In this article, A. Mohamed Musthafa pursuing M.A, in Business Law from NUJS, Kolkata discusses how to claim Tax benefits under DTAA.  

A DTAA is a tax treaty signed between two or more countries. The key objective of DTAA is that tax-payers in these countries can avoid being taxed twice on the same income. A DTAA applies in cases where a taxpayer resides in one country and earns income in another. For example, let’s say that you are a resident in the USA and I’m a resident in India. You render some service to me for which I pay certain sum of money to you. In that case there will be two implications on you.

1. The amount paid for service rendered will be taxed (by way of tax deduction at source) in India as it is an income which has arisen in India.
2. And secondly, since you are a resident in USA, the income earned in India will be taxed in USA as well.

In this case, there will be an unnecessary burden on you to pay tax on same income twice.

Thus, DTAA comes to the rescue in cases where an entity is being taxed twice. As per the agreement, the income will be taxed in just one country. Say it is taxed in India, after taxing in India when you offer the same income for taxation in USA, you will get a foreign tax credit as deduction from tax payable which will be equivalent to the amount of tax that you have paid in India. DTAAs can either be comprehensive to cover all sources of income or be limited to certain areas such as taxing of income from shipping, air transport, inheritance, etc. India has DTAAs with more than eighty countries, of which comprehensive agreements include those with Australia, Canada, Germany, Mauritius, Singapore, UAE, the UK and US.

In the current era of cross-border transactions across the world, due to unique growth in international trade and commerce and increasing interaction among the nations, residents of one country extend their sphere of business operations to other countries where income is earned.

One of the most significant results of globalization is the introduction noticeable impact of one country’s domestic tax policies on the economy of another country. This has led to the need for incessantly assessing the tax regimes of various countries and bringing about indispensable reforms. Therefore, the consequence of taxation is one of the important considerations for any trade and investment decision in any other countries. Where a taxpayer is resident in one country but has a source of income situated in another country, it gives rise to possible double taxation.

This arises from two basic rules that enable the country of residence as well as the country where the source of income exists to impose tax.

Source rule: The source rule holds that income is to be taxed in the country in which it originates irrespective of whether the income accrues to a resident or a nonresident Taxation

Residence rule: The residence rule stipulates that the power to tax should rest with the country in which the taxpayer resides.

If both rules apply simultaneously to a business entity and it were to suffer tax at both ends, the cost of operating in an international scale would become prohibitive and deter the process of globalization. It is from this point of view that Double taxation avoidance Agreements (DTAA) become very significant.

International double taxation has adverse effects on the trade and services and on movement of capital and people. Taxation of the same income by two or more countries would constitute a prohibitive burden on the tax-payer. The domestic laws of most countries, including India, mitigate this difficulty by affording unilateral relief in respect of such doubly taxed Double income (Section 91 of the Income Tax Act). But as this is not a satisfactory solution in view of the divergence in Taxation the rules for determining sources of income in various countries, the tax treaties try to remove tax obstacles that inhibit trade and services avoidance 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 international Law or “DTAA” law and governed by the principles laid down by 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.

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. The fundamental principles of Taxation throughout 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”. DTAAs ensure that countries adopt common definitions for factors that determine taxing rights and taxable events. Crucial among these is the definition of a permanent establishment.

Most treaties also specify a Mutual Agreement Procedure (MAP) which is invoked when interpretation of treaty provisions is disputed. To prevent abuse of treaty concessions, treaties increasingly incorporate restrictions and rules, such as a general anti-functions of avoidance rule (GAAR), that allow tax authorities to determine if a DTAAs transaction is only undertaken for tax avoidance or not. Benefit limitation tests and Controlled Foreign Corporation (CFC) rules also place limits on claims of residence in countries eligible for treaty concessions. Exchange of tax information on either a routine basis or in response to a special request is provided for in most treaties to assist countries counter tax evasion.

