All About Double Taxation Avoidance Agreement
All About Double Taxation Avoidance Agreement
If you are a global investor who loves investing in stocks of global companies, you might have faced challenges with double taxation. Moreover, taxation issues also arise if you set up a business in a foreign land and generate income from it. To resolve this issue, the government has introduced the Double Taxation Avoidance Agreement.
Let's discuss this taxation rule in detail.
Understanding DTAA Meaning
DTAA full form is Double Taxation Avoidance Agreement which is a treaty signed between two or more countries to avoid double taxation, that is, prevent the same income from being taxed twice. India, too, has signed a Double Tax Avoidance Agreement (DTAA) with other countries to reduce the tax liabilities on the taxpayers.
This is particularly relevant for individuals who reside in one country but earn income in another. The primary objective of this pact is to promote international trade and investment by offering tax stability and reducing tax barriers.
Suppose you are an Indian resident working in Germany. You earn income in Germany but also have investments in India that generate interest income. Without a DTAA in income tax, your interest income could be taxed in India and again in Germany.
Categories Covered Under Double Taxation Avoidance Agreement
As an NRI, you can claim DTAA for the income from the following sources:
Salary received
Income from house property
Capital Gains when assets are transferred to India
Payment of services rendered in India
Interest earned on Fixed Deposit accounts
Interest earned on Savings account
Different Methods to Avoid Double Taxation
There are two ways to avail relief under DTAA - bilateral and unilateral tax reliefs.
Bilateral Relief
This is applicable on nations that have signed a Double Taxation Avoidance Agreement (DTAA) with India. Presently, India has entered into DTAA treaties with over 80 countries.
The two common methods used to avoid double taxation under bilateral relief are:
Exemption Method
Under this, one country agrees not to tax certain income if it has already been taxed in another country. For example, if you are an Indian resident and receive dividends from a company in the UK, India may exempt this income from tax because it has already been taxed in the UK.
** Tax Credit Method**
This approach allows you to offset the tax you have paid abroad against your tax liability in your country of residence.
For example, if you are paying tax on employment income in Germany, you can claim a credit for these taxes against your Indian tax liability. This method ensures you are not paying more tax than the maximum rate you would have paid if the income was only taxed in one country.
Unilateral Relief
Unilateral relief is granted when there is no DTAA treaty between India and the country from which the income is derived. To avail of this relief, the following conditions must be met:
One should be an Indian resident
The income should be earned outside India
The earned income should be taxable, and the tax amount should be paid.
Under this method, the income will face double taxation, but a deduction from the Indian income tax would be applicable. The deduction rate would be determined by the lower of either the average tax rate in India or the average tax rate in the source country.
Understanding the DTAA TDS Rate Chart
The DTAA TDS rates for different countries are as follows:
Document Required for Claiming Double Taxation Avoidance Agreement Benefits
Keep the following documents handy when claiming DTAA perks:
An indemnity or self-declaration form that states your eligibility for DTAA benefits.
Tax Residency Certificate (TRC) issued by the tax authorities of the country of residence. You can apply for this certificate under sections 90 and 90A by furnishing form 10FA.
A self-attested PAN card copy
Self-attested Visa
A self-attested photocopy of the passport
If applicable, a copy of the proof of Person of Indian Origin (PIO) may be required to establish the individual's heritage and connections to India.
Benefits of Double Taxation Avoidance Agreement
The double taxation agreement can provide for a reduced rate of tax on dividends, interest, and royalties earned in India. This means lower upfront tax deductions on these types of income, leaving you with more cash in hand.
Some DTAAs allow for a tax-sparing credit. That means you get a credit for the tax that would have been paid in the foreign country, even if it wasn't actually levied.
The DTAA ensures that you are not discriminated against based on your nationality in tax matters. You will be treated the same as a resident taxpayer, which can prevent potential biases and unfair treatment.
The DTAA provides a Mutual Agreement Procedure (MAP) if you face taxation issues. This MAP allows authorities from both countries to resolve disputes. This can save you from lengthy and costly legal battles.
The DTAA agreement provides certainty and stability in tax matters. You can plan your investments and income streams knowing exactly how they will be taxed without worrying about sudden changes in tax laws.
By preventing double taxation, the DTAA encourages you to invest in foreign countries and engage in international trade. This can lead to diversified income sources and potentially higher returns.
How to Apply for Form 10F Under the Double Taxation Avoidance Agreement?
To apply for Form 10F, you can follow these steps:
Step 1: Access the official e-filing portal using your PAN or the user ID. If you don't have an account, you must register first.
Step 2: Navigate to the 'e-File' menu and select 'Income Tax Forms.'
Step 3: Click on 'File Income Tax Forms'. From the list of available forms, choose Form 10F.
Step 4: Provide the necessary details while filing Form 10F online, and attach a copy of the TRC as a mandatory requirement
Basic Principles of Double Taxation Avoidance Agreement
| DTAA | Income Tax Act | Resolution |
|---|---|---|
| If the treaty does not consider the dispute | Income Tax Act has provision for dispute resolution | You must refer to the sections of the Income Tax Act |
| If the treaty has specific provisions | Law is not responding to resolve the dispute | Refer treaty |
| If there is a provision in the treaty | The Income Tax Act has an identical provision | Go for the one that is more beneficial to you |
| If there are some provisions in the treaty | Contradictory provisions | The treaty will be applicable |
Understanding Section 89A
Section 89A, introduced in the Finance Act 2021, applies to retirement accounts. Indian residents face double taxation on income from retirement accounts in foreign countries. This section was enacted to address the mismatch in the tax treatment of such income, which was previously taxed on an accrual basis in India, even though it might be taxed on a receipt basis in the foreign country.
As per this section, income accrued in a specified account in a notified country will now be taxed in India only upon withdrawal. This provision is particularly beneficial for NRIs contributing to retirement accounts like the Individual Retirement Account (IRA) or 401(k) in the USA, where periodic accretions are tax-deferred until withdrawal.
Conclusion
The DTAA is a pact between two or more countries to prevent identical earnings from being taxed twice. This international treaty is crucial for taxpayers who earn income across borders, as it ensures they don’t pay tax on the same earnings in both the source and the resident country.
DTAA benefits include reduced tax burdens through tax credits or exemptions, fostering a favourable environment for international trade and investment.
DTAA is not the only way to save on taxes. If you are an individual, investing in medical insurance in India can also help you save tax under section 80D. The health insurance plan shields against various medical expenses such as OPD charges, consultation fees, prescription charges, and several other fees.
Additionally, there is also health insurance for senior citizens addressing the needs of individuals above 60 years. Tata AIG medical insurance offers comprehensive coverage to individuals and health insurance plans tailored for those over the age of 60.
Disclaimer / TnC
Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.
What does a Double Taxation Avoidance Agreement mean?
What does a Double Taxation Avoidance Agreement mean?
A DTAA is a treaty signed between two or more countries to help taxpayers avoid being taxed twice on the same income. It sets out the rules for how the tax authorities of both countries will treat income earned in one country, ensuring that the individual or company doesn’t pay tax twice.
What types of earnings are covered under DTAA?
DTAAs generally cover a wide range of income sources, including salaries, dividends, interest, royalties, and capital gains. Each agreement specifies which types of income are covered and the methods for avoiding double taxation on these incomes.
How can individuals or businesses take advantage of DTAA?
Taxpayers can take advantage of DTAA by applying for tax relief either as a tax credit or exemption, depending on the provisions of the DTAA between the countries involved. They must declare their foreign income and provide proof of taxes paid abroad to claim the benefits.
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