“DTAA is a bilateral or multilateral agreement between two or more countries to resolve the issues of taxation of income, bring the transparency and to plug the tax evasion.”
Introduction:
Globalization is bringing the world closer with each passing day. Many individuals are becoming global citizens, moving from one country to the other as their job requires this. They are also happy to explore the new opportunities as it is financially very lucrative for them. But this has raised few tax complications for them.
As a general principle, taxpayers have to pay taxes in the country where they earn income; this principle is also known as source-based taxation. No country would like any person to take away the income earned in it, without the due taxes being discharged by the taxpayer.
On top of it, if he is a resident of the other country, that country may also tax his global income (i.e. the income earned outside the country of residence).
Few countries like USA, tax its citizens based on the citizenship, implying that irrespective of the fact that the US citizen was outside the USA for the entire tax year, he may still have to pay taxes on his global income in the USA. Fortunately, India does not have citizenship based taxation and it follows residency based taxation system.
If the taxpayer qualifies as a resident as per the residency rules listed in section 6, then he will have to pay taxes on his global income. Further, if a taxpayer is becoming a resident of both the countries by applying the local tax laws, then his residential status is determined by applying the tie-breaker rule in the respective DTAA.
All this can result in serious double taxation of the same income. In such situation “Double Tax Avoidance Agreement – DTAA” can come to the rescue of such taxpayer. Currently, India has comprehensive DTAAs with 88 countries, out of which 85 have are in force.
What is DTAA? :
Double Taxation means taxing the same Income or subject-matter twice, for the same purpose, for the same period and in the same tax jurisdiction. When such income taxed in two countries, the aggregate of the tax liability will form substantial part of his total income. As an In 1920, the League of Nations had constituted a group of world-renowned four economists, Prof. Gijsbert, Prof. Luigi Einaudi, Prof. Edwin Seligman and Prof. Josiah Stamp to recommend certain International taxation rules with respect to allocating Taxing rights under Double Taxation Avoidance for avoiding multiple taxes on the same Income. The Group had recommended that dividing the right of taxation between the Country of Residence and the Country of Source while recognizing the taxing rights. The current Rules are no doubt the extension of those recommendations.
Double Taxation Avoidance Agreement (DTAA) is an agreement between two countries that the income of non-residents should not be taxed both in their country of origin and in the country in which they live.
Why is it Important? :
DTAAs are intended to make a country an attractive investment destination by providing relief on dual taxation. Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad. DTAAs also provide for concessional rates of tax in some cases.
For instance, interest on NRI bank deposits attract 30 per cent TDS (tax deduction at source) here. But under the DTAAs that India has signed with several countries, tax is deducted at only 10 to 15 per cent. Many of India’s DTAAs also have lower tax rates for royalty, fee for technical services, etc.
Objectives of DTAA:
1. To encourage transfer of technology 2. To prevent tax avoidance, evasion, grant relief, avail tax credits 3. To prevent discrimination between taxpayer 4. To improve the co-operation between two different taxing authorities 5. To attract foreign investments by providing relief from dual taxation. 6. To promote exchange of goods and services, movement of capital and person 7. To provide clarity on how certain cross-border transactions will be taxed. 8. To lay down ‘Specific Rules’ for division of Revenue between two countries. 9. To exempt certain Incomes in both the Countries. 10. To further reduction in the applicable tax rates on certain incomes.
Duration & Rates of DTAA:
Generally, these agreements will continue indefinitely until officially terminated by either Party of the Agreement. The Rates and Rules of DTAA will vary from country to country.
Availing of DTAA Benefit – In India’s perspective:
Subject to subsist of DTAA Arraignments, a non-resident assesse must furnish a ‘Tax Residency Certificate (TRC) or Form 10F obtained from the tax authorities of the other country where he resides. As said earlier, the income will be entirely exempted or it may be taxed at a lower rate. If it is taxable under DTAA arrangements, the non-resident assesse has to pay the tax in India and then claim the refund of such taxes paid against the tax liability in his home country.
Concluding Remarks:
However, India must wake up to the reality of the abuse of the DTAA provisions by multinational entities. Treaty shopping, a way of tax avoidance, has become the order of the day. Entering DTAA arrangements with the rest of the world is remote. There are signs of formidable changes occurring in recent times such as revised DTAA with Mauritius, Singapore, Cyprus and other tax heavens. However, a complete revamp of the Double Taxation Avoidance mechanism is need of the hour.