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7 Especial Features~
CHAPTER VI
SPECIAL PROVISIONS
ARTICLE 24
NON-DISCRIMINATION
(1) Nationals of a Contracting State shall not be subjected in
the other Contracting State to .any taxation or any requirement connected therewith which
is other or more burdensome than the taxation and connected requirements to which
nationals of that other State in the same circumstances are or may be subjected. This
provision Shall, notwithstanding the provisions of Article I also apply to persons who are
not residents of one or both of the Contracting States.
(2) The term 'nationals' means:
(a)All individuals possessing the nationality of a Contracting State;
(b) All legal persons, partnerships and associations deriving their status as such from
the laws in force in a Contracting State.
(3) Stateless persons who are residents of a Contracting State shall not be subjected in
either Contracting State to any taxation or any requirement connected therewith which is
other or more burdensome than the taxation and connected requirements to which nationals
of the State concerned in the same circumstances are or may be subjected.
(4) The taxation on a permanent establishment which an enterprise of a Contracting State
has in the other Contracting State shall not be less favourably levied in that other State
than the taxation levied on enterprises of that other State carrying on the same
activities. This provision shall not be construed as obliging a Contracting State to grant
to residents of the, other Contracting State any personal allowances, reliefs and
reductions for taxation purposes on account of civil status or family responsibilities
which it grants to its own residents.
(5) Except where the provisions of paragraph (1) of Article 9, paragraph (6) of Article
11, or 'paragraph (6) of Article 12 apply, interest, royalties and other disbursements
paid by an enterprise of a Contracting State to a resident of the other Contracting State
shall, for the purpose of determining the taxable profits of such enterprise, be
deductible under the same conditions as if they had been paid to a resident of the
first-mentioned State. [Similarly, any debts of an enterprise of a Contracting State to a
resident of the other Contracting State shall, for the purpose of determining the taxable
capital of such enterprise, be deductible under the same conditions as if they had been
contracted to a resident of the first-mentioned State.]
(6) Enterprises of a Contracting State, the capital of which is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of the other Contracting
State, shall not be subjected in the first-mentioned State to any taxation or any
requirement connected therewith which is other or more burdensome ttlan the taxation and
connected requirements to which other similar enterprises of the first mentioned State are
or may be subjected.
(7) The provisions of this Article shall, notwithstanding the provisions of Article 2,
apply to taxes of every kind and description.
114. Scope
This Article aims at ensuring to nationals of another Contracting State, residents of
any third State, stateless persons, equality of treatment with the nationals of the
Contracting State in regard to taxation and any requirement connected therewith.
Discrimination is also sought to be prevented in regard to levy of taxation on permanent
establishment related and controlled companies,deductibility of expenses by way of
interest, royalties and other disbursements for determination of taxable profits of an
enterprise. Avoidance of discrimination consists in prevention of imposition by the
State of liability which is more burdensome than the liability on its nationals. in the
matter relating to taxation and connected requirements.
For the Purpose of taxation discrimination on the ground of nationality is not Permitted.
If the circumstances of the national of a Contracting State are the same as those of the
national of the other Contracting State, the latter will not impose liability on that
national which is more burdensome than what its national would have been subjected to. The
liability relates to taxation and connected matters, and for that matter taxes covered are
not only those as mentioned in provisions of Article 2, but also others of every kind or
description The right against discrimination is not confined to nationals alone who
are residents of a Contracting State, but extends to all nationals of each Contracting
State, whether or not they are residents of either State but instead be residents of a
third State.
115. Same circumstances and same activities
The expression 'same circumstances’ means identical circumstances. It does not,
however, mean that the circumstances are exactly the same.
Complete identity between the circumstances of two persons with the mathematical precision
is not possible. Identity of facts, identity of circumstances, identity of claims,
identity of disputes, are impossible to achieve. The circumstances could be said same, if
these are substantially similar both in law and fact,1
i.e., if they correspond each other resembling in many respects barring a general
likeness.
Article 24 uses the expression 'same activities' or 'same circumstances' and not the
similar activities or circumstances. The two words 'same' and 'similar' connote different
concepts. Carrying on 'similar' activities does
not mean carrying on the same activities. Similar circumstances do not likewise mean same
circumstances. Whether two or more lines of activities be regarded as the same activities
or different activities, depend upon the nature of the activities, the nature of their
organisation, management, method of book-keeping and a host of other related circumstances
which stamp them as the same or distinct.
The similarity between the two activities is so close that .there is no feature in any of
them to make it distinct from the other. The activities then can be taken as similar. The
commonness of the features, as reflected by the nature and manner of management,
administration, control, the nature of the activity, etc., is so pronounced that
distinctness about each is completely lost. Though it is not possible to evolve a
satisfactory test of universal application for determining whether the activities or the
circumstances are the same, these would be taken same ifh common man is unable to make
distinction between the two sets of circumstances or activities or if one is replaced by
another, he would find no distinct change. It is not essential for the sameness of the two
activities or circumstances that these must reflect the exact or absolute likeness, the
reason being that it is unattainable. The same circumstances of activities may, therefore,
mean reasonably similar rather than strict]y identical circumstances or activities.
