Double Taxation Avoidance Agreement

Society is a pool of individual people who live in a particular place and come together to fulfil one another basic needs which includes road, bus, school, hospital and many other facilities. In order to fulfil these needs, the society created government body and assigned them with this function of implementing the common facilities and to maintain peace, harmony and security at the same phase. In the process of implement these needs the government body required fund. The fund was generated through the means of collection (either being direct or indirect tax form).

Eventually, the government authorities created a separate department for the purpose of collecting tax from each individual assesse who ever falls within certain criteria of clause being required to pay tax irrespective of being Indian citizen or NRI. The concept of International Taxation prevailed slowly in our country and concluded the practice of deducting enormous tax from NRI person after the initiation of the Double tax Avoidance Agreement.

Introduction

Double taxation avoidance agreement (DTAA) is a tool of effective tax treaty benefiting to both the tax giver and tax taker in various countries. DTAA is a tax treaty signed between India and another country, it is bilateral/multilateral agreement signed by both nations in order to avoid paying the Income tax twice.

DTAA is created to help the NRI from paying the tax for the same income. That is the place where the income is earned as well as the residence or his/her home country. India has this tax treaty with more than 80 countries.

This treaty or agreement’s essentiality commences in a manner to combat the imbalance in tax collection on the global income of the individual. If no such agreement were formed then the person who starts a business in foreign nation will end up paying double the tax for same income in both his host country (foreign) and home country.

Thus, the prime goal is not to pay double taxes on same income and to minimize the opportunity for tax evasion for tax payers in either or both the state wherein the DTAA agreement have been signed bilaterally/multilaterally.

DTAA rate and rules vary accordingly from one country to another depending upon the particulars signed by both the parties in the agreement. Generally, the Tax Deduction Source (TDS) rates on interest that is present in for most countries prevails either 10% to 15% in range only though they originate the range from 7.50% to 15%¹.

Residential Status of Taxpayers

For those taxpayers having income generating in two or more countries, the concept of residential status plays a crucial part. According to the India- USA DTAA agreement, the resident of a country is the person who, under the laws of that land is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion in relation. Hence, for the purpose of tax if a person is considered as a Indian resident then he/she will also be a resident under the India-USA DTAA agreement.

If the residential status is not determined as per the above criteria, then the residential status of the taxpayer would be determined as follows:

Taxpayers would be deemed to be a resident of the State if he/she has a permanent home available in that country. If a permanent house is available in both the countries then he/she will be deemed to be a resident of only that State in with which he/she has personal and economic relations.

If the taxpayer’s centre of interests cannot be determined, or if he/she happens to have no permanent home available to him in neither of State, then he/she would be deemed to be a resident in which he/she has a habitual abode.

If the taxpayer has a habitual abode in both States or in neither of them, then they would be determined by nationality.

And if the taxpayer has nationality of both country or has no nationality in either of them, the competent authorities of the Contracting States would settle the issue by mutual agreement.

Research Methodology: Similar Measures Which Commence from DTAAs

As double taxation avoidance agreement is build to conquer trust and incur mutual economic co-operation among member nations and with the ideology of maintaining good friendly relations. The Government of India has also entered into a multilateral agreement in a manner to foster mandatory furnishing of country-by-country reports alongside with DTAA.

A country-by-country is a reporting format through which the international conglomerates makes a mandatory obligation for them to give information about pecuniary transactions entered into by the assesse in another countries. The requirements for country-by-country were established by the Government of India on the basis of mutual agreement.

The agreement was signed by the Government of India with the Convention on Mutual Administrative Assistance in Tax Matters. The agreement states that India will exchange information related to tax-avoidance transactions with other countries. The grant of information is created on basis of condition to facilitate similar information on receipt from other signatories to the agreement.

Relief Incorporated towards Double Taxation

USA: it shall allow its residents’ credit against the US Tax with respect to : Income Tax paid to India by or on behalf of such resident Incase the US Company owns at least 10% of the voting stock of a company being a resident of India and the US Company receives dividends, then the income tax received by the Indian Government from the Indian company with respect to the profits from which dividends are paid shall be allowed as a credit.

In India: An Indian Resident derives income and the same is United States, then India shall allow the amount equal to the income tax paid in the United States, as a deduction. However, such deduction shall not exceed the Indian tax paid on the foreign income earned.²

Currently, there are 85 countries, with whom India has made a DTAA agreement to avoid payment of double tax by Non-Resident of India (NRI).

Documents required accessing the benefits under this Agreement

In order to avail the benefits from the provisions laid under DTAA, individual being Non-Resident of India will have to produce the following documents in a timely fashion to the concerned officials.

• Self-declaration cum indemnity format
• Self-attested PAN card copy
• Self-attested visa and passport copy
• PIO proof copy (if applicable)
• Tax Residency Certificate (TRC)

According to the Finance Act 2013, an assesse will not be entitled to claim any benefit under Double Taxation Avoidance Agreement until and unless he or she provides a Tax Residency Certificate to the concerned authority. To receive a Tax Residency Certificate, an application has to be made in Form 10FA (Application for Certificate of residence for the purposes of an agreement under section 90 and 90A of the Income-tax Act, 1961) to the income tax authorities. Once the application is successfully processed, the certificate will be issued in Form 10FB.³

Conclusion

Double taxation avoidance agreement (DTAA) is tax treaty benefiting both the tax giver and tax taker in various states. DTAA is a tax treaty signed between India and another country, it is bilateral/multilateral agreement signed by both nations in order to avoid paying the Income tax twice. Double taxation avoidance (DTAA) is build to conquer trust and incur mutual economic co-operation among member nations and with the ideology of maintaining good friendly relations.

DTAA is created to help the NRI from paying the tax for the same income. That is the place where the income is earned as well as the residence or his/her home country. India has this tax treaty with more than 85 countries.

According to the Finance Act 2013, an assesse will not be entitled to claim any benefit under Double Taxation Avoidance Agreement until and unless he or she provides a Tax Residency Certificate to the concerned authority.

About the Author: N. Jayasree is a 4^th year student at Kristu Jayanti College of Law Bangalore.

Note: The views in this article are personal only.

References

• “Double Tax Avoidance Agreement (DTAA)”(bankbazar,9^th March 2020)<https://www.bankbazar.com/tax/double-tax-avoidance-agreement>accessed 2nd March 2022.
• “DTAA between India and USA”(clear-tax,17^th May2021)<https://clear tax.in/dtta-between-India-and -USA.html> accessed 2^nd March 2022
• “Double Taxation Avoidance Agreement”(coverfox.com,2018)https://www.coverfox.com/personal-finance/tax/double-taxation-avoidance-agreement> accessed 2^nd March 2022