This article is written by Trupti Soneji pursuing Diploma in US Corporate Law for Company Secretaries and Chartered Accountants from LawSikho and has been edited by Shreya Pandey.
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
With the ever-growing economic and business environment at a global level, the relevance of Double Taxation Avoidance Agreements (DTAA) is becoming more relevant than ever before. The advent of remote work culture brought about by the pandemic has only increased the importance of ordaining DTAAs between countries. DTAAs have facilitated the ease of having multi national incomes without having to worry about the taxes applicable in multiple countries.
When a resident of one country earns income from another country, he may be taxed in both countries on the grounds that he is the resident of the first country while the source of the income is in the second country. This gives rise to the need for a DTAA. Without a DTAA, the taxpayer would bear the brunt of paying taxes in both countries. This is because both countries would claim their right to tax the income earned by the taxpayer, on the basis of residency in one country and on the basis of income source in the other country. At this point, if there is an effective DTAA between both these countries, the dilemma of double taxation on the same income may be avoided.
Decoding a Double Taxation Avoidance Agreement (DTAA)
Double Taxation Avoidance Agreement is a mutually consented upon agreement between two countries on the taxability of specified incomes which both countries claim to have the right to levy tax on. Most countries have DTAAs with each other to overcome the issue of double taxation arising due to cross border incomes. With the help of these tax treaties, countries also aim to promote international trade and amplify economic relations.
DTAA was first conceptualised in the early nineties by economists for making a division of tax rights between countries. After that, tax conventions for avoidance of double taxation were published by the United Nations (UN) and the Organisation of Economic Co-operation and Development (OECD). Eventually, most countries broadly followed the UN model tax convention and the OECD model tax convention while some South American countries followed the Andean Community Income and Capital Tax Convention. The OECD model derives the tax division based on the fundamentals of tax residency. However, the UN model is driven by the idea of tax residency as well as the source of the incomes.
Objectives of a Double Taxation Avoidance Agreement (DTAA)
The following are the objectives of entering into DTAAs:
Avoidance of double taxation on international incomes
The main purpose of DTAAs is to ensure that the same income is not taxed more than once by different territories. The articles laid down in the DTAAs establish the territory that will have the right to levy tax on a particular income.
To grant relief to taxpayers in one country for the tax paid by them in another country
With cross border incomes there are situations when taxes are paid by a taxpayer in one country but he may be subject to tax in another country as well. In such situations, DTAAs provide a mechanism for availing the credit of tax paid in one country against taxes to be paid in another country. Alternatively, it may provide an exemption to tax on the overlapping income already taxed in another country.
For exchanging information for preventing tax evasion or tax avoidance
As the DTAAs provide the methods for resolving taxes on overlapping income between countries, it facilitates both countries the requisite information exchange to ensure prevention of tax evasion and tax avoidance.
For recovery of income tax due as per the provisions of tax of respective countries
With the exchange of information through the implementation of DTAAs, the countries are in a position to also recover the taxes as per the respective tax provisions of the countries in a well structured manner and well within the regulatory framework.
Promoting economic and trade relations between countries
DTAAs bring in transparency in the tax systems which promotes a better business environment and helps in expanding trade relations between countries.
Types of Double Taxation Avoidance Agreements (DTAA)
DTAAs may be classified based on two criteria: one based on the incomes that it covers and the other based on the countries involved.
Based on the Incomes Covered
DTAAs may either be comprehensive or limited. Comprehensive DTAAs cover all major income streams. Usually, comprehensive agreements include incomes from immovable properties, business profits, dividends, royalties, fees for technical services, interest, capital gains, services, etc. However, limited DTAAs cover specific incomes like shipping, aircraft, inheritance, etc.
Based on the Countries involved
DTAAs may either be bilateral or multilateral. Bilateral agreements are entered into only between two countries, while multilateral agreements are entered into by more than two countries.
Progressive stages in a Double Taxation Avoidance Agreement (DTAA)
Before the DTAAs are enforced, they follow a structured path for their formulation and implementation. Broadly, the stages of a DTTA progress in the following manner-
Negotiation
The countries intending to agree upon dealing with overlapping incomes negotiate on the terms to deal with double taxation. The countries deliberate on the matter and come to a consensus on the terms and methods of resolutions that would form part of the agreement.
Formulation of Articles
The various clauses of the terms and conditions of a DTAA are designed to align with the agreed upon negotiations. The articles are formally structured terms of a DTAA. They are standardised clauses that form the skeleton of the DTAA.
Execution of the DTAA
On approval of the formulated articles of the DTAA, it is executed by both countries by signing the DTAA as an acceptance of the DTAA by respective countries.
