Skip to content

CA Final · Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties

Lotus Inc., a non-resident company of Country Z, receives Rs 80,00,000 of interest from an Indian borrower. The domestic rate is 20% and the India–Z treaty rate is 15%. Assume surcharge and cess are not applicable to treaty rate computations for this question, and Lotus has a valid tax residency certificate and no PE. Lotus's home country allows credit for Indian tax by the ordinary credit method and taxes the interest at 30% in Z. The foreign tax credit in Z equals the lower of Indian tax paid and Z tax on that income. What is the net tax payable by Lotus in Country Z on this interest, if Lotus claims the treaty rate in India?

Lotus pays Rs 12,00,000 in Country Z. Indian tax at the 15% treaty rate is Rs 12,00,000. Z tax at 30% is Rs 24,00,000. Ordinary credit allows the lower, Rs 12,00,000, so the net Z tax is 24,00,000 minus 12,00,000, which is Rs 12,00,000.

  1. ARs 24,00,000
  2. BRs 12,00,000
  3. CRs 9,00,000Correct
  4. DRs 0

Explanation

Indian tax at treaty rate = 15% of 80,00,000 = 12,00,000. Z tax = 30% of 80,00,000 = 24,00,000. Credit is limited to the lower, 12,00,000. Net Z tax = 24,00,000 - 12,00,000 = 12,00,000. Since this equals 12,00,000, option B is correct and option C would wrongly apply a 20% reduction.

Did you get it right without looking?

One question tells you little. A timed set on Application and Interpretation of Tax Treaties shows your real accuracy, how long you take and where you lose marks.

Practise Application and Interpretation of Tax TreatiesFree diagnostic mock

More Application and Interpretation of Tax Treaties questions