As of now, there exists 84 Double Taxation Avoidance Agreements (DTAAs) between India & other countries. These treaties are usually between countries with substantial trade or other economic relations. Most treaties are between pairs of developed countries while, of the balance, most of the DTAAs entered are between developed and developing countries. DTAAs Taxation provides reciprocal concessions to mitigate double taxation, avoidance, assign taxation rights roughly in accordance with that “existing consensus” and largely though not rigidly follow the OECD Model Tax Convention or, for developing agreements countries, the UN Tax Convention (DTAAs). Recent treaties contain new clauses following the OECD Model Tax Conventions of 2005 to 2010 which extend areas of cooperation to administrative and information issues. A typical DTAA agreement between India and another country covers only residents of India and the other contracting country which has entered into an agreement with India. A person who is between India & not resident either of India or of the other contracting country cannot claim any benefit under the said DTA Agreement.

Section 90 of the Income Tax Act, 1961- Agreement with foreign countries or specified territories

Since the tax treaties are meant to be beneficial and not intended to put taxpayers of a contracting state to a disadvantage, it is provided in Section 90 that a beneficial provision under the Indian Income Tax Act will not be denied to residents of contracting state merely because the corresponding provision in tax treaty is less beneficial. Section 90A facilitates double taxation relief to be extended to agreements (between specified DTAAs & Associations) adopted by the Central Government. Section 91 explains, countries with which no agreement exists i.e, Unilateral Agreements. Some Double Taxation Avoidance agreements provide that income by way of interest, provisions of royalty or fee for technical services is charged to tax on net basis. This may result in tax deducted at source from sums paid to Non-residents which may be Income-Tax more than the final tax liability. The Assessing Officer has therefore been empowered under section 195 to determine the appropriate proportion of the amount from which tax is to be deducted at source Act. There are instances where as per the Income-tax Act, tax is required to be deducted at a rate prescribed in tax treaty. However, this may require foreign companies to apply for refund. To prevent such difficulties Section 2(37A) provides that tax may be deducted at source at the rate applicable in a particular case as per section 195 on the sums payable to non- residents or in accordance with the rates specified in DTAAs.

Importance of DTAA

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 attracts 30 percent 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 percent. Many of India’s DTAAs also have lower tax rates for royalty, fee for technical services, etc.

Favourable tax treatment for capital gains under certain DTAAs such the one with Mauritius have encouraged a lot of foreign investment into India. Mauritius accounted for $93.65 billion or one-third of the total FDI flows into India between April 2000 and December 2015. It has also remained a favoured route for foreign portfolio investors. But the problem is DTAAs can become an incentive for even legitimate investors to route investments through low-tax regimes to sidestep taxation. This leads to loss of tax revenue for the country.

Why should I care?

For us to prosper, the economy has to grow. And for growth in today’s globalised world, foreign investments are inevitable. DTAAs basically provide clarity on how certain cross-border transactions will be taxed and this encourages foreign investors to take the plunge. If you are sent on deputation abroad and you receive emoluments during your stint away from home, your income may sometimes be subject to tax in both the countries. You can claim relief when filing your tax return for that financial year, if there is an applicable DTAA. Similarly, if you are an NRI having investments in India, DTAA provisions may also be applicable to your income from these investments or from their sale.

However, given India’s narrow tax base, it can ill-afford a tax regime that allows big fish to completely evade the tax net, citing a DTAA. Hence the ongoing drive to plug loopholes in these agreements.

Income types under DTAA

Under the Double Tax Avoidance Agreement, NRIs don’t have to pay tax two times on the following income earned from

• Services provided in India
• Salary received in India
• House property located in India
• Capital gains on transfer of assets in India
• Fixed deposits in India
• Savings bank account in India

The primary idea behind DTAA agreements with various countries is to minimize the opportunity for tax evasion for taxpayers in either or both of the countries between which the bilateral/multilateral DTAA agreement have been signed.

Lower withholding tax is a plus for taxpayers as they can pay lower TDS on their interest, royalty or dividend incomes in India, while some agreements provide for tax credits in the source or country of operations so that taxpayers don’t pay the same tax twice. In some cases, such as agreements with Mauritius, Cyprus, Singapore, Egypt etc. capital gains tax is exempted which can be a boon to taxpayers as they can use the DTAA agreement to minimize taxes.

DTAA Rates

The rates and rules of DTAA vary from country to country depending on the particular signed between both parties. TDS rates on interests earned for most countries is either 10% or 15%, though rates range from 7.50% to 15%. List of DTAA rates for particular countries is given in the next section.