Domestic Affirmation
The DTAA is subsequently approved and inserted within the domestic laws of the respective countries. Both countries then inform each other of their ratification of the DTAA in their respective domestic laws.
Enforcement
As per the ratification in the domestic laws, the DTAA becomes effective on the date mentioned in the DTAA.
Commonalities of different Double Taxation Avoidance Agreements (DTAA)
Due to the international nature and use of DTAAs, it is pertinent to have standardisation and uniformity in the design and implementation of DTAAs. Further, a DTAA, if interpreted differently, would nullify the very purpose of its enforcement. Hence, all DTAAs, by and large, are drafted and applied in a standard format based on the model convention opted for in the DTAA. Accordingly, DTAAs are structured to follow standard terminology, with each term well defined and uniformly interpreted unless specified. The DTAAs predominantly cover the following areas:
- Scope of the DTAA: It includes the general scope, the taxes covered by the DTAA, the date of effectiveness and termination (if any).
- Definitions: It provides a list of terms used in the DTAA along with their definitions for clarity. More importantly, it defines the term “Resident” and “Permanent Establishment” among others that are crucial in the interpretation of the DTAA.
- Substantive Provisions: It covers the various income streams that will be guided by the DTAA.
- Double taxation elimination: It contains the clauses pertaining to the methods to be adopted for eliminating double taxation.
- Anti Avoidance Terms: It includes the clauses that ensure that there is no leeway for avoiding taxes.
- Miscellaneous provisions: It includes ancillary terms not covered in any other clause of the DTAA.
- Protocol and Memorandum of Understanding(MoU): Protocols and MoUs state the amendments in the DTAAs and explanations to the DTAA.
Structure of a Double Taxation Avoidance Agreement (DTAA)
Based on the broad classifications listed in the previous paragraph, the following are the detailed list of Articles encompassing a DTAA-
| Article | Area of Coverage | Article | Area of Coverage |
| 1 | Persons covered | 17 | Entertainers and sportspersons |
| 2 | Taxes covered | 18 | Pensions |
| 3 | General definitions | 19 | Government service |
| 4 | Resident | 20 | Students |
| 5 | Permanent establishment | 21 | Other income |
| 6 | Income from immovable property | 22 | Capital |
| 7 | Business profits | 23 | Methods for Elimination of Double Taxation |
| 8 | International shipping and air transport | 24 | Non-discrimination |
| 9 | Associated enterprises | 25 | Mutual agreement procedure |
| 10 | Dividends | 26 | Exchange of information |
| 11 | Interest | 27 | Assistance in the collection of taxes |
| 12 | Royalties | 28 | Members of diplomatic missions and consular posts |
| 13 | Capital gains | 29 | Entitlement to benefits |
| 14 | Independent Personal Services | 30 | Territorial extension |
| 15 | Dependent Personal Services | 31 | Entry into force |
| 16 | Directors’ fees | 32 | Termination |
All DTAAs all over the world are designed based on the above structure of articles. Comprehensive agreements cover most of the above articles as listed above. Different countries may include or exclude some articles based on areas of agreement between countries. As can be seen above, DTAAs by and large cover most of the income streams that might be subject to double taxation. Each of the incomes are dealt lucidly.
Double Taxation Avoidance Agreements (DTAA) in India
DTAAs in India are governed by Section 90 of the Income Tax Act, 1961 and Section 90A of the Income Tax Act, 1961 along with the related Rules. India predominantly follows the UN Model of Tax Convention for DTAA. India has different types of agreements with countries, including comprehensive, limited, multilateral, and tax information exchange. India has executed DTAAs with all major countries extending to over eighty countries.
How to avail the benefits of DTAA in India
For the purpose of availing the benefit of DTAA, a taxpayer may follow the following guiding principles-
- Whether there is a DTAA between India and the other country for checking the taxability of cross border income.
- If yes, the taxpayer is required to check whether he is eligible to choose DTAA provisions. His eligibility is determined by his residential status, permanent establishment and source of income of the taxpayer.
- Next, if the taxpayer is eligible for choosing the provisions of the DTAA, he shall check if the said DTAA covers the nature of income in question.
- Based on the relevant provisions of the DTAA applicable for the said income, the taxpayer may derive the tax implication applicable on the said income.
- Simultaneously, the taxpayer may compute the tax payable by him as per the regular provisions of the Income Tax Act, 1961.
- As per the provisions of the Income Tax Act, 1961, the taxpayer has the option to choose the provisions of the DTAA if they are more beneficial to him. Accordingly, a comparison of taxes payable under Points 4 and 5 above shall be the deciding factor for a taxpayer on whether to opt for the provisions of DTAA.
