The concept of double taxation is a major impediment to international trade, services, capital and people. This is due to the fact that the same income is taxed by two or more countries, leading to a prohibitive burden on the taxpayers. In order to address this issue, countries have adopted various methods such as unilateral relief, provided through domestic laws like the Income Tax Act.
However, for a more comprehensive solution, a range of countries have come together to sign Double Taxation Avoidance Agreements (DTAA), which aim to reduce taxation obstacles and improve the general investment climate. This article explores the importance and advantages of DTAA in greater detail.
What is Double Taxation Avoidance Agreement (DTAA)?
Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between two or more countries to help taxpayers avoid paying double taxes on the same income. A DTAA becomes applicable in cases where an individual is a resident of one nation, but earns income in another.
The intent behind a Double Tax Avoidance Agreement is to make a country appear as an attractive investment destination by providing relief on dual taxation. This form of relief is provided by exempting income earned in a foreign country from tax in the resident nation or offering credit to the extent taxes have been paid abroad.
What are the benefits of DTAA?
The main benefit of a Double Tax Avoidance Agreement is that it allows an individual to avoid paying taxes twice on the same income. This is particularly beneficial for those taxpayers who operate in multiple countries and would otherwise be liable to pay taxes in both countries.
The second primary goal of DTAA agreements with other nations is to reduce the chance that taxpayers in either or both of the nations between whom the bilateral or multilateral DTAA agreement has been struck would engage in tax evasion.
Additionally, DTAAs can also provide for concessional rates of tax in certain cases. For instance, interest earned on NRI bank deposits attracts a TDS of 30 percent. However, under the DTAAs that India has signed with other countries, tax is deducted at 10-15 percent.
What are the documents required to avail the benefits under DTAA?
To avail the benefits of DTAA, an NRI individual will have to provide a self-declaration cum indemnity format, a self-attested PAN card copy, a self-attested visa and passport copy, a PIO proof copy (if applicable) and a Tax Residency Certificate (TRC) in a timely fashion to the concerned deductor.
According to the Finance Act 2013, an individual will not be entitled to claim any benefit of relief under Double Taxation Avoidance Agreement unless he or she provides a Tax Residency Certificate to the deductor.
To receive a Tax Residency Certificate, an application has to be made in Form 10FA (Application for Certificate of residence for the purposes of an agreement under section 90 and 90A of the Income-tax Act, 1961) to the income tax authorities. Once the application is successfully processed, the certificate will be issued in Form 10FB.
Depending on the specifics that were agreed upon by both parties, the DTAA rates and regulations change from one nation to the next. TDS rates on interest earnings range from 7.50% to 15% but are typically 10% or 15% in most nations.
India presently has a Double Tax Avoidance Agreement with 80+ countries, with plans to sign such treaties with more countries in the years to come. Some of the countries with which it has comprehensive agreements include Australia, Canada, the United Arab Emirates, Germany, Mauritius, Singapore, the United Kingdom and the United States of America.