India USA DTAA
DTAA – Double Tax Avoidance Agreement
The Government of India has entered into Double Tax Avoidance Agreements (DTAA) with various countries to prevent any double incidence of taxation for an income, to mitigate the undue imposition of hardship on taxpayers. India and USA have a DTAA that comprehensively addresses and eliminates the incidence of double taxation of income on persons having income in both the countries. Taxpayers should note that only Income Tax is covered under the India USA DTAA. There is no India USA DTAA agreement for GST or other types of indirect taxes. The purpose of this article is to discuss the India USA DTAA to the extent it is applicable to individual taxpayers. The complete India USA DTAA agreement is reproduced below for reference:
India – USA DTAA Applicability
The India USA DTAA would be applicable to any individual or an estate, a trust, a partnership, a company, any other body of persons, or other taxable entity having income in both India and the USA. The DTAA agreement between India and USA encompasses the following taxes levied by both the countries:
- In the United States, the Federal income taxes imposed by the Internal Revenue Code (but excluding the accumulated earnings tax, the personal holding company tax, and social security taxes), and the exercise taxes imposed on insurance premiums paid to foreign insurers and with respect to private foundations. The India USA DTAA also applies to the exercise taxes imposed on insurance premiums paid to foreign insurers to the extent that the risks covered by such premiums are not reinsured with a person not entitled to exemption from such taxes.
- In India, the income-tax including any surcharge and surtax. However, the India USA DTAA does not apply to the income tax on undistributed income of companies, imposed under the Income Tax Act.
For all taxpayers having income from two countries, the concept of residential status plays a major role. According to the India USA DTAA, the resident of a country means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. Hence, if a person is considered as a resident of India for tax purposes, then he/she would also be a resident under the India USA DTAA.
In case the residential status is not determinable as per the above rule, then the residential status of the taxpayer would be determined as follows:
- Taxpayers would be deemed to be a resident of the State in which he/she has a permanent home available. If a permanent home is available in both States, he/she would be deemed to be a resident of the State with which his/her personal and economic relations are closer (centre of vital interests).
- If the State in which the taxpayer has his/her centre of vital interests cannot be determined, or if he/she does not have a permanent home available to him in either State, he/she would be deemed to be a resident of the State in which he/she has a habitual abode.
- If the taxpayer has a habitual abode in both States or in neither of them, he/she would be deemed to be a resident of the State of which he is a national.
- If the taxpayer is a national of both States or of neither of them, the competent authorities of the Contracting States would settle the question by mutual agreement.
Income from Immovable Property
According to the India USA DTAA, “Income derived by a resident of a Contracting State from immovable property (real property), including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State.” Hence, in case of income from immovable property situated in India from the direct use, letting, or use in any other form of immovable property, the income from the immovable property would be taxable in India. The same concept is also applicable to the income earned from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.
According to the India USA DTAA,
- “Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
- However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed :
- 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); and
- 15 per cent of the gross amount of the interest in all other cases.”
Hence, interest income is normally taxable to the taxpayer in the country in which he/she is a resident. However, interest income can also be taxed in the country in which it arises, if the tax does not exceed 15% of the gross amount of interest or if 10% of the gross amount of interest is used by the taxpayer for paying a loan granted by a bank or financial institution.
According to the India USA DTAA:
- “Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
- However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:
- 15 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at least 10 per cent of the voting stock of the company paying the dividends.
- 25 per cent of the gross amount of the dividends in all other cases.
If dividends are paid by an Indian company to a resident of the USA, the dividends would be taxable in the USA. However, the dividends could also be taxed in India and if the owner of the dividends is a resident of the USA, then the tax on dividends charged cannot exceed the above-mentioned amounts.
Measures Similar to DTAAs
A double taxation avoidance agreement helps to foster trust and mutual economic co-operation among member nations. Along with DTAAs, the Government of India (GoI) has also entered into a multilateral agreement in relation to mandatory furnishing of Country-by-Country (CbC) Reports. A CbC is a reporting format for international conglomerates which makes it mandatory for them to give information about financial transactions entered into by the assessee in other countries also. The requirement for CbC was established by the GoI on the basis of mutual agreement. The agreement was signed by the GoI with the Convention on Mutual Administrative Assistance in Tax Matters. The agreement mentions that India will exchange information related to tax-avoidance transactions with other countries. The grant of information is conditional on receipt of similar information from other signatories to the agreement.