Income Tax Rules governing implementation of DTAAs in India
- Rule 128 of Income Tax Rules 1962: This Rule specifies how a resident of another country may claim credit for tax paid on income earned in that country in accordance with a DTAA in India. Some of the important considerations are as follows:
- The credit of foreign tax shall be available only to the extent of the income tax, surcharge and cess payable under Income Tax Act ,1961. No credit shall be availed for payment of any interest, fee or penalty under the Act.
- No credit of foreign tax shall be available if the foreign tax paid is disputed by the said resident unless sufficient evidence is submitted by the resident within six months of the end of the dispute. The said evidence to be submitted should be to the effect that the tax liability is paid by him including an undertaking that no refund is claimed by him in this respect.
- The amount of foreign tax credit shall be restricted to the amount of tax payable under Income Tax Act, 1961 and the foreign tax paid on the same income, whichever is lower. If foreign tax paid is in excess of Indian income tax, the difference is to be ignored and is not eligible to be claimed. The rate of conversion to be taken is the telegraphic transfer buying rate on the last day of the month immediately before the month in which such foreign tax was paid or withheld.
- In case foreign tax credit is to be availed against tax payable under Section 115JB of the Income Tax Act, 1961 or Section 115JC of the same Act, the foreign tax credit is allowable only to the extent of the tax payable under normal provisions of the Act. Tax as per normal provisions of the Act is the tax payable as per the provisions of the Act other than Section 115JB of the Income Tax Act, 1961 or Section 115JC of the same Act.
- Following documents are required for availing the benefit of a DTAA
- Form 67 is required to be filed electronically by the resident providing details like the country of foreign income, amount of income earned outside India, foreign tax paid on the said income, tax payable as per the Act, the foreign exchange conversion rate, the amount of foreign tax credit availed, refunds of foreign tax claimed, etc. The form is to be filed on or before the last day of filing IT returns for the year in which the income is offered to tax in India.
- Certificate or statement, specifying the nature of income and the tax paid or withheld, is to be obtained from the foreign tax authority or the person responsible for withholding of the tax. If such a certificate or statement is not available, then a statement is to be provided by the resident along with the evidence of tax paid or withheld. These documents are required to be uploaded along with Form 67.
- Form 67 is also used in a case of carry backward losses which may result in the refund of taxes paid by availing foreign tax credit in the earlier year.
- Rule 21AB of the Income Tax Act, 1961: A non-resident is not eligible to claim relief under a DTAA unless he provides the requisite documents and information as referred in Rule 21AB.
- The non resident is required to provide the following-
- Status of the non resident (whether he is an individual, firm, company or any other entity)
- Nationality of the non resident
- Tax Identification Number (TIN) of the non resident
- Period of residential status in the foreign country
- Address of the non resident in the foreign country
- Tax Residence Certificate (TRC) issued by the foreign country
- The non-resident is required to keep adequate documents that substantiate the information provided above.
- The non resident is required to provide the following-
Further, for availing the benefits of DTAA outside India, Indian residents may also apply for a Tax Residency Certificate (TRC) in the relevant Form 10FA to the concerned officer. The officer, upon receiving the application in Form 10FA, may upon being satisfied, issue the TRC in Form 10FB.
Conclusion
DTAAs have come a long way in promoting globalisation and transparency in taxation. They have further assisted nations in preventing tax evasion and resolving geographical tax rights between countries. DTAAs provide a seamless passage of income and taxes across the world, thereby providing a limitless expanse for promoting trade and boosting economies around the world.
References
- https://groww.in/blog/all-about-double-taxation-avoidance-agreement
- https://www.coverfox.com/personal-finance/tax/double-taxation-avoidance-agreement/
- https://www.bankbazaar.com/tax/double-taxation-avoidance-agreement.html
- https://incometaxindia.gov.in/pages/international-taxation/dtaa.aspx
- https://incometaxindia.gov.in/Pages/acts/income-tax-act.aspx
- https://incometaxindia.gov.in/Rules/Income-Tax%20Rules/103120000000007365.htm
- https://incometaxindia.gov.in/Rules/Income-Tax%20Rules/rule128.htm
- https://carajput.com/dtaa.php
- https://taxsummaries.pwc.com/india/individual/foreign-tax-relief-and-tax-treaties
- https://www.wirc-icai.org/images/material/Overview-DTAA-provisions-final.pdf
- https://www.taxmann.com/post/blog/831/double-taxation-avoidance-agreement-all-about-dtaa/#:~:text=Double%20Taxation%20Avoidance%20Agreement%20(DTAA)%20is%20an%20agreement%20between%20two,League%20of%20Nations%20in%201927.
- https://taxguru.in/income-tax/double-tax-avoidance-agreements-taxation.html
- https://blog.ipleaders.in/dtaa-clauses/
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