possi)le in case of separate le%al entity li=e

su)sidiary and as su)sidiary if forei%n tax rates are lo!er than ho$e taxes.

17:. What is su)stance and purpose test for conduit co$panies?

u)stance $eans nu$)er and a$ount of transaction other than the co$pany !ith

!hich &t2s transactions are suspected as tax avoidance.

urpose is the o)6ective of incorporatin% these co$panies.

178. What is stealth tax?

3any social security sche$es !hich are totally inade>uate to Bnance the future

social security needs / )ut )asic purpose is to Bnance %overn$ent expense.

0i%hly pe%%ed exchan%e rates !hich act as tax on exporters and su)sidy to

i$porters.


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Lo! exchan%e rate is a su)sidy to exporters and tax on i$porters

These are all called as stealth tax.

17


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Documents

International Tax