Basics of International Taxation - Part 1 - Introduction

“Taxation” is highly complex and intriguing subject. 

International Taxation due to its dynamic and ever-changing nature has always been a complex subject not only to study but to practice. Due to 

1. increase in cross border transactions, 
2. mergers and acquisitions, 
3. e-commerce, 
4. capital mobility and so on, 

the taxation laws have become more and more complex. 

This ever-increasing complexity in taxation laws of the global village has been a matter of consultations, dialogues, debate, discussions at various forums. The resultant of the same is identification of the concept of Base Erosion and profit shifting (BEPS) and the action points to resolve the issues.

International Taxation is evolving in response to 

1. globalization, 
2. capital mobility and 
3. the increased trade in services. 

The progressive development that has taken place in recent years have allured the multi-national corporations to enter into all types of business and trade formats in India and be at its own or engaging through domestic partners and channels.

The economic reforms of our country initiated in the nineties has acquired momentum and the economy is growing at a rapid rate. 

1. India has become the hub of manufacturing, servicing and outsourcing activities for the multinational corporations. 
2. There has been an enormous increase in the activities of multinational corporations and other non-residents in the manufacturing and servicing sectors of the economy. 
3. Outsourcing, which was confined only to non-core activities has been expanding its scope to cover even core and strategic activities of the foreign corporates. 
4. There has been an enormous increase in the inflow of funds from international financial institutions. 
5. India has emerged as a major player in the arena of information technology.

All the above developments have a great impact on taxation of the transactions arising out of such activities. Thus, international taxation is gradually becoming a major area of professional interest. However, the concepts and issues concerning international taxation are of a complex nature.

The globalization of the Indian economy has resulted in manifold increase in volume of international transactions. Apart from the quantum increase, the international transactions have become very complex. Consequently, tax implications of international transactions have assumed greater significance. The international tax is no longer restricted to corporates or to large cities.

This has brought the Indian tax system to the attention of Multi-national Corporation on one hand and their professional consultants on the other hand requiring them to gain better understanding and familiarity of the Double Tax Avoidance Agreements (DTAAs) which play key role in the international taxation arena.

These developments in the frontiers of business have naturally resulted in the emergence of taxation issues which have cross-border implications. The Indian Income-tax law has been responding to the developments in this regard. Double Taxation Avoidance Agreements and Transfer Pricing Regulations are some of the examples in this regard. The Authority for Advance Rulings has also made significant pronouncements on various issues of international taxation.

The complexities and dynamic nature of taxation pose a number of challenges to all stakeholders – general public, business organizations, taxpayer and the tax consultant. 

Every stakeholder has his share of issues that needs a solution. Unfortunately, there is no panacea to resolve the issues overnight. All concerned need to continually learn and relearn with the emerging changes in the subject.

We are experiencing paradigm changes in the economic, social and psychological aspects of humanity. With the more and more involvement of technology, the manners in which business is conducted and people function and transact are undergoing significant changes. Revival of economy is the biggest challenge the governments across the world are facing. 

Governments are, broadly speaking, taking two pronged actions. 

1. various incentives are being provided either through cash or kind, 
2. regulatory requirements are being relaxed by postponing or modifying the relevant rules.
   
   

Organization of Economic Cooperation and Development (OECD) and the United Nations (UN) are examining the pain points of taxpayers and assisting tax authorities in minimizing those. India, like many countries has been proactive in addressing the economic challenges, in general, and tax difficulties faced by stakeholders, in particular. The government has taken several steps for the latter, such as extending various time limits for tax compliances and tax payments, suspending debt recovery, quicker refunds to taxpayers, temporary changes in audit policy and introducing ways to provide quicker tax certainty, enhancing taxpayer services and communication.

The recent amendments by the Finance Act, 2020 witnessed that Indian tax system is getting ready to address taxation of digital business: 

1. The scope of Equalization Levy has been widened. At the same time, the expansion of scope of deeming fiction to cover the advertisement income, income from sale of data, income from sale of goods or services; from a person who resides in India or from a person who uses Internet protocol address located in India are some notable changes in the Income-tax Act. Further, widening of income attribution concepts are a sign of migration from Function, Assets, Risks (FAR) approach to Function, Assets, Risks and Marketing (FARM) approach. The analysis of interplay between domestic law and tax treaties are going to be very challenging.
   
   
2. The withdrawal of dividend distribution tax, rationalization of income tax rates, relieving non-resident taxpayers from income-tax return filing if income is only from royalty or fees for technical services earned from India and extension of sunset clauses for concessional rate of tax on certain specified income are welcome steps for ease of doing business in India.   

This Series broadly covers all aspects of International Taxation including taxation of non-residents, DTAAs, Transfer Pricing, advance rulings, taxation of e-commerce, Foreign Tax Credit, BEPS etc.