116. Taxation and any requirement connected therewith
Discrimination against taxation or any requirement connected therewith may mean
discrimination in regard to levy of tax itself and the procedure for imposition of
liability. There is a difference between the tax and the imposition of the tax. The former
is the levy itself and the latter method by which the levy is imposed and collected, the
procedure by which the tax. is imposed that is to say the various steps taken to impose it.
As regards levy, the primary guide is the charging section. Identification of the
subject-matter is to be found in the charging section, that is the section which creates
liability to pay tax as distinguished from the mode of assessment and machinery by which
it is assessed. The intrinsic
character is not to be determined by the mode of measurement or the standard of
calculation prescribed for assessing the amount of tax.
The components which enter into concept of tax are well known. The first is the character
of the imposition known by its nature which prescribes the taxable event attracting the
liability, the second is the clear identification of the person on whom the levy is
imposed and who is obliged to pay the tax, the third is the rate at which the tax is
imposed and the fourth is the measure or value to which the rate will be applied for
computing the tax liability. The word 'computing'
has been used in relation to the process of inclusion and exclusion of the taxable income.
Exclusion is provided under various clauses of Second Schedule read with section 14.
The discrimination forbidden relates to all components of the tax, about the character of
the charge, the person upon whom levy is imposed, about payment of taxes and rates for
determination of taxes and the procedure relating thereto such as formalities connected
with taxation. It is interesting to note that paragraph (1) of this Article is couched in
a mandatory language framed in a negative form. Prohibitive or negative words are
indication of intent that the provision is mandatory. Negative
words compel an imperative construction.
The words '.... shall not be subjected .... to any taxation or any requirement connected
therewith which is other or more burdensome .... ' connote that in the matter of
imposition of tax, determination of what income and property to be subjected to tax;
manner and method of procedure or determination and quantification of liability or its
recovery, and all other formalities connected with taxation and assessment, no
discrimination can be made between'national and foreigner if circumstances of both are the
same.
116.1 Other or more ‘burdensome taxation - The
prohibition relates to taxation or any requirement connected therewith which has the
effect of discriminating a foreign national, vis-a-vis the national of the concerned State
by creating a more burdensome obligation or an obligation which is at variance with the
obligation of the States' national, when both are similarly placed. The word 'other' is an
alternative. to the word ‘more’ and not to the word 'burdensome'. If the
liability is burdensome which is other than or more than the liability of the State's own
nationals under similar circumstances, discrimination could be said having occurred. The
word 'burdensome' qualifies the expression 'any taxation or any requirement connected
therewith'. The word 'burdensome' in its turn is qualified by two alternative expressions
'other' or more. Every tax liability or an obligation connected therewith is burdensome,
but if its nature is different from the burden, or it casts more or heavier burden on the
foreign national, than on the national of the State, the case of discrimination exists.
Since the principal object is to prohibit burdensome discrimination by one State against
the nationals of the other, there is nothing to prevent the first-mentioned State from
granting to persons of foreign nationality certain concessions or facilities which are not
available to its own nationals.
Likewise if a Contracting State makes distinction between its national and the foreign
national in granting reliefs to the former from taxation on account of family
responsibilities, or in according special taxation privileges to its own public bodies or
services as such, discrimination within the meaning of Article 24 cannot be said to have
happened. In fact public bodies or services are integral parts of the State and their
circumstances are not comparable to those of public bodies or services of the other State.
Circumstances being not the same, benefit: or privilege given by the State to its own
public bodies or services cannot be discriminatory if such benefit or privilege is not
extended to the public bodies or services of the other State. But such concession if
granted to public sector companies or bodies which have been engaged in carrying out
trading, commercial or gainful activities would amount 'to discrimination, if such a
benefit is not extended to foreign companies or bodies similarly placed.
What is prohibited is a more burdensome or less favourable treatment to a foreigner
wis-a-vis a national. But grant of concessional treatment or less burdensome or more
favourable benefits or some other concessions or facilities to a foreigner or an
enterprise of another Contracting State is not prohibited. If a country chooses to accord
favourable treatment or a benefit vis-a-vis its nationals, such a choice is not a
discrimination within the meaning of Article 24. The State may be influenced by many
considerations when it decides to discriminate foreigners more favourably. These may be,
import of technology or services or capital for its economic development or to comply with
special stipulations in a double taxation agreement.
117. Nationality of a state
Paragraph (2) defines the expression 'nationals' as to mean all individuals possessing
the nationality of a Contracting State, and all legal persons, partnerships and
associations deriving their status as such from the laws in force in a Contracting State.
