Double Taxation Avoidance Scheme – An Outline

With globalisation, people and companies tend to earn income in different nations. Nevertheless, this cross-border income can lead to double taxation —the same income can be taxed in both the country where it is earned and the country where it is lastly located. To ensure that this does not occur, nations sign a treaty known as the Double Taxation Avoidance Agreement (DTAA), which provides taxpayers with legal ways to obtain tax relief and avoid paying taxes twice on the same amount.

What is Double Taxation?

When the same income is taxed in two countries, it results in double taxation. For example, a resident of India who earns interest or dividends on investments in the United States may be taxed in the United States (source country) and in India (residence country). This increases the tax burden and puts off international trade and investment.

What the Double Taxation Avoidance Agreement does is to make this burden null or less on the company by deciding on the method and the place of taxation of this income.

Purpose of the Double Taxation Avoidance Scheme

Increasingly, the primary aim of the DTAA is to prevent the imposition of tax on the same income by taxation and negotiations on cross-border economic activities. Its objectives include:

1. Promoting trade and investment internationally through certainty of taxes.
2. Avoidance of avoidance and evasion of tax by the open flow of financial information.
3. There was a need to ensure fair taxation between the two contracting countries.
4. Encouragement of economic collaboration through enhancing bilateral relations among countries.

DTAA and India: An Overview

India has entered into a Double taxation avoidance agreement with more than 90 countries, such as the USA, the UK, Canada, Singapore, Australia, the UAE, and Germany. These contracts are negotiated according to Sections 90 and 91 of the Income Tax Act, 1961.

1. Section 90 permits the Central Government to sign a DTAA with another country to prevent the occurrence of double taxation and the exchange of tax information.
2. Section 91 offers unilateral relief in situations where India lacks a formal DTAA with another foreign country.

India provides these provisions so that individuals and corporations are not subjected to numerous tax obligations on the same income.

Types of Double Taxation Avoidance Agreements

There are two main ways in which DTAA can be organized regarding the grant of the relief:

• Bilateral Relief: This form of relief is provided whereby the countries themselves agree on the manner of taxation of income. The agreement determines the taxation rights between the source country and the residence country.
• Unilateral Relief: In cases where one country cannot find an agreement with another nation, India grants unilateral relief as provided by Section 91. It addresses the situation where Indian residents are subject to foreign income, yet there is no DTAA to prevent double taxation.

Techniques of Tax Relief under DTAA

The Double Taxation Avoidance Agreement usually provides aid in one of the following ways:

• Exemption Method: In this approach, both countries’ income tax is imposed in a single country and exempted in the other. For example, if India exempts income earned in the UAE, that income will not be subject to tax in India.
• Tax Credit Method: In this approach, both countries tax the revenues and allow the taxpayer to receive a credit for the tax paid in the foreign country against the tax payable in the home country. This makes the overall taxation burden just and acceptable.

Ordinary Incomes Covered by DTAA

DTAA is normally imposed on the following types of income:

1. Salary income earned abroad
2. Foreign investment interest and dividends.
3. Payments of royalty and technical fees to non-residents.
4. Sale of assets or shares in a foreign country.
5. The income of the business is due to a permanent establishment in another jurisdiction.

Such facilities render DTAA particularly useful to Non-Resident Indians (NRIs) and foreign firms doing business in India.

Claiming the Benefits of DTAA by NRIs

NRIs are required to undergo some compliance procedures to benefit from the Double Taxation Avoidance Agreement under tax relief.

1. Get a Tax Residency Certificate (TRC) of the country where one resides.
2. Give a self-statement in Form 10F as provided in Section 21AB of the Income Tax Rules, 1962.
3. File the PAN and supporting papers with the payer of the income or with the assessing officer.

After verification, NRIs are entitled to either pay tax at the lower rate under a DTAA or claim an excess tax refund on the source.

Relevance of DTAA in International Taxation

The Double Taxation Avoidance Agreement enhances collaboration and openness between countries. It promotes foreign direct investment, minimises tax controversies, and ensures that international tax standards established by the OECD (Organisation for Economic Co-operation and Development) are followed.

In addition, DTAA has now played a vital role in countering the effects of base erosion and profit shifting (BEPS) by multinational companies, leading to an equitable distribution of tax revenue among the involved nations.

Conclusion

The Double Taxation Avoidance Agreement ( DTAA ) is an important aspect of international tax law, which prevents taxpayers from being taxed by two different jurisdictions on the same income, unfairly. It enhances international business, investment, and economic stability, and provides significant relief to taxpayers.

In the case of NRIs, foreign investors and multinational corporations, tax savings and legal compliance can be of high value when a person knows the provisions of the DTAA and takes advantage of the benefits under the appropriate sections. With worldwide taxation becoming more complex than ever, DTAA remains an important tool for ensuring financial fairness and facilitating cross-border cooperation.

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Frequently Asked Questions

1. What is the key aim of DTAA?

To avoid paying twice on the same income in two countries and to promote international trade and investment.

2. What is the number of countries that have DTAA with India?

India has entered into DTAA with over 90 countries, including the key economies such as the USA, the UK, and the UAE.

3. What documents do you have to claim DTAA benefits?

Tax Residency Certificate (TRC), Form 10F, PAN and self-certification of tax residency.

4. Is DTAA applicable to earnings made abroad in the form of salary?

Yes, the salary income received by an Indian resident or NRI in another country can be subject to the provisions of the DTAA.

5. Is it possible to claim both DTAA and foreign tax credit?

Yes, depending on the country’s tax arrangement, a credit for foreign taxes paid can be taken to avoid double taxation.