Double Tax Avoidance Agreement: Double Taxation Relief

Double Tax Avoidance Agreement (DTAA) is an agreement or treaty which is signed between two countries to relieve taxpayers from paying double taxes in both, the source country and the origin country. For instance, if a person from India is working for a company in another country, the income received could be subjected to double taxation. In such a case, to avoid the burden on the taxpayers, DTAA is signed between two or multiple countries. India has signed the DTAA with 80+ countries, which include Australia, France, Canada, UK, USA, etc.

There are many advantages that can be availed under DTAA.

• The main intention of DTAA is to make the country attractive for investments by offering tax benefits while avoiding double taxation.
  E.g., if an infrastructure company from one country invests in another country, where will the company pay taxes? The DTAA agreement between countries ensures that there is no double taxation . The agreement ensures that the company will effectively pay taxes in only one country.
• There is legal certainty in DTAAs as there are specific rules for applying taxes on international income.
• The DTAA also ensures that the benefits are applicable to only genuine residents of two countries by implying anti-abusive provisions.
• Concessional tax rates can be offered in some cases as per the provision of DTAA.

For Example, interest earned on the NRI bank deposit attracts TDS of 30%, but the tax could be deducted at 10-15% depending on the DTAA between the two countries.

• To avail the benefits of DTAA, the taxpayer will have to submit documents to the deductor such as self-declaration, PAN Card copy, Visa, Passport, PIO proof copy (Person of Indian Origin), and Tax Residency Certificate.
• The respective rates and rules of taxes vary from one country to another and will depend on the DTAA signed by the country.
• There are two modes of DTAAs that can be used, which are tax credit and exemption.
• The tax credit can be claimed at the country of residence, whereas exemption can be claimed in any one of the two countries.

As per the provisions of DTAA, it restricts investments done to save tax from taking benefits of the agreement. So, if a company makes an investment in a country and then reinvests in another country with the intention of saving taxes, such an investment does not fall under the purview of the DTAA.Double tax avoidance agreement ensures that the honest taxpayers do not end up paying tax in two countries. It also acts as a tool to promote investment from certain countries by offering tax exemptions or lower tax rates. It is an effective way to promote cross country investments without any ambiguity.

1. Self-declaration cum indemnity format
2. Self-attested PAN card copy
3. PIO (Person of Indian Origin) proof copy (only if applicable)
4. Visa and passport copy
5. Tax residency certificate

1. Tax credit method
   The taxpayer will have to take the aggregate income from the home country and the foreign country to compute the taxes. Next, calculate the taxes as per the home country and claim the difference as a tax credit.
2. Exemption method
   In this method, the taxpayer does not have to take the home country income tax into consideration. Taxes can be paid in the foreign country (or any one of the two countries).

1. The taxpayer will need to submit the following documents to the tax deductor:
2. Fill Form 10F, which can be taken from any Bank or downloaded from the income tax website. Here, the taxpayer will have to fill the mandatory details like nationality, Tax Identification Number, address, period of residential status, etc.
3. DTAA can be claimed in two ways:

1. Exemption Method Taxpayers are exempt from paying tax in the home country in this method. However, the total tax on the aggregated income will have to be paid in the foreign country where the income arises. This encourages taxpayers to make cross-border investments in the home country without worrying about taxation. Countries that only use the exemption method to avoid double taxation are called tax havens since foreign income is taxed at very low to nil rates. Some examples of such countries are: The Cayman Islands, The Bahamas, and Cyprus.
2. Foreign Tax Credit Method As per this method, the taxpayers are supposed to pay the taxes in the country that they are residing in, regardless of where it arises from. The home country then allows a tax credit in that country after the tax has been paid in the country in which the revenue was paid. In this method, the tax paid in one country is balanced and offset against the tax liability that arose in another country.

1. Individual
2. Trust
3. Partnership Firm
4. Company
5. Any other entity

1. Exemption is offered to investors from both countries.
2. Tax Credit is offered against any TDS that was deducted in either of the countries
3. Lower tax rate will apply between the applicable tax rates for royalty, interest or dividend income in both countries

1. Place of permanent residence
2. Close of personal economic ties
3. Habitual habitation

1. How can I claim DTAA benefit in India? A taxpayer can claim DTAA benefits in India by following the procedure.
2. Is DTAA applicable on GST? GST is an indirect tax on the consumption of goods and services whereas DTAA to avoid double taxation of income tax for taxpayers earning income in two different countries. However, in certain cases if the supply of goods is between India and another country, GST may apply and so might the indirect taxes of the other country. This will lead to double taxation. However, whether or not a DTAA is applicable to GST purely depends on the specific details of that DTAA but as of now there is no DTAA that extends to GST.
3. Is PAN mandatory for DTAA? PAN is not mandatory to claim benefit of DTAA. The non-resident Indians who don’t have a PAN can manually file Form 10F before the end of the financial year to avoid tax deductions on payments they receive. This form is filled by NRIs to receive payments from India without submitting proof like PAN card or Tax Residency Certificate.This manual option is available only because NRIs who were trying to fill Form 10F online were being asked to register on the income tax portal which requires a PAN. Therefore, up to 31 March 2023, they will have to fill the form manually to avail the benefit since they do not have a PAN card.However, this option is only available if the NRIs are not required to apply for a PAN as per income tax regulations. This form becomes crucial because without a PAN, higher rates of TDS are applied on payments. Therefore, to avoid paying TDS and to claim the benefit of DTAA, this form has to be filled on time by the non-resident Indians earning income from India.
4. What are the 3 modes of eliminating double taxation? There are 2 modes of eliminating double taxation through the DTAA (Double Taxation Avoidance Agreement).
5. What is double taxation avoidance agreement between India and USA? DTAA ( Double Taxation Avoidance Agreement ) is a tax treaty signed by two countries to ensure that taxpayers of the countries can freely transaction in the other country within having to pay double taxes in both countries.DTAA between India and USA only extends to income tax and does not include GST or other indirect taxes. There are several other treaties signed between the two countries affecting financial regulations. The DTAA between India and USA extends to the following taxpayers:
6. It covers the federal income taxes, social security taxes and exercise taxes paid in USA and the income tax including cess and surcharge paid in India. The benefit offered by the DTAA between India and USA are as follows:
7. To determine the correct form of taxation, the residential status is decided based on tie-breaker rules mentioned in the DTAA. As per these rules, the residential status is determined by:

1. Income from agriculture
2. Income from forestry
3. Income from letting or direct use of the property
4. Income from using the property for independent personal services.

1. Income from immovable property Taxes will be levied in the country in which the immovable property is located.
   Income from immovable property includes:
2. Dividend income When the resident company of one country is paying dividend to a resident of the other country, the income will be taxable in the other country. Between India and USA, a USA-based company can only deduct 15% of the dividend as tax if the Indian shareholder is a company and holds more than 10% stake in the company. In all other cases, 25% of the dividend can be deducted as tax.
3. Interest income Interest income will be taxed in the country of the receiver of the income. However, if income is charged in the country in which the interest originates as well, it will be limited to 10% tax if it is interest paid on a bank loan or by an insurance company, or 15% tax in all other cases.
4. Capital Gains Taxed based on the tax regulations in the country in which the asset was sold.
5. For income received by professors, teachers, or research scholars, upon meeting certain predefined conditions, the taxpayer may be exempt from tax.
6. Both countries allow a tax credit of the amount of tax paid in that country if a resident from their country has paid tax in the other country.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.