As per International tax rules for Non-Resident Taxation, specific income of Non-residents have been excluded from the business Income so as to give taxing rights to the source Countries in respect of excluded incomes. Business profits of the Non-residents is taxable in the source state only when such Non-residents are having fixed place of business in the source state and income earned is attributable to that fixed place of business. While the specific income like, interest, dividend, Royalty and fee for technical services (FTS) may be taxable in the source state based on the bilateral negotiations between two states based on their economic needs. The tax rate is also negotiated based on the gross income to simplify the process of taxation on such specific Incomes.
There is always a tug of war between the person in the source Country and the person in the Resident Country to determine the true Characterization of income in the hands of Non-resident due to different tax effect amongst the varied nature of Income. We in the blog discuss few tips how to optimize tax in international Transactions.
(A) Domestic Tax provisions on the nature of Transactions proposed to be entered into and the probable tax effect thereon need to Analysis;
(B) Existence of tax treaty between the two Countries should be the next step, of the persons who are proposed to enter into Transactions, if yes, need to deep drive into treaty provisions to find out suitable Article of the treaty which may applicable to the proposed Transaction.
(C) Now the key matter is the drafting of Agreements between two parties. Obviously, the main consideration must be the actual services which are subject matter of agreement. But by changing few words and few phrases the tax effect may change completely or very specifically, the desired tax effect may be achieved by utilizing the variations between domestic tax laws and treaty provisions. This can be achieved in the following reasons:
Even after implications of G-20/BEPS Inclusive Framework in International tax rules for Non-Resident Taxation, there are wide variations amongst the tax treaties and domestic laws of the various Countries which provides wide opportunities for tax payers to align their service level agreements (SLAs) for optimization of tax at Transaction level.
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