Application and Interpretation of Tax Treaties – CA Final DT Question Bank

Application and Interpretation of Tax Treaties – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Application and Interpretation of Tax Treaties – CA Final DT Question Bank

Question 1.
Explain the meaning of “Treaty” as per Article 2 of Vienna Convention on Law of Treaties, 1969. Why it come into play? [CA Final May 2018 (New Syllabus)] [3 Marks]
Answer:
Article 2 of Vienna Convention on Law of Treaties, 1969 defines “Treaty” as an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation.

Where a person earns any income, the resident country may tax the income on the basis of Residence Rule whereas the host country may also tax the same income on the basis Source Rule. In home country, tax is an obligation, while in the host country, tax is a cost.

Therefore, Treaties comes into play to mitigate hardship caused by subjecting the same income to double taxation. Tax Treaties attempt to eliminate double taxation and try to achieve balance and equity. Treaties aim at sharing of tax revenues by the concerned states on a rational basis. However, the treaties do not always succeed in eliminating Double taxation, but contain.the incidence to a tolerable level.

Application and Interpretation of Tax Treaties – CA Final DT Question Bank

Question 2.
Examine and state the correctness or otherwise of each of the fol¬lowing statements in the context of international tax treaties between the countries and answer in brief with reasons/contents thereof:
(i) “Providing assistance in the collection of the fair and legitimate share of tax by the countries involved” is the sole objective of Tax Treaties entered among Countries.
(ii) A Protocol is an integral part of the Tax Treaty and has the same binding force as the main clauses therein. [CA Final May 2019 (New Syllabus)] [6 Marks]
Answer:
(i) Incorrect: The Important considerations while entering into the tax treaty are following:

  • Ensuring non-discrimination between residents and non-residents.
  • Resolution of disputes arising on account of different interpretation of tax treaty by the treaty partner.
  • Providing assistance in the collection of the fair and legitimate share of tax.

Therefore, providing assistance in the collection of the fair and legitimate share of tax is not the sole objective of Tax Treaties entered among Countries.

(ii) Correct: Protocol is an integral part of the Tax Treaty and has the same binding force as the main clauses therein. It is like a supplement to the treaty. In many treaties, in order to put certain matter beyond doubt, there is a protocol annexed at the end of the treaty, which clarify border line issues.

Application and Interpretation of Tax Treaties – CA Final DT Question Bank

Question 3.
(i) Explain briefly Jurisdictional double taxation and Economic double taxation. How does the tax law provide for remedial measures?
(ii) Do you agree that the tax treaties are to be interpreted liberally? If so, why? [CA Final Nov 2019 (New Syllabus)] [6 Marks]
Answer:
(i) In a Jurisdictional double taxation, source rules overlap and therefore, double taxation arises in which the tax is imposed by two or more countries as per their domestic laws in respect of the same transaction.

As a remedial measure, a company can invoke the provisions of DTAA with the source country or in absence of such an agreement, an Indian company can invoke the provision of Section 91, providing Unilateral Relief in event of double taxation.

While in an Economic double taxation, the same transaction, item of income or capital is taxed in two or more states but in hands of different person (because of lack of subject identity).

Application and Interpretation of Tax Treaties – CA Final DT Question Bank

(ii) As per the principal of customary International law in interpretation of tax treaties, there should be a liberal construction of tax treaties so as to carry out the apparent intention of the parties. On the other hand, the words and terms of treaties should be interpreted keeping its objective or ordinary meaning in mind.

The terms of treaties should be interpreted contextually and in case of any absurdity or inconsistency with the intentions of parties, it should not be adopted.

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