Question

: Are tax Treaties necessary? Refer to the ‘Australian – UK Tax Treaty’. Write about 3000 words.

Answer 1

Tax treaties are bilateral agreements which are made by two countries so that issues can be resolved which involve double taxation.

Treaties under Income tax generally determine the amount of tax that a country can apply to a taxpayer's income, capital, estate, or wealth.

Here Double Taxation means that a same income getting taxed twice in the hands of same assesse.

It could be Bilateral or Unilateral. In Bilateral section 90 & section 90 A of the Income Tax Act applies, Section 90 states that Central Government of one country can enter into an agreement with the government of Foreign Country for the various purposes which are:

1. Relief from doubly taxed income which is paid in the Resident country as well as the Foreign Country.

2. Prevention from tax evasion.

Section 90 A states that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favorable charge or levy of tax in respect of such foreign company.

Under Bilateral Double taxation Section 91 applies which provides for a rebate from Tax.

Calculation of Rebate under section 91:

Step 1 - Calculate tax on total income inclusive of the foreign income on which relief is available.

Step 2 - Add Surcharge if applicable + Higher education cess.

Step 3– Calculate the average rate of tax by dividing the tax computed under Step 2 with the total income (inclusive of such foreign income).

Step 4-Calculate the average rate of tax of the foreign country by dividing income tax actually paid in the said country after deducting all relief due.

Step 5– Claim the relief from the tax payable in India at the rate calculated at Step 3 or Step 4, whichever is less.

Basically, Tax Treaties helps to resolve the issues of double taxation.

In case there is no tax Treaty between two countries then the assesse must have to pay tax on the income in the resident country as well as foreign Country.

Australia-UK Tax Treaty basic pointers :

1. Australia has a tax treaty with UK which is entered into force 17 December 2003.

2. This treaty shall apply to persons who are residents of one or both of the Contracting States.

3. The existing taxes in the case of the United Kingdom to which this treaty shall apply are: (i) the income tax; (ii) the corporation tax; and (iii) the capital gains tax

4. The existing taxes in the case of the Australia to which this treaty shall apply are the income tax, the resource rent tax in respect of offshore projects relating to exploration for or exploitation of petroleum resources, and the fringe benefits tax, imposed under the federal law of Australia.

5. There are 30 Articles under the Treaty between Australia & Uk which cavers various other things such as Interest, royalties, Mutual Agreement Procedures, etc...

By referring to the Australia-Uk Tax treaty it can be concluded that it came into force to resolve the issues for taxing the various incomes i.e. the treaty between the Government of Australia and the Government of the United Kingdom came into force for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, and an associated exchange of information.