What is a Double Taxation Avoidance Agreement (DTAA)? A Comprehensive Guide

• A Double Taxation Avoidance Agreement (DTAA) is an arrangement between two countries to prevent individuals and businesses from being taxed twice on the same income

• This agreement ensures lower tax liabilities for the taxpayers of either of the countries

• It generally applies to business profits salaries, capital gains, interest income, dividends, and property sales

• To claim DTAA benefits, taxpayers must obtain a Tax Residency Certificate (TRC), submit income proof, fill out necessary forms, and file declarations

A Double Tax Avoidance agreement is signed between two countries as an arrangement relating to applicable taxes. This is applicable to you when your profits come from two different nations.

Assume that you invest in stocks in the New York Stock Exchange and earn capital gains. So, the capital gains you make now will be taxable in both of these countries. Here, DTAA comes to the rescue. It reduces the total tax liability to a lower rate, helping you save more on taxes.

Not only does it apply to capital gains, but it accounts for income from various other sources. It includes income, including salary, interest, savings, FDs, business profits, etc.

Various types of income covered under the DTAA contract include:

• When you sell any assets in another country and account for capital gains such as stocks

• If you are an Indian citizen working as a salaried employee in another country

• If you have a fixed deposit account in India as an NRI

• Income gained from the sales of your property

• Earnings from professional services in another country

• Interest income from savings accounts

Let’s understand the DTAA with the help of an example. Let’s say you bought stocks of a company based in USA in 2022 and now sell it for a profit of $265. The capital gains will attract taxation in the USA and India.

Assuming that both the countries tax 15% of the capital gains, the effective taxation would be 30%. But with DTAA in effect, you will have to pay taxes only in one of the countries.

The purpose of the DTAA agreement is to provide relief for taxpayers from paying double taxes. This agreement helps save more on income earned from the source country and residence country. A double tax avoidance treaty between two countries is crucial to prevent unfair practices in taxation.

The functioning agreement is simple as it narrows down the tax basis the source country and residence country. This DTAA tax agreement uses a simple calculation to decide which country is the primary holder of your taxes. It is called the credit and exemption method for avoiding double taxation.

Let’s dive into these two common methods used to decide which country primarily has the right to address your taxes.

1. Credit Method

As per basic rules, the income you own is taxed in both source and residence countries. But in this case, you as a taxpayer get credit by filing Form 67 in the resident country if you pay a tax in the source country. For instance, if you pay 20% tax on your income in Russia and you owe 30% tax in India, you will only have to pay 10% difference tax in India.

2. Exemption Method

In this method, only one country will be liable to receive tax from you. For instance, you have to provide 20% tax in Russia and 30% tax in India. But, there is a DTAA signed between India and Russia. In this case, your income will be only taxed in Russia and not India.

To claim DTAA benefits for your income from two countries, you must get TRC, provide some documents and fill out the forms.

1. The first step is to check if you are eligible for this relief. You can do this by checking if your source country has DTAA with the resident country

2. Apply for a Tax Residency Certificate (TRC) from tax authorities as this will help you save taxes

3. Collect and provide other necessary documents such as income proofs, taxes paid and contracts

4. Fill out the required forms (Form 10F in India for this purpose)

5. You will have to file a declaration to the tax authorities in the source country

6. While filing ITR, claim the credit for the taxes you have paid and ask for exemptions

Some key provisions have been made in the DTAA revising the applicable liabilities based on certain conditions.

• Residency Provision: If a person spends more than a certain time in another country, they are considered as a resident of another country for the specific financial year. This impacts the consideration of where they pay these taxes.

• Permanent Establishment: This provision determines a fixed place of the business or profit to be taxed accordingly. For instance, if an Indian company opens a branch in Germany and gains profits, Germany will gain the benefit of those profits as taxes.

• Immovable Property: This agreement applies to income from the sales of property in another country.

• Business Profits: Wherever the permanent establishment of the business is located, the taxes apply in that country.

• Capital Gains: This agreement also applies to taxes on the sales of stocks, shares or assets in another country.

• Mutual Agreement Procedure (MAP): In case a dispute arises between two countries for taxation applicability, MAP tends to resolve it.

• Exchange of Information: This provision ensures smooth communication between two countries to avoid tax evasion.

Some benefits of DTAA for you as a taxpayer in two countries include avoidance of double taxes and protection against discrimination. Read on for an in-depth understanding.

• The primary benefit of this agreement is that you do not have to pay double taxes in the source country and resident country.

• Another benefit of this agreement is reduced withholding of taxes, specifically on interest, royalties and dividends.

• This agreement has another benefit of providing clear guidelines and taxation rules between two countries.

• It also provides clarity on the rules applicable to different types of income sources.

• Another benefit of this agreement is protection against discrimination as a source country may have higher taxes for foreign individuals than domestic individuals.

• In case a disagreement or dispute happens between two countries for tax, you as a taxpayer do not suffer. The Mutual Agreement Procedure (MAP) provision helps in resolving this litigation.

• By providing clear information on double taxation, this agreement encourages cross-border trade and business opportunities.

• In other countries, information exchange happens due to this agreement, and the transparency ensures the avoidance of tax evasion.

1. What is DTAA and how does it work?

DTAA is a double tax avoidance agreement signed between two countries. It prevents the individuals of the resident country from paying double taxes if they earn from the source country.

2. Who can benefit from Double Taxation Avoidance Agreements?

NRIs, persons of Indian origin (PIO) and overseas citizens of India can benefit from Double Taxation Avoidance Agreements.

3. What types of income are covered under DTAA?

Income from capital gains, FD accounts, interest from savings, sales of assets, property, stocks, etc. are covered under DTAA.

4. How can I claim relief under a DTAA?

You can get relief from double taxes as per DTAA in income tax return. Further, you must provide a deduction certificate from the source foreign country.

5. What is the difference between exemption and credit methods in DTAA?

In the credit method, the taxpayer gets a credit in the residence country from a tax paid in the source country. However, the exemption method enables tax exemption from one country if the tax is already paid in the other.

6. Do all countries have DTAA agreements?

Depends on the agreements between countries. Specifically, India has this DTAA treaty signed between 85 countries.

7. How does DTAA impact non-residents earning income in India?

In the DTAA, non-residents avoid paying tax twice on the same income in India and their home country.

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