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Double Taxation Avoidance Agreement
Introduction
The Double Tax Avoidance Agreement (DTAA) is fundamentally a bilateral agreement entered into by two countries. The primary motive is to encourage and foster economic trade and investment between two countries by avoidance of double taxation.It has adverse consequences on the trade and services and movement of capital and people. The taxation of the same income by two or more countries would constitute a restrictive weight on the innocent taxpayer. The domestic laws of most of the countries lessen the complexity by affording unilateral remedy in respect of such double-taxed income. However, as this is not a satisfactory and pleasing solution, given the divergence in the rules for determining the sources of income in different countries, the tax treaties try to remove tax obstacles that hinder trade movement and services and movement of capital and persons between the countries concerned.
The need for an agreement for Double Tax Avoidance arises because of different rules in two distinct countries about the chargeability of income on the receipt and accrual basis or the residential status. As there is no precise definition of the income and taxability thereof, which is approved internationally, a salary may become liable to tax in two countries. It occurs when an individual is bound to pay two or more taxes for the same income, asset, or financial transaction in the different countries of the world.
The double taxation occurs mainly due to the overlapping tax laws and the rules and regulations of countries where an individual operates his business. The income is taxable only in one country. The income is exempt in both countries. The income is taxable in both of the countries, but the credit for the tax paid in one country is given against the tax payable in other country.
Reliefs against Double Taxation
In India, Section 90 and 91 of the Income Tax Act, grants relief against double taxation is granted in two ways detailed as under:-
Unilateral Relief
Under Section 91 of the said Act, an individual can be relieved from double taxation by Indian government irrespective of the whether there is a DTAA between India and the other country concerned. The unilateral relief to a taxpayer may be provided if:
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The person or company was a resident of India in the previous financial year.
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In India and in some another country with which there is no tax treaty, the income should have be taxable.
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The tax has been paid by the person or company under the statutory laws of the foreign country in question.
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Bilateral Relief
Under Section 90, the Indian government protects against double taxation by entering into a DTAA with another country, based on mutually acceptable terms.
Types of DTAA
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Comprehensive DTAA:
Comprehensive DTAAs are those which cover all almost the types of incomes covered by any model convention. Many a time a treaty includes wealth tax, gift tax, surtax etc. too. DTAA Comprehensive Agreements concerning taxes on income with the following countries-
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Romania
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Russia
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Saudi Arabia
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Singapore
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Slovenia
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South Africa
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Spain
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Sri Lanka
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Sudan
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Sweden
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Swiss Confederation
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Syria
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Tanzania
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Thailand
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Trinidad and Tobago
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Turkey
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Turkmenistan
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UAE
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UAR (Egypt)
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UGANDA
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UK
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Ukraine
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USA
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Uzbekistan
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Vietnam
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Zambia
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Limited DTAA:
Limited DTAAs are those who are limited to the certain types of incomes only.
The DTAA Limited agreements– For income of airlines/merchant shipping with the following countries:
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Afghanistan
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Bulgaria
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Czechoslovakia
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Ethiopia
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Iran
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Kuwait
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Lebanon
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Oman
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Pakistan
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People’s Democratic Republic of Yemen
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Russian Federation
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Saudi Arabia
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Switzerland
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UAE
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Uganda
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Yemen Arab Republic
When an Indian person makes profit or some other type of a taxable gain or receives any income in the another country, he may be in a situation where he will be needed to pay tax on that income in India, as well as in the country in which the income was made. To protect Indian taxpayers from this unfair practice, DTAA assures that India’s trade and services with other countries, & also the movement of capital are not adversely affected acting under the authority of law.
Claiming of Treaty Benefits for international business
The taxability of non-resident is to be examined under the Income-tax Act, 1961 vis-à-vis under the Double Taxation Avoidance Agreement (“DTAA”). He can decide between the two, whichever is more beneficial and advantageous.With the world becoming a local economy, the overseas income is also chargeable to tax in many of the cases in India. Since the income may be taxed at both places, this paves the way for a foreign tax credit as there would be double taxation. The countries have entered into DTAA to prevent such excessive double taxation.
