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DTAA
2. Foreign income of person becomes liable in 2 countries :- The country in
which income is earned and The country in which the person in resident
Double taxation of such income is avoided by means of ADT (Double taxation
avoidance agreements)
3. What is Double taxation avoidance agreements? Such agreements are
entered into by the Government of India with Governments of other countries
under section 90
4. Also referred as Tax Treaty. It is a bilateral economic agreement between
two nations that aims to avoid or eliminate double taxation of the same
income in two countries.
5. Example of DTAA An NRI individual living in X country maintains an NRO
account with a bank based in India. The interest income on the balance
amount in the NRO account is deemed as income that originates in India and
hence is taxable in India.
6. In case, India and X nation are contracted under the DTAA, this income
will have tax implications in accordance with the rate specified in the
agreement. Otherwise, the interest income will attract tax @ 30.90 % i.e. the
current withholding tax.
7. To be entitled to the benefits laid down under the provisions of the DTAA,
NRI individual needs to submit below listed documents in a timely manner to
the concerned deductor. Self-attested PAN card copy Self-attested visa and
passport copy Tax Residency Certificate (TRC): TRC is a crucial document
that is to be submitted with the deductor for availing the benefits of the DTAA
agreement. The same can be obtained from the government or tax authorities
of the foreign nation where the NRI is residing.
8. Current Scenario As of now, India has DTAA with 84 nations, including
Armenia, Bangladesh, Finland, Ireland, Japan, Kazakhstan, Greece, Italy and
several others.
9. What if no DTAA exists? Unilateral tax relief is provided on doubly taxed
income under section 91 provisions
10. Modes of granting relief under ADT Agreements Two modes of granting
relief:- Exemption Method Tax credit Method
11. Exemption Method Under this method, a particular income is taxed in
one of the two countries.
12. Tax credit Method Income is taxable in both the countries in accordance
with ADT agreement. Then, the country of residence of tax payer allows him
credit for the tax charged
13. Unilateral Relief (Sec 91) It is provided in case resident tax payers has
suffered tax in India as well as with country with which there is no ADT
agreement.
14. Requirements to be satisfied to claim double taxed income:- The
assessee must have been resident in PY Income must have accrued or arisen
to him outside India
solution in view of the divergence inTaxation the rules for determining sources
of income in various countries, the tax treaties try to remove tax obstacles that
inhibit trade and servicesAvoidance and movement of capital and persons
between the countries concerned. It helps in improving the general investment
climate.Agreements The double tax treaties (also called Double Taxation
Avoidance Agreements or DTAA) are negotiated under public internationalor
DTAA law and governed by the principles laid down under the Vienna
Convention on the Law of Treaties. It is in the interest of all countries to
ensure that undue tax burden is not cast on persons earning income by taxing
them twice, once in the country of residence and again in the country where
the income is derived. At the same time sufficient precautions are also needed
to guard against tax evasion and to facilitate tax recoveries. Double Taxation
Avoidance Agreements with India 4
5. The Fiscal Committee of OECD in the Model Double Taxation Convention
on Income and Capital, 1977,defines double taxation as: The imposition of
comparable taxes in two or more states on the same tax payer in respect of the
same subject matter and for identical periods.Double Double Taxation of the
same income would cause severe consequences on the future of international
trade. Countries ofTaxation the world therefore aim at eliminating the
prevalence of double taxation. Such agreements are known as "Double Tax
Avoidance Agreements" (DTAA) also termed as "Tax Treaties. In India, the
Central Government, acting under Section 90 of the Income Tax Act, has been
authorized to enter into double tax avoidance agreements with other countries.
Double Taxation Avoidance Agreements with India 5
6. Necessity of The need and purpose of tax treaties has been summarized
by theDouble OECD in the Model Tax Convention on Income and on Capital in
the following words:Taxation It is desirable to clarify, standardize, and confirm
the fiscal situation of taxpayers who are engaged, industrial, financial, or any
otherAvoidance activities in other countries through the application by all
countries
of
common
solutions
to
identical
cases
of
double
taxation.Agreements Double Taxation Avoidance Agreements with India 6
7. Avoiding and alleviating the adverse burden of international double
taxation, by - 1. laying down rules for division of revenue between two
countries; 2. exempting certain incomes from tax in either country;Objectives
of 3. reducing the applicable rates of tax on certain incomes taxable inDouble
either countries. Tax treaties help a taxpayer of one country to know with
greaterTaxation certainty the potential limits of his tax liabilities in the
otherAvoidance country. Another benefit from the tax-payers point of view is
that, to aAgreements substantial extent, a tax treaty provides against nondiscrimination of foreign tax payers or the permanent establishments in the
country is given by the residence country against its domestic tax as if the
foreign tax were paid to the country of residence itself. Double Taxation
Avoidance Agreements with India 12
13. 3. Tax Sparing One of the aims of the Indian Double Taxation Avoidance
Agreements is to stimulate foreign investment flows in India from foreign
developed countries.Methods of One way to achieve this aim is to let the
investor to preserve to himself/itself benefits of tax incentives available in India
for suchEliminating investments. This is done through Tax Sparing. Here the
tax credit is allowed by the country of its residence, not only in respect of
taxesDouble actually paid by it in India but also in respect of those taxes India
forgoes due to its fiscal incentive provisions under the Indian IncomeTaxation
Tax Act. Thus, tax sparing credit is an extension of the normal and regular
tax credit to taxes that are spared by the source country i.e. forgiven or
reduced due to rebates with the intention of providing incentives for
investments. Double Taxation Avoidance Agreements with India 13
14. There are Two major types of DTAA Model 1. OECD MODEL OECD
Models are generally adopted by developed nations and their emphasis is on
the residency based taxation.DTAA Models 2. UN MODEL UN Model emphasis
is on the source based taxation and generally adopted by the developing
nations. There are also US model Convention & Indian Model Convention too.
Double Taxation Avoidance Agreements with India 14
15. An analysis of any tax treaty would have the following components: 1.
The date on which it come into effect. 2. Applicability Applies to a person who
is resident of one or both the countries. Resident is defined under domestic
law of different counties differently. Article 4 expects that it should based upon
domicile, physical residence, place of management or such other criteria but
makes it clear that where a person is a resident in both the countries, it is the
location of the permanent home or where vital interests are located or where
there is fixed abode or where he is citizen, in that order, will decide the
residential status. There may be cases, when it has been found that the
assessee is resident in both the countries then tie-breaker rule has to apply to
determine the residential status.Components a. In the case of individual his
personal & economic ties determine his residential status.of Tax Treaty 3. b. In
the case of others, it is the place of effective management. General Definitions
Article 3 of DTAA generally covers general definition of Person, Company,
contracting state, Enterprise of a contracting state, Competent Authority,
national etc, which all are applicable to the respective DTAA. 4. The Tax which
it covers What kind of tax the treaty covers should be known as there are
different form of tax in different countries & the DTAA will provide the relief on
the specified tax as mentioned in the DTAA. 5. The definition which will be