Double Taxation Avoidance Agreement (DTAA) Country List

A total of 85 countries currently have DTAA agreements with India. The following countries having Double Taxation Avoidance Agreement with India. TDS rates on interests are listed below. (Listed alphabetically)

Sl No.	Country	TDS Rate
1	Armenia	10%
2	Australia	15%
3	Austria	10%
4	Bangladesh	10%
5	Belarus	10%
6	Belgium	15%
7	Botswana	10%
8	Brazil	15%
9	Bulgaria	15%
10	Canada	15%
11	China	15%
12	Cyprus	10%
13	Czech Republic	10%
14	Denmark	15%
15	Egypt	10%
16	Estonia	10%
17	Ethiopia	10%
18	Finland	10%
19	France	10%
20	Georgia	10%
21	Germany	10%
22	Greece	As per agreement
23	Hashemite kingdom of Jordan	10%
24	Hungary	10%
25	Iceland	10%
26	Indonesia	10%
27	Ireland	10%
28	Israel	10%
29	Italy	15%
30	Japan	10%
31	Kazakhstan	10%
32	Kenya	15%
33	South Korea	15%
34	Kuwait	10%
35	Kyrgyz Republic	10%
36	Libya	As per agreement
37	Lithuania	10%
38	Luxembourg	10%
39	Malaysia	10%
40	Malta	10%
41	Mauritius	7.50-10%
42	Mongolia	15%
43	Montenegro	10%
44	Morocco	10%
45	Mozambique	10%
46	Myanmar	10%
47	Namibia	10%
48	Nepal	15%
49	Netherlands	10%
50	New Zealand	10%
51	Norway	15%
52	Oman	10%
53	Philippines	15%
54	Poland	15%
55	Portuguese Republic	10%
56	Qatar	10%
57	Romania	15%
58	Russia	10%
59	Saudi Arabia	10%
60	Serbia	10%
61	Singapore	15%
62	Slovenia	10%
63	South Africa	10%
64	Spain	15%
65	Sri Lanka	10%
66	Sudan	10%
67	Sweden	10%
68	Swiss Confederation	10%
69	Syrian Arab Republic	7.50%
70	Tajikistan	10%
71	Tanzania	12.50%
72	Thailand	25%
73	Trinidad and Tobago	10%
74	Turkey	15%
75	Turkmenistan	10%
76	UAE	12.50%
77	UAR (Egypt)	10%
78	Uganda	10%
79	UK	15%
80	Ukraine	10%
81	United Mexican States	10%
82	USA	15%
83	Uzbekistan	15%
84	Vietnam	10%
85	Zambia	10%

 

DTAA, or Double Taxation Avoidance Agreement is a tax treaty signed between India and another country ( or any two/multiple countries) so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country. At present, India has double tax avoidance treaties with more than 80 countries around the world.

The need for DTAA arises out of the imbalance in tax collection on global income of individuals. If a person aims to do business in a foreign country, he/she may end up paying income taxes in both cases, i.e. the country where the income is earned and the country where the individual holds his/her citizenship or residence. For instance, if you are moving to a different country from India while leaving income sources such as interest from deposits in here, you will be charged interest by both India and the country of your current residence as per your consolidated global earnings. Such a scenario can have you pay twice the tax over the same income. This is where the DTAA becomes useful for taxpayers.

The Protocol for amendment of the India-Mauritius Convention signed on 10th May, 2016, provides for source-based taxation of capital gains arising from alienation of shares acquired from 1st April, 2017 in a company resident in India. Simultaneously, investments made before 1st April, 2017 have been grandfathered and will not be subject to capital gains taxation in India. Where such capital gains arise during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India. However, the benefit of 50% reduction in tax rate during the transition period shall be subject to the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.

The revised DTAA between India and Cyprus signed on 18th November 2016, provides for source-based taxation of capital gains arising from alienation of shares, instead of residence based taxation provided under the DTAA signed in 1994. However, a grandfathering clause has been provided for investments made prior to 1st April, 2017, in respect of which capital gains would continue to be taxed in the country of which taxpayer is a resident. It also provides for assistance between the two countries for collection of taxes and updates the provisions related to Exchange of Information to accepted international standards.