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Director-International Taxation and Litigation, ACA
“Confidence Comes From Keeping The Promises You Made To Yourself.” .
Frequently Asked Questions
Yes, you can claim a relief in respect of income charged to tax both in India and abroad. Relief is granted either as per the provisions of the Double Taxation Avoidance Agreement (DTAA) entered into with that country (if any) by the Indian Government or by allowing relief according to section 91 of the Act in respect of tax paid in the foreign country.
The following are some of the main areas covered in the DTAAs between countries:
* Methodology for avoiding double taxation of income.
* Rate of withholding tax, the procedure for a tax deduction and providing tax credits.
* Process for recovery of tax under the respective laws of the countries to the agreement.
* Method for exchange of information between the countries to control tax evasion.
* Process for investigation of cases of tax evasion or avoidance.
* Methodology for avoiding double taxation of income.
* Rate of withholding tax, the procedure for a tax deduction and providing tax credits.
* Process for recovery of tax under the respective laws of the countries to the agreement.
* Method for exchange of information between the countries to control tax evasion.
* Process for investigation of cases of tax evasion or avoidance.
There are two modes by which the benefit of DTAA can be availed:
Tax credit - Under this method, tax relief can be claimed in the form of a tax credit from the Income Tax chargeable under the Income Tax Act for the Income Tax chargeable under the applicable law in force in the other country, or
Exemption - Under this method, tax relief can be claimed in the form of exemption of income on which both Income Tax under the Income Tax Act of India and Income Tax in the other country are chargeable, from the total income of the assessee.
Tax credit - Under this method, tax relief can be claimed in the form of a tax credit from the Income Tax chargeable under the Income Tax Act for the Income Tax chargeable under the applicable law in force in the other country, or
Exemption - Under this method, tax relief can be claimed in the form of exemption of income on which both Income Tax under the Income Tax Act of India and Income Tax in the other country are chargeable, from the total income of the assessee.
For an assessee to whom a Double Taxation Avoidance Agreement is applicable, i.e., the assessee is a resident of a nation that has DTAA with India, the provisions of the Double Taxation Avoidance Agreement, or the provisions of the Income Tax Act, whichever is more beneficial to him, will prevail in India.
A Tax Residency Certificate is a certificate confirming which country an assessee is a resident of. To claim Income Tax relief under the DTAA, the Tax Residency Certificate, issued by the tax authority of the assessee's resident country, is mandatory to be furnished.
Hence, the assessees must obtain a Tax Residency Certificate from the country of their residence to claim a relief under the Double Taxation Avoidance Agreement in India.
Hence, the assessees must obtain a Tax Residency Certificate from the country of their residence to claim a relief under the Double Taxation Avoidance Agreement in India.
The primary motive behind Double Tax Avoidance Agreements (DTAA) is to encourage and foster economic trade and investment between two countries by avoiding double taxation. It also emphasizes on exchange of information between the two countries.
Unilateral relief against double taxation is a relief provided by a country to its residents, irrespective of whether there is a DTAA or not.
Bilateral relief against double taxation is provided through a Double Taxation Avoidance Agreement (DTAA) between two countries based on mutually acceptable terms.
Double taxation occurs when an individual or company is taxed for the same income or transaction by two or more countries.
A DTAA is needed to avoid double taxation and to provide clarity on tax liabilities for businesses and individuals operating in multiple countries.
Yes, DTAAs benefit individuals as well by providing relief from double taxation on their income earned in foreign countries.
Tax treaties, such as DTAAs, seek to eliminate tax obstacles, harmonize tax rules, and provide relief to taxpayers by preventing or mitigating double taxation.
Unilateral relief is provided independently by the Indian government, while bilateral relief is based on agreements made between India and another country.
Yes, DTAAs are legally binding agreements between countries, and the provisions outlined in these agreements have the force of law in both countries.
DTAA typically covers various types of income, including salaries, dividends, interest, royalties, capital gains, and business profits. The specific coverage may vary between different DTAA agreements.
