7/23/2019 International Tax
1/33
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$ent to la!.
7/23/2019 International Tax
2/33
&n a$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.
7/23/2019 International Tax
3/33
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%?
7/23/2019 International Tax
4/33
(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$ent in tax.
7/23/2019 International Tax
5/33
1
7/23/2019 International Tax
6/33
!hile su)6ect to tax at nor$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
7/23/2019 International Tax
7/33
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.
7/23/2019 International Tax
8/33
'*. 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$e of (F( is
taxed.
'
7/23/2019 International Tax
9/33
To avoid the per$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 $isuse of treaty provisions for tax avoidance. ut treaty override
unilaterally !ithout the consent of other party is violative of ;ienna conventions.
*-. What is loo= throu%h clause?
7/23/2019 International Tax
10/33
Loo= throu%h clause in treaties say that the national authorities can lift the
corporate veil to see the real nature of transactions. This assu$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 $ethod of taxation.
*
7/23/2019 International Tax
11/33
.
-1. What is exe$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
'@.
7/23/2019 International Tax
12/33
+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?
7/23/2019 International Tax
13/33
&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.
7/23/2019 International Tax
14/33
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.
7
7/23/2019 International Tax
15/33
:'. 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
7/23/2019 International Tax
16/33
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.
7/23/2019 International Tax
17/33
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 $oney !as )ac=ed )y %old/ after
1
7/23/2019 International Tax
18/33
uer and it is i$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.
7/23/2019 International Tax
19/33
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$?
7/23/2019 International Tax
20/33
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
7/23/2019 International Tax
21/33
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%?
7/23/2019 International Tax
22/33
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
7/23/2019 International Tax
23/33
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.
7/23/2019 International Tax
24/33
"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.
7/23/2019 International Tax
25/33
+ven thou%h " tax to #, ratio is 7J co$pared to +" s '
7/23/2019 International Tax
26/33
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
7/23/2019 International Tax
27/33
&t refused to apply loo= throu%h clause since the sa$e !as not incorporated in act
or in ,TAA.
;odophone cannot )e treated as a%ent for non resident since it is not a resident.
+ven thou%h section 1
7/23/2019 International Tax
28/33
+ven =eepin% tax oCce of other country as !ell as presence of tax oCcial of other
country durin% exa$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*
7/23/2019 International Tax
29/33
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$$in%/
penetration pricin% )ased on diGerentiation or cost leadership.
&n +cono$ic analysis the econo$ic condition li=e )oo$ or recession is lin=ed to
transfer pricin%.
1-:. What is e>uita)le tax syste$?
oor are not su)6ect to tax / )ut %iven su)sidies this is considered as e>uita)le/
!hile even thou%h the statutory rates on )usiness is hi%h they pay very lo! rates
due to incentives/ it is called as eGective rates/ this is 6ustiBed due to $o)ility of
capital/ )ut this is cross su)sidied throu%h taxin% $iddle class !ho are salary
earners on %ross )asis !ithout allo!in% $uch deductions and i%norin% in9ation
)ecause la)our is not $o)ile. Tax e>uity !ants to tax capital and la)our ali=e.
7/23/2019 International Tax
30/33
1-8. What are non tariG )arriers?
Quota/ exchan%e rate $anipulation/ hostile tax procedures for non residents/
restriction on 0u$an $ove$ents li=e visa/ phyto sanitary certiBcates. WTO is
successful in re$ovin% >uota.
ut excessive co$pliance cost for transfer pricin%/ restriction on 01 ;isa/ +uropean
nations protectin% their a%riculture )y !ay of phyto sanitary certiBcates/ Eations
li=e (hina $anipulatin% their exchan%e rates to =eep their international
co$petitiveness/ still re$ain as su)stantial non tariG )arrier.
1-
7/23/2019 International Tax
31/33
17'. What are the co$plaints of forei%n corporate a%ainst &ndian tax syste$?
&ndian tax syste$ apart fro$ )ein% co$plicated/ is prone to hi%h pitched
assess$ents as evidenced )y 8@J of appeal Bled a%ainst revenue )ein% decided in
favour of tax payer/ even thou%h &ndia has %ood 6udicial syste$/ 6udicial delays are
ende$ic and it ta=es 1@ to 1- years to %et Bnality on disputes/ out of courtsettle$ent is not favoured in &ndia.
17*. What is ar$s len%th price?
Ar$s len%th price is price )et!een independent )uyer and seller !hich does not
involve any extra co$$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.
7/23/2019 International Tax
32/33
Lo! exchan%e rate is a su)sidy to exporters and tax on i$porters
These are all called as stealth tax.
17
7/23/2019 International Tax
33/33