The India-Singapore DTAA at present provides for residence based taxation of capital gains of shares in a company. The Third Protocol amends the DTAA with effect from 1st April, 2017 to provide for source based taxation of capital gains arising on transfer of shares in a company. This will curb revenue loss, prevent double non-taxation and streamline the flow of investments. In order to provide certainty to investors, investments in shares made before 1st April, 2017 have been grandfathered subject to fulfillment of conditions in Limitation of Benefits clause as per 2005 Protocol. Further, a two year transition period from 1st April, 2017 to 31st March, 2019 has been provided during which capital gains on shares will be taxed in source country at half of normal tax rate, subject to fulfillment of conditions in Limitation of Benefits clause.

The Third Protocol also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases. This is a taxpayer friendly measure and is in line with India’s commitments under Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases. The Third Protocol also enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion.

In a laymen’s language, DTAA is an agreement entered between two countries so that the citizens of those countries need not pay taxes on same income in two countries.

Basically, some countries have residence based taxation like the USA, while some countries have source based taxation, meaning you have to pay taxes on such income if its source is in that country. India follows a dual structure.

So for the benefits of their citizens, the respective governments enter into agreement, defining tax residency, tax rates, where particular income shall be charged to tax etc, so that a particular income is not taxed in both countries. In case same income is being taxed in both countries, the respective income tax legislation generally have provisions to give credit of taxes paid in foreign countries with respect to that income.

A new revised Double Taxation Avoidance Agreement (DTAA) between India and Korea for the Avoidance of Double Taxation and the Prevention of Fiscal evasion with respect to taxes on income was signed on 18th May 2015 during the visit of the Prime Minister Shri Narendra Modi to Seoul. It has now come into force on 12th September 2016, on completion of procedural requirements by both countries. The earlier Double Taxation Avoidance Convention between India and Korea was signed on 19th July, 1985 and was notified on 26th September 1986.

Provisions of the new DTAA will have effect in India in respect of income derived in fiscal years beginning on or after 1st April, 2017.

Salient features of new DTAA

• The existing DTAA provided for residence-based taxation of capital gains on shares. In line with India’s policy of taxation of capital gains on shares, the revised DTAA provides for source-based taxation of capital gains arising from alienation of shares comprising more than 5% of share capital.
• In order to promote cross border flow of investments and technology, the revised DTAA provides for reduction in withholding tax rates from 15% to 10% on royalties or fees for technical services and from 15% to 10% on interest income.
• The revised DTAA expands the scope of dependent agent Permanent Establishment provisions in line with India’s policy of source-based taxation.
• To facilitate movement of goods through shipping between two countries and in accordance with international principle of taxation of shipping income, the revised DTAA provides for exclusive residence based taxation of shipping income from international traffic under Article 8 of revised DTAA.
• The revised DTAA, with the introduction of Article 9(2), provides recourse to the taxpayers of both countries to apply for Mutual Agreement Procedure (MAP) in transfer pricing disputes as well as apply for bilateral Advance Pricing Agreements (APA). Further, as per understanding reached between the two sides, MAP requests in transfer pricing cases can be considered if the request is presented by the taxpayer to its competent authority after entry into force of revised DTAA and within three years of the date of receipt of notice of action giving rise to taxation not in accordance with the DTAA.

It may be added that a Memorandum of Understanding (MoU) on suspension of collection of taxes during the pendency of Mutual Agreement Procedure (MAP) has already been signed by Competent Authorities of India and Korea on 9th December 2015. The MoU provides for the suspension of collection of outstanding taxes during the pendency of MAP proceedings for a period of two years (extendable for a further maximum period of three years) subject to providing on demand security/bank guarantee.

• The Article on Exchange of Information is updated to the latest international standard to provide for exchange of information to the widest possible extent. As per revised Article, the country from which information is requested cannot deny the information on the ground of domestic tax interest. Further, the revised DTAA contains express provisions to facilitate exchange of information held by banks. Information exchanged under the revised DTAA can now be used for other law enforcement purposes with authorization of information supplying country.
• The revised DTAA inserts new Article for assistance in collection of taxes between tax authorities.
• The revised DTAA inserts new Limitation of Benefits Article i.e. anti-abuse provisions to ensure that the benefits of the Agreement are availed only by the genuine residents of both the countries.

The revised DTAA aims to avoid the burden of double taxation for taxpayers of two countries in order to promote and thereby stimulate flow of investment, technology and services between India and Korea. The revised DTAA provides tax certainty to the residents of India and Korea.

