[Opinion] Elimination of Double Taxation Challenges and India’s Role

D.C. Agrawal – [2025] 178 taxmann.com 155 (Article)

1. Introduction

In today’s interconnected global economy, individuals and businesses routinely engage in cross-border trade, investment, and employment. This increasing integration of markets has brought enormous economic opportunities, but it has also created complex tax challenges. One of the most significant is double taxation, where the same income or capital is taxed in more than one jurisdiction.

Double taxation is not merely a technical matter. It has profound economic, political, and social implications:

(i) It raises the cost of cross-border transactions,
(ii) Reduces after-tax returns on investment,
(iii) Discourages global capital flows, and
(iv) Strains international relations when countries compete for tax revenues.

Historically, the problem became acute in the early 20th century, prompting efforts by the League of Nations to develop a coordinated system of international taxation. These efforts eventually led to the emergence of two major frameworks for resolving tax disputes:

(i) The OECD Model Tax Convention (OECD MC), representing developed, capital-exporting countries, and
(ii) The UN Model Tax Convention (UN MC), which prioritizes the taxing rights of developing, capital-importing countries like India.

Central to both models is Article 23, which provides mechanisms to ensure that while countries retain their sovereign right to tax, the same income is not taxed twice. These mechanisms are now embedded in the network of over 3,000 Double Taxation Avoidance Agreements (DTAAs) worldwide, including more than 90 signed by India.

In recent years, globalization and the digital economy have introduced new challenges. The focus has shifted from simply preventing double taxation to also addressing double non-taxation, where aggressive tax planning enables income to escape taxation entirely. The OECD/G20 Base Erosion and Profit Shifting (BEPS)Project, the Multilateral Instrument (MLI), and global minimum tax rules represent landmark efforts to modernize the global tax framework.

This article examines the causes of double taxation, its impact, and the mechanisms developed to eliminate it, with particular emphasis on India’s approach and the emerging challenges of the 21st century.

2. Understanding Double Taxation

Double taxation occurs when two or more countries tax the same income or capital for the same taxpayer during the same period. It primarily takes two forms:

2.1 Juridical Double Taxation

The same taxpayer is taxed twice on the same income by two different countries.

Example: An Indian resident earns consultancy fees from the U.S. The U.S. taxes the fees at source, while India taxes the same income because its residents are taxed on global income. As a result, the taxpayer pays tax twice unless relief is provided through a treaty or domestic provision.
Thus, the primary focus of DTAAs and Article 23, which explicitly aims to prevent juridical double taxation.

2.2 Economic Double Taxation

Two different taxpayers are taxed on the same income.

Example: A foreign subsidiary pays corporate tax on profits, and when those profits are distributed as dividends, the parent company is taxed again, often in another jurisdiction.

In cross-border contexts, this can involve multiple countries, such as an Indian parent company receiving dividends from its U.S. subsidiary, leading to taxation in both jurisdictions.

While treaties mainly target juridical double taxation, some also include provisions to mitigate economic double taxation, particularly in the context of cross-border group structures and transfer pricing adjustments.

2.3 Double Non-Taxation

An unintended consequence of poorly designed treaties or mismatched domestic rules is double non-taxation, where income is not taxed by either jurisdiction.

Example: Hybrid instruments may be treated as debt in one country (interest deductible) and equity in another (dividends exempt), resulting in neither country taxing the income.

This issue has become more prominent with the rise of digital businesses and aggressive tax planning strategies, prompting reforms under the OECD BEPS Project.

3. Causes of Double Taxation

Double taxation arises due to overlapping tax claims and differing domestic laws:

(i) Source vs. Residence Conflict: The source country taxes income generated within its borders, while the residence country taxes worldwide income.
Example: An Indian engineer working temporarily in Singapore may face taxation in both countries.
(ii) Dual Residency: A company may be incorporated in one country but managed and controlled in another, resulting in dual residence and competing worldwide tax claims.
(iii) Permanent Establishments (PEs): Profits of a foreign company attributable to a PE in another country may be taxed in both jurisdictions unless clearly allocated under treaty rules.
(iv) Withholding Taxes: Dividends, interest, and royalties are often taxed at source through withholding, in addition to being taxed again in the residence country.
(v) Timing Mismatches: Income recognized in different fiscal years by two countries can cause temporary double taxation.
(vi) Conflicting Income Classifications: One country treats software payments as royalties while another classifies them as business income, creating overlapping claims.
(vii) Digital Economy: E-commerce and digital services challenge traditional PE rules, as companies can generate revenue without physical presence.

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