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Double Taxation Avoidance Agreements (DTAA): Types, Benefits, and Claim Procedures

Double Taxation Avoidance Agreements (DTAA) Types, Benefits, and Claim Procedures

Double Taxation Avoidance Agreements (DTAA): Types, Benefits, and Claim Procedures

In our interconnected world, it’s common for individuals to reside in one country while their Income is sourced from another. Under the Income Tax Act of 1961 guidelines, earnings are subject to tax obligations. This scenario often leads to Income being taxed in both the country of origin and residence, resulting in double taxation. The Double Taxation Avoidance Agreement (DTAA) was introduced in 1927 by the Fiscal Committee of the League of Nations to address this issue. This agreement aims to prevent the unfairness of taxing the same Income twice. This article explores the nuances of DTAA, including its various types, benefits, and the procedures for claiming these benefits, shedding light on how DTAA eases tax burdens for individuals and businesses earning across international borders.”

What is a Double Taxation Avoidance Agreement?

Double Tax Avoidance Agreement (DTAA), also known as the Double Tax Avoidance Treaty is an international treaty between two or more countries designed to prevent the same Income from being taxed twice. India, for instance, has such agreements with 85 countries, benefiting individuals who reside in one country but earn Income in another. The treaty includes approaches like bilateral treaties, exemption methods, and tax credits to address double taxation.

This agreement mitigates the tax burden and fosters economic cooperation by encouraging cross-border trade, capital investments, and other economic exchanges. Under DTAA, participating countries agree on specific tax rates for Income earned in one nation by residents of another. The scope of DTAA can encompass various forms of Income depending on the agreement details, which might include:

  • Capital gains,
  • Income from property,
  • Salaries,
  • Earnings from professional services,
  • Interest from fixed deposit accounts,
  • Savings, and other categories.

Objectives and Scope of Double Taxation Avoidance Agreements

The Double Taxation Avoidance Agreement (DTAA) plays a vital role in the international business and taxation landscape, with its primary objectives being:

  • Avoidance of Double Taxation: This is the cornerstone of any DTAA. It ensures that Income earned in one country by a resident of another is taxed in just one of the two countries, thereby preventing the same Income from being taxed twice. This is particularly important for multinational corporations and individuals who operate across borders.
  • Prevention of Tax Evasion: DTAA agreements often include provisions that help prevent tax evasion, ensuring taxpayers cannot exploit loopholes in international tax rules to avoid paying taxes.
  • Information Exchange: These agreements often facilitate the exchange of information between the countries’ tax authorities. This exchange is crucial for enforcing tax laws and preventing illegal activities like tax evasion and money laundering.
  • Specific vs. Comprehensive Agreements: DTAAs can be comprehensive, covering all types of Income and capital or limited to specific sectors or types of Income. Comprehensive agreements provide a broad framework covering various income sources, while sector-specific agreements focus on particular areas like Income from aviation, shipping, etc.

Benefits of  Double Taxation Avoidance Agreement (DTAA)

The Double Taxation Avoidance Agreement (DTAA) offers several advantages for Indian residents, particularly in managing international Income and investments. Some of these benefits include:

  • Tax Exemption: DTAA can provide exemptions from tax in certain situations, particularly beneficial for those in business and trade. For example, capital gains may be exempt under DTAA, but it’s important to understand the specific terms and conditions that apply for claiming such exemptions.
  • Tax Credit: This benefit allows individuals to claim a credit for taxes paid in the country where the Income was generated. It effectively prevents paying tax on the same Income twice, facilitating smoother business operations and revenue transfer internationally.
  • Legal Certainty: DTAA provides clear guidelines on taxing international Income, which enhances legal certainty. This certainty is particularly encouraging for developing countries looking to attract foreign investments.
  • Reduced TDS Rates: The agreement also reduces TDS (Tax Deducted at Source) rates on dividends received in India. This can lead to significant savings, especially for those with substantial dividend income.
  • Tax Refund Opportunities: In certain cases, if a company from one country pays tax on Income earned in another country, the country of origin may offer a refund or a part of the tax paid. Under the framework of DTAA, this rebate can provide financial relief to businesses operating across borders.

