In today’s globalised world, many of us and the businesses we invest in have financial ties with multiple countries. This leads to more than one country’s taxation for the same income you earn. This is where the Double Taxation Avoidance Agreement (DTAA) comes into play.
What is the Double Taxation Avoidance Agreement?
In short, it prevents double taxation on the same income.
The Double Taxation Avoidance Agreement (DTAA) is a treaty signed between two or more countries, which helps you, as a taxpayer, avoid paying double taxes on the same income in multiple countries.
Let’s take an example, if you are an Indian resident earning income in the United States of America (USA), you might be liable to pay taxes in both countries. However, with a DTAA in place between India and the USA, you can avoid being taxed twice on the same income.
What are the Key Objectives of a Double Taxation Avoidance Agreement?
Now that you know what such agreements are, let’s understand the key objectives of a Double Taxation Avoidance Agreement:
1. Avoidance of Double Taxation:
This agreement makes sure that income is not taxed twice in both, the resident country (where you belong from i.e., the country of permanent residence) and the source country (where you earn your income).
2. Prevention of Tax Evasion:
DTAAs often include provisions to prevent tax evasion. Such agreements maintain transparency between countries and the income of their migrant population.
3. Cross-Border Trade:
By reducing the tax burden, this agreement promotes international businesses to trade and invest more.
4. Information Exchange:
Such treaties help in the exchange of information related to tax between countries to prevent tax evasion and fraudulent activities.
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How Does The Double Taxation Avoidance Agreement Work?
DTAAs can work in different ways depending on the agreement between the countries involved. The common methods include the following:
1. Tax Credit Method:
Under this method, the resident country allows the taxpayer to deduct the tax paid in the source country from the tax payable in the resident country. Take, for example, you are an NRI who is staying in the United States. Tax credit method allows you to deduct the tax paid in the USA instead of India where the tax is also payable. Note the deduction in tax liability only pertains to the income earned in the USA.
2. Exemption Method:
The resident country exempts the income earned in the source country from taxation. Let’s take the same example, where you are an NRI and are staying in the USA. In the exemption method of avoiding double taxation is when the Indian government exempts the income you earned in the USA. This has the same effect as the tax credit method but is its exact opposite.
3. Reduced Tax Rates:
The DTAA specifies reduced tax rates on certain types of income like interest, dividends, royalties, etc. Another way of reducing the tax burden of NRIs, Persons of Indian Origins (PIOs) and Overseas Indians is reduced tax rates fixed by different countries that have agreed upon their specific treaty.
Countries With Which India Has DTAA
India has signed DTAAs with ~100 countries, including the United States, the United Kingdom, Canada, Australia and many other countries. These agreements cover various types of income, such as salary income, business profits, royalties, dividends and capital gains.
Benefits of DTAA for Non-Residents
Now that you know which countries have an agreement with India in regard to double taxation, here are the benefits of DTAA to Non-Resident Indians (NRIs):
1. Lower Withholding Tax:
DTAAs often provide for lower withholding tax rates on income such as interest, dividends, and royalties.
2. Tax Exemptions:
There are certain types of income that might be exempt from taxation in one of the countries under a DTAA. In order to claim such exemptions, you have to fill up the 10F form of the Income Tax Act, 1961.
3. Tax Credits:
You can claim credits for the taxes you paid in the country where you earned the income in. This reduces your tax liability.
4. Avoidance of Double Taxation:
Most importantly, the same income is not taxed twice. Therefore, you can avoid excessive taxation.
Steps to Claim DTAA Benefits
Now, let’s understand the steps that you must follow to claim the benefits of DTAA:
1. Know your Eligibility:
Check whether the DTAA between India and the source country covers your income type.
2. Get a Tax Residency Certificate:
The Tax Residency Certificate (TRC) is essential to prove your residency in a country and claim DTAA benefits.
3. File Form 10F:
This form must be submitted along with the TRC to claim DTAA benefits in India.
4. Claim the Benefits:
After following all the steps correctly, you can now use your choice of method (exemption, tax credit, or reduced rates) as specified in the DTAA to claim tax relief.
Wrapping Up
The DTAAs with different companies help avoid double taxation for residents of one or both nations. With today’s global aspect in mind, people are bound to earn and spend in multiple countries at the same time.
Therefore, the Double Taxation Avoidance Agreement specifies rules for taxing different types of income, such as , salary income, business profits, dividends, interest, royalties, and provides mechanisms for tax credits or exemptions. The treaty also includes provisions to address issues like permanent establishments, residency and builds mutual cooperation between tax authorities.
FAQs
What is DTAA?
DTAA stands for Double Taxation Avoidance Agreement, a treaty between two countries to prevent the same income from being taxed twice.
Who benefits from DTAA?
Both individuals and companies earning income in a foreign country can benefit from DTAA.
How can I claim DTAA benefits in India?
To claim DTAA benefits, you need to obtain a Tax Residency Certificate (TRC) from your resident country and submit Form 10F to the Indian tax authorities.
What is a Tax Residency Certificate (TRC)?
A TRC is a document issued by the tax authorities of your resident country, proving your tax residency status.
Can I avoid paying tax in India if there is a DTAA?
DTAA allows you to either get a credit for the taxes paid in the source country or to be taxed at reduced rates, but it does not necessarily exempt you from paying taxes entirely.
How do I know if my income qualifies for DTAA benefits?
Check the DTAA (specific agreement) between India and the country where you earned the income to see if your income type is covered.
What documents are needed to claim DTAA benefits?
You will need a Tax Residency Certificate (TRC), Form 10F and proof of income and taxes paid.
What happens if the country, where I work in, does not have a DTAA with India?
You may not be able to claim DTAA benefits, but you might still be eligible for unilateral relief under Indian tax laws.
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