International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries or the international aspects of an individual country's tax laws. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. Many governments tax individuals and/or enterprises on income. Such systems of taxation vary widely, and there are no broad general rules. These variations create the potential for double taxation (where the same income is taxed by different countries) and no taxation (where income is not taxed by any country). 'DOUBLE TAXATION' Double taxation means taxation of same income of a person in more than one country. This results due to countries following different rules for income taxation. There are two main rules of income taxation i.e. (a) Source of income rule and (b) residence rule As per source of income rule, the income may be subject to tax in the country where the source of such income exists (i.e. where the business establishment is situated or where the asset/property is located) whether the income earner is a resident in that country or not. On the other hand, the income earner may be taxed on the basis of his/her residential status in that country. For example, if a person is resident of a country, he may have to pay tax on any income earned outside that country as well. Further, some countries may follow a mixture of the above two rules. Thus problem of double taxation arise if a person is taxed in respect of any income on the basis of source of income rule in one country and on the basis of residence in other country or the basis of mixture of above two rules. In India, the liability under the Income-tax Act arises on the basis of the Residential Status of the assessee during the previous year. In case the assessee is resident in India, he also has to pay tax on the income which accrues or arises outside India, and also received outside India. The position in many other countries being also broadly similar, it frequently happens that a person may be found to be a resident in more than one country or that the same item of his income may be treated as accruing, arising or received in more than one country with the result that the same item becomes liable to tax in more than one country. To prevent this hardship Double Taxation Relief is provided. METHODS OF AVOIDING DOUBLE TAXATION:
Countries throughout the world are following various methods of avoiding double taxation. They are as follows.
(1) Unilateral relief
(2) Bilateral relief
(3) Multilateral relief
(4) Non-tax treaties
Under this system of taxation whether the income is subject to tax abroad or not is immaterial. In Unitary system, relief is given by way of tax credit for the taxes paid abroad. The countries, which follow this method of tax credit, are, U.S, Greece, India, and Japan to name a few. For example, under section 91 of the Income tax Act,
1961,the method is “tax credit method”. A resident in India who has paid income tax in any country with which India does not have a treaty for the relief or avoidance of double taxation is entitled to credit against his Indian Income tax for an amount equal to the Indian coverage rate or the foreign rate whichever is lower applied to the double taxed income. This is done as follows. a. Where the foreign tax is equal to Indian tax, the full amount of foreign tax will be given credit. b. Where the foreign tax exceeds the tax payable in India, the liability to Indian tax will be nil. However, no refund in respect of the excess amount is allowed, and c. Where the foreign tax paid is less than the Indian tax after deducting the foreign tax would be payable by the taxpayer. The principle is that the credit...
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