Double Taxation Avoidance Agreement

Different Types of Double Taxation Avoidance Agreements

Online Legal India LogoBy Online Legal India Published On 16 Mar 2023 Category Taxation

The primary goal of the Double Taxation Avoidance Agreement (DTAA) is to avoid tax evasion, exchange information between nations, and double taxation. Such an agreement assures that the corporation will pay the tax in just one of the nations.

A Double Taxation Avoidance Agreement (DTAA) can be either comprehensive and include all sources of revenue, or it can be confined to specific sectors, such as taxing income from air transport services, shipping, and so on.

What do you mean by Double Taxation Avoidance Agreement?

A tax deal known as the Double Taxation Avoidance Agreement, or DTAA, was signed between India and other countries. It was signed to avoid taxpayers from paying taxes in their home nation and their place of origin on their earnings. This means the nations involved have determined tax rates and taxing jurisdictions for money generated within their borders. In addition, this agreement promotes the exchange of goods, services, and capital between the two countries.

DTAA now exists between India and over 85 countries. Based on the sorts of companies or assets that citizens of one country have in another, the DTAA might encompass all types of income or focus on a specific type of income. The DTAA guidelines state that investments designed to decrease taxes are not eligible for treaty benefits. As a result, if a company invests in one country and then reinvests the revenues in another country to avoid paying taxes, such a transaction is not protected by the DTAA.

Rates and rules under the DTAA vary per country. Rates are usually determined by a special agreement signed by both parties. TDS charges on interest profits usually range from 7.50% to 15%, but in some countries, they can be as high as 10% or 15%. Therefore, people should compare the prices indicated with the nations specified in the DTAA India.

To take benefit of the DTAA's provisions, an NRI must timely submit the following paperwork to the applicable deductor.

  • Self-declaration and indemnity form
  • PAN card self-attested copy
  • Passport with self-attestation
  • VISA with self-attestation
  • Proof of Person of Indian Origin (if applicable)
  • Certificate of Tax Residence (TRC)

According to the Finance Act of 2013, a person is only qualified to claim reduction advantages under the DTAA if they provide a Tax Residency Certificate (TRC) to the deductor. To get a TRC, submit a Form 10FA application to the taxation authorities. Form 10FB will be used to issue the certificate when the application is handled correctly.

Different Types of DTAA

The following are the different types of Double Taxation Avoidance Agreements that can be put into based on the degree of commerce and bilateral ties between nations:

Bilateral Treaties

A bilateral treaty is an agreement between two countries solely. For example, the Double Taxation Avoidance Agreement between India and the United States is a bilateral treaty because it was signed by only two countries, India and the United States.

Multilateral Treaties 

Multilateral treaties, such as the APAC or SAARC Convention, are agreements signed by many countries. In addition, various nations have signed a multilateral agreement in tax agreements, whereby existing treaties have been changed for states who are parties to the Multilateral Convention.

Limited Agreements

The Limited Double Taxation Avoidance Agreement only applies to a few types of income. For example, only revenues from the shipping and aircraft sectors are included in the two nations' DTAA.

Benefits of DTAA

There are several advantages to a Double Taxation Agreement (DTAA). Other than avoiding having to pay double tax on earned income, the primary benefit includes the following:

Tax Exemption- Assume that nation A (the source country) taxes capital gains at 10%. Today, tax exemption occurs when the government of country A (source country) declares that it will not collect tax on investment from country B (origin country) and exempts country B from tax on capital gains on investment.

Reduced Tax Rate- Using the preceding example, if country A (source country) imposes a 10% tax on capital gains, it notifies country B (origin country) that it would collect tax on capital gains at a rate of 5% on investments coming from country B, this is known as a tax reduction.

Refund- Assume that firm X from country A (origin country) invests in country B (source country) and pays Rs. 100 as a tax on income received in country B. (source country). Country A (the nation of origin) may return the Rs. 100 or a portion of the tax to firm X. With the notion of a Double Tax Avoidance Agreement, this is known as a rebate (DTAA).

Tax Information Exchange Agreements

The OECD established TIEAs, or Tax Information Exchange Agreements, to combat harmful tax practices such as corporate tax avoidance, international tax evasion, and unlawful money flows. These agreements promote worldwide collaboration and openness among countries by exchanging data on tax evaders. In addition, bilateral or multilateral Tax Information Sharing Agreements are possible.

Comprehensive Contracts

Complete DTAAs generally include provisions for each income stream in any model agreement. As a result, most of the DTAAs signed by India are comprehensive agreements.

Conclusion
Regarding trade and commerce, most people are inclined to do so worldwide. As a corporation becomes globally established, it generates money from several countries. Yet, the business owner is a citizen of a particular country.

The biggest concern now is the double taxation levied by both countries. Countries signed the Double Taxation Avoidance Agreement to address this issue. A large number of nations have already signed this pact. Various countries have implemented DTAA tax rates. There are also numerous varieties of DTAA, such as multilateral and bilateral accords. Furthermore, there are other benefits to signing a DTAA, including lower tax rates, tax credits, tax exemption, and many others.


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