International Taxation

1. CONFLICTS OF SOURCE AND RESIDENCE
ANU. K.S
PRINCIPLES OF TAXATION
M.Com (Accounting & Taxation)
Dept. of Commerce
Pondicherry University
anu444ks@gmail.com

2. 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.

3. 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

4. WHAT IS A DOUBLE TAXATION?
• Double taxation occurs when tax is paid
more than once on the same taxable
income or asset.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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

12. 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.

13. 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.

14. 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.

15. SUGGESTIONS
HOW 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

16. 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.

17. SUGGESTIONS
HOW 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.