Foreign tax credit – (Part 5)

Credit method (continued)

Tax sparing credit method

Under this, taxpayer will get credit of the amount of tax which would have been paid in the source country had there been no exemption from tax under the domestic laws of the source country.

That means here that benefit is provided by the residence state even though actual taxes has not been paid in the source state.

Types of tax credit –

  • Tax sparing granted with respect to general tax incentives
  • Tax sparing granted with respect to specified sections/ enactments
  • Deemed tax credit

Example of tax sparing clause in India-Canada DTAA

Relevant extract of the India-Canada DTAA

In the case of Canada, double taxation shall be avoided as follows :

a. Subject to the existing provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada and to any subsequent modification of those provisions – which shall not affect the general principle hereof – and unless a greater deduction or relief is provided under the laws of Canada, tax payable in India on profits, income or gains arising in India shall be deducted from any Canadian tax payable in respect of such profits, income or gains.

Some of the other tax treaties that have tax sparing clause are India-China DTAA, India-Japan DTAA etc.

Underlying tax credit method

Under this method, credit on account of foreign taxes paid is given, in Country of residence for the tax paid on the underlying profits out of which the dividend is paid by a company in the source Country.

DTAAs generally prescribe minimum shareholding required to be eligible for claiming credit under UTC method.

However, under India-Singapore DTAA, India provides UTC to a company resident in India deriving dividend from Singapore Company for the taxes paid by Singapore Company in respect of the profits out of which such dividend is paid. Article 25 of the said DTAA reads as under:

“2. Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Singapore, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Singapore tax paid, whether directly or by deduction. Where the income is a dividend paid by a company which is a resident of Singapore to a company which is a resident of India and which owns directly or indirectly not less than 25 per cent of the share capital of the company paying the dividend, the deduction shall take into account the Singapore tax paid in respect of the profits out of which the dividend is paid. Such deduction in either case shall not, however, exceed that part of the tax (as computed before the deduction is given) which is attributable to the income which may be taxed in Singapore.”

Some of the other DTAAs wherein underlying tax credit clause are available India-UK DTAA, India-Mauritius DTAA, India-Japan DTAA etc.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s