Transfer Pricing & DTAA
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Transfer Pricing and DTAA under Income Tax Act
As per the Income Tax Act in India TRANSFER PRICING refers to “prices of transaction between associated enterprises which may take place under conditions differing from those taking place between independent enterprises”.Transfer pricing was introduced in Indian Taxing System in the year 2001 in the Section 92 of Income Tax Act. It is the value with reference to value attached to transfer of goods or services along with technology between connected companies or individual companies controlled by a common entity. The transfer is done at a dictated price but not on the market price in general. The main aim of transfer pricing is to generate inadequate taxable income or extravagant loss on any particular transaction by the parent company. This is all done for solo motive of earning higher profits and reducing revenue loss.
Double Taxation means taxing the same Income or subject-matter twice, for the same purpose, for the same period and in the same tax jurisdiction. When such income taxed in two countries, the aggregate of the tax liability will form substantial part of his total income. As a In 1920, the League of Nations had constituted a group of world-renowned four economists, Prof. Gijsbert, Prof. Luigi Einaudi, Prof. Edwin Seligman and Prof. Josiah Stamp to recommend certain International taxation rules with respect to allocating Taxing rights under Double Taxation Avoidance for avoiding multiple taxes on the same Income. The Group had recommended that dividing the right of taxation between the Country of Residence and the Country of Source while recognizing the taxing rights. The current Rules are no doubt the extension of those recommendations. Double Taxation Avoidance Agreement (DTAA) is an agreement between two countries that the income of non-residents should not be taxed both in their country of origin and in the country in which they live.
Basically, the DTAAs is based on Four Models, namely,
1. OECD Model Tax Convention –
Based on the Residence principle.
2. UN Model Double Taxation Convention –
Based on a combination of Residence and Source. The principle with key emphasis on the latter.
3. US Model Income Tax Convention –
Followed for entering into DTAAs with the US
4. Andean Community Income and Capital Tax Convention –
Adopted by Member State, namely, Bolivia, Chile, Ecuador, Columbia, Peru, and Venezuela.
1. To encourage the transfer of technology
2. To prevent tax avoidance, evasion, grant relief , avail tax credits
3. To prevent discrimination between the taxpayer
4. To improve the co-operation between two different taxing authorities
5. To attract foreign investments by providing relief from dual taxation.
6. To promote the exchange of goods and services, movement of capital and person
7. To provide clarity on how certain cross-border transactions will be taxed.
8. To lay down ‘Specific Rules’ for the division of Revenue between two countries.
9. To exempt certain Incomes in both Countries.
10. To further reduction in the applicable tax rates on certain incomes.
Generally, these agreements will continue indefinitely until officially terminated by either Party of the Agreement. The Rates and Rules of DTAA will vary from country to country. For instance, TDS rates on interests earned will be charged either at 10 percent or 15 percent.
Subject to subsist of DTAA Arraignments, a non-resident assessee must furnish a ‘Tax Residency Certificate (TRC) or Form 10F obtained from the tax authorities of the other country where he resides. As said earlier, the income will be entirely exempted or it may be taxed at a lower rate. If it is taxable under DTAA arrangements, the non-resident assessee has to pay the tax in India and then claim the refund of such taxes paid against the tax liability in his home country.
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