ANU. K.S

M.Com (Accounting & Taxation)

Dept. of Commerce

Pondicherry University

anu444ks@gmail.com

CONFLICTS OF SOURCE AND RESIDENCE PRINCIPLES OF TAXATION

WHAT IS INTERNATIONAL TAXATION?

• International taxation refers to tax levied on the cross - border transaction.

• The transaction may take place between two or more persons or entity in two or more countries or tax jurisdiction .

• Such a transaction may involve a person in one country with property and income flows in another.

TYPES OF INTERNATIONAL TAXATION

• Residence based taxation : Residents of the country are taxed on their worldwide (local and foreign) income.

• Source Based Taxation : Only local income (income from a source inside the country) is taxed. Usually non-residents are taxed only on their local income

WHAT IS A DOUBLE TAXATION?

• Double taxation occurs when tax is paid more than once on the same taxable income or asset.

TYPES OF DOUBLE TAXATION:

JURIDICAL: Double taxation is juridical when the same person is taxed twice on the same income by more than one state.

ECONOMIC: Double taxation is economic if more than one person is taxed on the same item.

SOURCE PRINCIPLES OF TAXATION• Source Principle of Taxation is a principle for the

taxation of international income flows.

• According to the principle, if a country consider certain income as taxable income when such income arises within its jurisdiction, Such income is taxed regardless of the residence of the taxpayer.

• i.e. residents and non-residents are taxed on income derived from the country.

RESIDENCE PRINCIPLE OF TAXATION

• Principle according to which residents of a country are subject to tax on their worldwide income and non-residents are only subject to tax on domestic-source income.

• Residents of the country are taxed on their worldwide (local and foreign) income.

CONFLICTS OF RESIDENCE AND SOURCE

Residence/Source Conflicts • Most commonly, double taxation arises through the combined operation of the residence

and source principles.

• Under the residence principle, residents of a country are taxed on their worldwide income and, under the source principle, non- residents are taxed on their domestic source income only.

Example

• suppose a person resident of America with business or investment activities in India, will be liable to tax on the income arising from the activity in India under the source principle and in America under the residence principle.

SOURCE /SOURCE CONFLICT

• Similarly, while it is the international norm that countries can tax non-residents on income sourced within their jurisdiction, there is no internationally agreed set of source rules for this purpose. Instances of source/source conflicts can be found for almost all classes of income.

• When more than one country claim that revenue was sourced from its territory.

EXAMPLES

• Example-1 some countries may regard business profits as sourced within the jurisdiction if the profits are attributable to a permanent establishment in the jurisdiction, while other countries may regard business profits as sourced in the jurisdiction if the place of contract is in the jurisdiction.

• Example-2 royalties – some countries may regard royalties as sourced in the jurisdiction if the underlying property giving rise to the royalty is used in the jurisdiction, while other countries may regard it as sourced in the jurisdiction if the royalty is paid by a resident of the jurisdiction.

RESIDENCE/RESIDENCE CONFLICTS • Two or more countries claim that a particular

taxpayer is a resident of their tax jurisdiction.

• While it is now the international norm for countries to tax residents on worldwide income, there is not universal agreement as to how residence is defined.

• For individuals, two common methods are used to determine residence

CONTD…

• Facts and circumstances approach – having regard to all the facts and circumstances, a judgement is made as to whether a taxpayer has a sufficiently strong personal connection to the jurisdiction as to be regarded a fiscal resident of the jurisdiction.

• Days present approach – an individual is a resident of a jurisdiction if they are physically present in the jurisdiction for a specified number of days (usually 183 days) in the tax year or, alternatively, in any period of 12 months beginning or ending during a tax year.

FOR COMPANIES• There are also two common methods used to

determine residence –

• Place of incorporation – a company is resident of the country in which it is incorporated.

• Central management and control – a company is resident of the country in which its central management and control is located.

CONTD….• Consequently, it is possible that a company

incorporated in one country but with its central management and control in another country will be a resident of both countries.

• It is also possible that a company may have its central management and control divided between two countries and, as a result, be resident of both countries.

SUGGESTIONSHOW TO AVOID RESIDENCE /SOURCE CONFLICT

• By requiring the residence country to give tax relief for the source country tax.

• The DTAA may provide for residence country only taxation of the income. In other words, the DTAA precludes the source country from taxing the income

• The DTAA may provide for source country only taxation of the income. In other words, the DTAA precludes the residence country from taxing the income

SUGGESTIONS

HOW TO AVOID SOURCE/SOURCE CONFLICT

• The taxing rights specified in a DTAA effectively set out a uniform set of source rules that are then applied by both countries overriding any conflicting domestic rules.

SUGGESTIONSHOW TO AVOID RESIDENT/RESIDENT CONFLICT

• The residence article in a DTA will include tiebreaker rules that treat a person who is resident of both contracting states under each state’s domestic law as a resident of one only of the states for the purposes of the DTA.