It is not unusual for a businessman or an individual, who is resident in one country, to make a taxable gain (earnings) in another country. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many countries sign Double Taxation Avoidance Agreements (DTAAs) with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises.
In the remaining cases, the country where the gain accrues, deducts taxation at source (Withholding Tax) and the taxpayer receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has already been paid. To do this, the taxpayer must declare himself (in the foreign country) to be non-resident there. So the second aspect of the agreement is that the two taxation authorities exchange information about such declarations, and may investigate any anomalies that might indicate tax evasion. While individuals or natural persons can have only one residence at a time; corporate persons, owning foreign subsidiaries, can be simultaneously resident in multiple countries. Control of unreasonable tax avoidance by corporations becomes more difficult and requires investigation of transfer pricing set for transfer of goods, intellectual property rights, and services, among its subsidiaries.
Double tax liability is mitigated in a number of ways; either the main taxing jurisdiction may exempt foreign-source income from tax, or the main taxing jurisdiction may exempt foreign-source income from tax if tax has been paid on it in another jurisdiction, or above some benchmark to not include tax haven jurisdictions, or the main taxing jurisdiction may tax the foreign-source income but give a credit for foreign jurisdiction taxes paid.
Developing countries, including Bangladesh, have now signed around 1,500 tax treaties with their wealthier counterparts. These agreements between countries carve up the right to tax business that operate across borders. Tax treaties have played a facilitating role in many well-known tax avoidance schemes. The revenue that developing countries let go in these agreements is in billions. Yet, with a myriad of more than 3,000 treaties worldwide, little public scrutiny of these agreements has been carried out.
Bangladesh has comprehensive DTAAs with 33 countries out of which 29 have entered into force. This means there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Ordinance, 1984, there are two provisions, Section 144 and Section 145, which provide specific relief to taxpayers to save them from double taxation. Section 144 is for taxpayers who have paid the tax to a country with which Bangladesh has signed DTAA while Section 145 provides relief to any person who is resident in Bangladesh in respect of any income which has accrued or arisen to him during that year outside Bangladesh where he has paid tax, by deduction or otherwise.
In any country with which there is no reciprocal arrangement for relief or avoidance of double taxation, the Deputy Commissioner of Taxes may, subject to such rules, may on this behalf deduct from the tax payable by him under this Ordinance a sum equal to the tax calculated on such doubly-taxed income at average rate of tax of Bangladesh or the average rate of tax of the said country, whichever is the lower. Thus, Bangladesh gives relief to both kinds of taxpayers. For foreign institutional investors, who trade on Bangladesh's stock markets, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold.
A recent ActionAid report reveals that Bangladesh tops the list and is losing approximately US$85 million every year from just one rule in its tax treaties that severely restricts its right to tax dividends. With an annual total health expenditure of approximately US$25 per capita, remedying this alone could pay for health services for 3.4 million people.
Bangladesh has to review following three taxing rights that might be at stake in tax treaties:
* Profit tax: Tax treaties set the rules when a foreign corporation that's operating in the country has to pay profit tax. China's tax deals with Mongolia and Laos mean that those countries can only tax the profits of Chinese multinationals making money in these two countries in very restricted circumstances.  Â
* Withholding taxes: Taxing money that flows out of the country can help guarantee that foreign-owned businesses don't shift profits out of the country untaxed and it raises much-needed revenue. Uganda's tax treaty with the Netherlands blocks the former from taxing dividends, even though this income is routinely not taxed in the Netherlands either.
* Capital gains tax: This tax has delivered multi- million dollar tax payments in lower-income countries like Mozambique, but the right to tax capital gains may be undermined in 49 per cent of treaties examined, which lack a clause that protects against a well-known form of tax avoidance.
The writer is former Secretary to GoB and Chairman, NBR.
mazid.muhammad@ gmail.com
Whither double taxation treaties?
Muhammad Abdul Mazid | Published: October 26, 2016 00:00:00 | Updated: October 25, 2016 19:52:17
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