Double Taxation Avoidance Agreement

    Double Taxation Avoidance Agreement

    Example citing the working 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.

DTAA

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. Also, NRI is entitled to avail the benefits under the provisions of DTAA between India and his country of residence with respect to interest

income on government securities, company fixed deposits, dividend

and loans. 

  Entitlement to benefits under DTAA requires submission of certain

documents: 

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-declaration or indemnity format. The format for the same is available on the website of the bank. 

Self-attested PAN card copy Self-attested visa and passport copy PIO proof copy in case renewal of the passport is made during the course of the current financial year 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.

Scenario of DTAA in India:

As of now, India has DTAA with 84 nations, including Armenia, Bangladesh, Finland, Ireland,Japan, Kazakhstan, Greece, Italy and several others. Further, India is constantly gearing to establish DTAA with other nations as such agreements work towards promoting trade

and investments among contracted nations.

Need for Understanding DTAA

For a country to prosper, its economy has to grow. Apart from the development in the domestic country, it will require foreign investments to flourish. DTAA's provide clarity on how the cross -

border transactions will be taxed and this will encourage foreign investors to benefit from understanding the rules and regulations. For Example: If an individual of Indian origin who is working in a company in India has been posted abroad for a brief period of time then the salary and other emoluments which he/she earns during their stay abroad might be taxed in both the countries. So it is better to understand the rules and regulations of the DTAA to claim the benefits of taxation at the time of filing Income Tax Returns. Government working on DTAA to avoid tax evasion. Recently, there were reports that the DTAA agreement with one of the leading countries through which a lot of inflows happens was being re-worked. The government has been worried that individuals are using the Double Taxation Avoidance Agreement to evade paying tax. In fact, the available of capital gains tax treaty through the DTAA many feel ay have been exploited. The government is now loooking at changing some provisions of the DTAA. Similarly, another tax haven from which a lot of inflows happens could be examined and re-worked. The list of countries with whom India has these DTAA agreements could be re-visited from time to time. Recently, the government of India signed a protocol ammending the Double Taxation Avoidance Agreement with Mauritius.It would now allow India the ability to tax Mauritius residents for capital gains sale of share arising in India. For long there has been an argument that tax treaties from tax havens have been exploited.

In India, there have been reports of round tripping, where money first

leaves the country and than flows back to India into the stock markets

through tax havens. India recently amended its Double Taxation Avoidance Agreement (DTAA) with Mauritius to plug certain loopholes. Now, a Mauritian entity will have to pay capital gains tax here while selling shares in a company in India from April 2017. Earlier, the company could avoid tax as it was not a ‘resident’ in India. It could get away from the taxman in Mauritius too, due to non taxation of capital gains for its

residents. As a result, many shell entities sprang up in Mauritius to profit from investments in India and get away without paying taxes anywhere.

What is it?

A DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-payers in these countries can avoid being taxed twice for the same income. A DTAA applies in cases where a tax-payer resides in one country and earns income in another.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.

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.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. Double taxation is an issue related with taxation of income that crosses boundaries. Here, an individual or a company may be earning his/ its income in a foreign country. But that income is transferred to

the home country. The issue is that who has the right to tax such an

income.

 Definitely, the source country (the country where income has generated, the country where the company or individual worked) would like to tax the income generated there. Similarly, the resident country (where the individual is residing or the company is incorporated) to which he/it belongs also tries to tax the income. This is because; the income is generated by its resident. Now if both countries try to tax the person/company, it is double taxation. Double taxation means taxing the same income twice, once in the home country and again in the host country.  Such a double taxation discourages the individual/company to engage in economic activities overseas. Hence, there should be mechanisms to avoid double taxation. But, there is no international law to avoid double taxation. So, it is for the countries in the international arena to solve double taxation problems by preparing bilateral agreements. Hence, negotiations are taking place between different countries and as a result, large number of Double Taxation Avoidance Agreements(DTAAs) are reached to facilitate cross national economic activities by avoiding double taxation. Double taxation avoidance treaties comprise of agreements between two countries, which, by eliminating international double taxation, promote exchange of goods, persons, services and investment of capital. These are bilateral economic agreements where the countries concerned evaluate the sacrifices and advantages which the treaty brings for each contracting state, including tax forgone and compensating economic advantages.The right to tax a particular income, rate of taxes etc are reached after bilateral discussion with the other country under the DTAA process. This is needed because each country has its own unique tax laws. India has signed 92 DTAAs with other countries. Many of these agreements contain additional facilities like Tax Information Exchange Agreements aimed at providing tax payment information about cross

national income.