Types of Double Taxation Avoidance Agreements (DTAAs)

Double Taxation Avoidance Agreements (DTAAs) come in different forms, each tailored to the specific needs and relationships between the countries involved. The main types of DTAAs include:

Bilateral Treaties

These agreements between two countries are the most common form of DTAA. For instance, the DTAA between India and the United States is a bilateral treaty involving only these two nations. These treaties are tailored to the two countries’ specific economic and taxation contexts.

Multilateral Treaties

These agreements involve multiple countries and are less common than bilateral treaties. Multilateral treaties are usually part of broader regional or international cooperation, such as the APAC (Asia-Pacific) or SAARC (South Asian Association for Regional Cooperation) conventions. These treaties standardize tax rules across several countries, simplifying international trade and investment for countries within the group.

Limited Agreements

Limited DTAAs are narrower in scope, applying only to specific types of Income. For example, a limited DTAA might only cover Income earned from operating ships or aircraft in international traffic. These agreements are typically between countries with significant commercial exchanges in specific sectors but do not require a comprehensive DTAA covering all forms of Income.

Each type of DTAA serves a unique purpose in international tax law, helping to reduce or eliminate the issue of double taxation and promoting cross-border economic activities.

DTAA Rates

DTAA rates vary between countries and depend on the agreements they have with each other. Here are some key points to understand:

  • Different Rates for Different Countries: The tax rate under DTAA is not the same for all countries. It depends on the agreement between each pair of countries.
  • No Set Expiry Date: These agreements don’t have a specific end date. They continue until any of the countries involved decides to end it.
  • Changes are Possible: The rules and tax rates under DTAA can change if both countries agree to make amendments.
  • TDS Rates for Interest: The tax deducted at source (TDS) for interest income usually ranges between 10% and 15%, but this can vary based on the specific agreement.
  • Tax on Dividend Income: For foreign firms or non-residents receiving dividend income from India, the tax rate is decided based on the relevant DTAA.

India has entered Double Taxation Avoidance Agreements (DTAAs) with approximately 85 countries. Click here to get the DTAA rates applicable for Various Countries.

Documents Required and Steps for Availing DTAA Tax Benefits

To claim benefits under a Double Taxation Avoidance Agreement (DTAA), it’s essential to begin by confirming the DTAA terms between your country of residence and the nation where your business is located. For Non-Resident Indians (NRIs) aiming to claim tax advantages in India against taxes paid abroad, the following steps and documents are required for submission to Indian tax authorities:

Gather Required Documents:

  • Tax Residency Certificate (TRC): Essential for proving your tax status in a foreign country.
  • Indemnity or Self-Declaration Form: To declare relevant tax details.
  • Self-Attested Copy of PAN Card: For your Permanent Account Number verification.
  • Self-Attested Visa: As proof of your current residency status.
  • Person of Indian Origin (PIO) Proof Copy: If applicable, confirm your Indian origin.
  • Self-Attested Passport Copy: For identity and nationality verification.
  • Submit the TRC to the Tax Deductor: This is crucial for claiming tax benefits under the DTAA.

Procedure for Obtaining TRC:

  • Apply for TRC: You must apply for the Tax Residency Certificate using Form 10FA as per Sections 90 and 90A of the Indian Income Tax Act.
  • Verification and Processing: After submitting Form 10FA, the application will undergo verification and processing.
  • Issuance of TRC: The Tax Residency Certificate will then be issued under Form 10FB upon successful verification.

This procedure ensures that NRIs can efficiently claim the tax benefits available under the DTAA, provided they adhere to the required documentation and application process.

Click here to know more about How to Claim Double Taxation Relief in Absence of DTAA?