A legal relationship involving allegiance on the part of an individual to a State is
termed nationality. It is the character or quality arising from membership of some
particular nation or State, which determines the political status and allegiance of a
person. It may be acquired by birth, descent naturalisation, conquest or cession or
territory, or (if a woman) by marriage.
'Nationality' and 'citizenship' are not interchangeable terms. Nationality has reference
to the jural relationship which may arise for consideration under international law. On
the other hand, citizenship has reference to the jural relationship under municipal law.
In other words, nationality determines the civil rights of a person, natural or
artificial, particularly with reference to international law, whereas citizenship is
intimately connected with civic rights under the municipal law.
Nationality refers to the civic rights of a person, natural or artificial. A person is the
object of rights and duties, that is capable of having li'ghts and of being liable to
duties. Persons are of two kinds, natural and artificial. A natural person is a human
being; an artificial person is a collection or succession of natural persons forming a
corporation. 'Individual' denotes a human being. Paragraph (2), therefore, refers both
natural and artificial persons.. It is more specific as to legal persons, partnerships and
associations which derive their status as such from the laws in force in the Contracting
State.
If an artificial person has acquired a status in a State according to its domestic laws,
it is a national of that State as an entity with that status. In defining the nationality
of companies, certain States have regardless to the law which governs the company than to
the origin of the capital with which the company is formed or the nationality of the
individuals or legal persons controlling it.
118. Stateless persons
Persons not possessing nationality of any State under the operation of its laws but
is a resident of either of the Contracting States are entitled to equality of treatment
with the nationals of a Contracting State in regard to the taxation or any other
requirement connected therewith.
The scope of paragraph (1) is thus extended to stateless persons who are residents of
either of the Contracting States.
119. Discrimination between domestic enterprise and permanent
establishment of foreign enterprise not permitted
Paragraph (4) obliges a Contracting State not to exercise discrimination between its own
enterprise and the permanent establishment of a foreign enterprise carrying on the same
activities, in. the matter relating to taxation so that the taxation is not less
favourably levied on the permanent establishment. Thus in respect of business carried on
by a non-resident enterprise through a permanent establishment there is no discrimination
between it and the resident enterprise carrying. on the same activities. However, if the
State grants personal allowance, relief and reductions for taxation purposes to its
residents because of their civil status or family responsibilities, the State is not
obliged to extend those benefits to the residents of the other State. Liabilities under
the Income Tax Ordinance, 1979 are no incident of ordinary civil rights.
Denial of equality in regard to such benefit is justified on the
ground of preventing individuals securing advantages of personal allowances and reliefs
for family responsibilities, both in the State of which they are residents under their
domestic laws and in the other State by virtue of the principle of equality, and thus
being more advantageous than the residents.
The focus for prevention of discrimination has been shifted from nationality to the actual
situs of an enterprise. If once the existence of a permanent establishment is established,
the nationality of the persons of which it is the permanent establishment is of no
relevance for claiming parity with the domestic enterprise which has been carrying on
similar activities, in regard to taxation and matters connected therewith. The condition
precedent for claiming such parity is that both enterprises are engaged in carrying on of
the same activities.
The words 'carrying on the same activities' are referable to the nature of the activities.
If the nature of activities happen to be the same, the income arising to a permanent
establishment from such activities and also from other industrial or commercial activities
should not suffer detriment more than what a domestic enterprise suffers. The principle of
equal treatment though ensures availability of all deductions, rebates, allowances which
are normally allowed in the computation of income of a business enterprise does not always
hold good in respect of exemption, rebates and deductions allowed as incentives for the
development of economically backward areas, or for the economic development of the country
or for encouraging exports. Such benefits could be extended to the permanent
establishments of foreign enterprises, if such establishments agree to fulfil all
conditions which are precedent to their grant.
120. Discrimination as regards deductibility of expenses
Paragraph (5) is designed to prevent discrimination as regards deductibility of amounts
paid as interest, royalties and other disburseinents paid by an enterprise to the
residents of the other Contracting State, for the purpose of determining taxable profits.
There should be no discrimination on the basis 0f the recipient of such disbursements
being a resident or nonresident, unless it could be found that because transactions are
arranged as to avoid payment of taxes and thus transacted under the of the close
relationship between the enterprise and the non-resident recipient, the circumstances
which call for the application of paragraph (1) of Article 9, paragraph (6) of Article 11
or of Article 12.
Paragraph (6) forbids discrimination of an enterprise on the basis that its capital is
owned or controlled wholly or partly, directly or indirectly, by residents of the other
Contracting States. This, therefore, ensures nondiscrimination and not to look upon
persons who own or control the enterprise. Equal and identical treatment for taxpayers
residing in the same State is the object of paragraph (6).
