Introduction to International Taxation

International Taxation means taxation of cross-border transactions and entities. In other words, international taxation means levying of taxes by one country on transactions involving multiple nations, or tax on transaction in other nation, or tax on transactions in own nation by foreign entities.

International Taxation comes into picture when we have a transaction of either import or export of either goods or services or both. In a globalised world where we live today, the idea of survival without either exports or imports seems alien and hence the knowledge of International taxation is basic and ignoring it would be a huge error or rather blunder.

History & Emergence of the Concept

Traditionally, the business models were brick and mortar stores with physical presence. Countries used to levy income-taxes on profits earned by businesses in their own nation. The profits earned by the businesses included transactions from domestic sales & exports of both goods and services. Eventually with the technological revolution, now businesses started having a virtual presence and the traditional model of levying taxes based on physical presence started being obsolete.

Goods and services are now rendered by businesses located in one country (say X) to customers in another country (say Y).  For the transaction of import of goods, we have levy of customs duty. However for services there is no such import duty. Further due to only virtual presence of the business in one country (Country Y), it could not tax the profits earned by the business having no physical location in the same country. Such businesses had no offices, employees or any direct co-relation with the nation from where they were so earning profits from.

The impact of this was that country X taxed the profits of the business globally and despite the business earning profits from country Y, country Y did not have any revenue from the said business. These resulted in revenue leakage for country Y. Eventually country Y also started levying taxes on the businesses rendering such services. Now the businesses were in dilemma as they had to pay taxes on the same profits earned by them twice.

Considering the harms and negative impacts of such double taxation, nations started entering into DTAA (Double – Taxation Avoidance Agreements) so as to give businesses credit for the taxes already paid by them, either fully or partially and thereby mitigate the negative sentiments and boost the trade and commerce and help economy grow.

Major Points for practical consideration

When any international taxation is undertaken, the following points should be checked for applicability of various taxation purposes-

  1. TDS deductions (if payer is located in India)
  2. Applicability of DTAA (Double-taxation avoidance agreements)
  3. The transfer-pricing documentations
  4. Advance Rulings and Advance Pricing Agreements
  5. Consideration of provisions of GAAR and SAAR
  6. Provisions and applicability of MLI (Multilateral Instruments)

Wrapping up

If you enter in an international transaction, ensure you do not miss out on any of the wide compliance requirements. The various applicability sections are scattered and need a comprehensive reading. If you miss on any of the same, effects might be manifold. It is always advisable to indulge in professional consultation for every transaction as international laws, applicability and impact are highly subjective and dynamic.

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