What are the benefits of DTAAs?

Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as location of the source, residence of taxable entity, maintenance of Permanent Establishment and so on. The interaction of two tax systems each belonging to different country, can result in double taxation. Following are the main advantages of DTAAs.

1. DTAAs avoid double taxation by considering the specific ax laws of the two countries (the two countries in the case of a bilateral DTAA).
2. DTAAs as international tax treaties often provide tax information exchange. This tax exchange information lowers the administrative costs of taxation.
3. Another advantage is that there is legal certainty in DTAAs as there are specific rules for taxing international income. This encourages foreign investment to developing countries as there is tax certainty.
4. DTAAs also incorporates anti-abusive provisions to ensure that the benefits of the DTAAs are availed by the genuine residents of the two countries.
5. With DTAA, investors need not depend on conflicting national tax rules. Rather the taxation of international income falls under the rules of DTAAs.

Income types under DTAA

Under the Double Tax Avoidance Agreement, NRIs don’t have to pay tax two times on the following income earned from:

• Services provided in India
• Salary received in India
• House property located in India
• Capital gains on transfer of assets in India
• Fixed deposits in India
• Savings bank account in India

When income from these sources is taxable in the NRI’s country of residence as well, they can avoid paying taxes on it India by availing the benefits of DTAA.

The benefit of DTAA can be used by the following methods

Bilateral relief – Under this method, the Governments of two countries can enter into an agreement to provide relief against double taxation by mutually working out the basis on which relief is to be granted. India has entered into 84 agreements for relief against or avoidance of double taxation. Bilateral relief may be granted in either one of the following methods:

• Exemption method, by which a particular income is taxed in only one of the two countries and types of relief.
• Tax relief methods under which, an income is taxable in both countries in accordance with the respective tax laws read with the Double Taxation Avoidance Agreements.
• However, the country of residence of the taxpayer allows him credit for the tax charged thereon in the country of source.

Unilateral relief – This method provides for relief of some kind by the home country where no mutual agreement has been entered into between the countries.

Exemption Method – One method of avoiding double taxation is for the residence country to altogether exclude foreign income from its tax base. The country of source is then given exclusive right to tax such incomes. This is known as complete exemption method and is sometimes followed Methods of in respect of profits attributable to foreign permanent establishments or income from immovable property. Indian tax Eliminating treaties with Denmark, Norway and Sweden embody with respect to certain incomes.

Double Credit Method Taxation – This method reflects the underlining concept that the resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the source 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.

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 such Eliminating investments. This is done through “Tax Sparing”. Here the tax credit is allowed by the country of its residence, not only in respect of taxes double actually paid by it in India but also in respect of those taxes India forgoes due to its fiscal incentive provisions under the Indian Income Taxation 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.

Procedure to Seek exemption under DTAA

A person who earns income must pay tax in the country he earns in as well as the country he resides in. In order to avoid this, India has signed Double Taxation Avoidance Agreements (DTAAs) with many countries so that the income is taxed only once.
To claim this benefit, one needs to know whether the country one resides in or earns income in has a DTAA with India. One has to file Form 10F, a tax residency certificate and self declaration in the prescribed format to the entity responsible for deducting tax at source.

Form 10F

This can be obtained from the bank or downloaded at www.incometaxindia. gov.in/forms/income…/103120000000007197.pdf

Details like the applicant’s nationality, tax identification number, address and period of residential status has to be filled and the form has to be signed. Form 10F must be verified by the government of the country in which the assessee is a resident for the period applicable.

Points to note

1. PAN of the assessee needs to be provided in Form 10F and the self declaration form.

2. In order to know whether a particular country is under a DTAA, one can access the following link: http://www.incometaxindia. gov.in/Pages/internationaltaxation/dtaa.aspx 

A person who earns income must pay tax in the country he earns in as well as the country he resides in. In order to avoid this, India has signed Double Taxation Avoidance Agreements (DTAAs) with many countries so that the income is taxed only once.

To claim this benefit, one needs to know whether the country one resides in or earns income in has a DTAA with India. One has to file Form 10F, a tax residency certificate and self declaration in the prescribed format to the entity responsible for deducting tax at source.