April 26,2023

Double Taxation Avoidance Agreement, Rates, Benefits & Types

Many NRIs working abroad may need some assistance if both their countries implement taxes on their income, which results in double taxation. This phenomenon can consume a sizable amount of your total income and place you under financial stress. To avoid this, Double Taxation Avoidance Agreements are in place, to make your life simpler.

What is a Double Taxation Avoidance Agreement?

The Double Avoidance Tax Agreement (DTAA) is a treaty signed between two or more countries that helps remove instances of double taxation in cross-border income flow. It applies in cases where the taxpayer is from one country and earns income from another. One of the double taxation avoidance agreements examples includes India, which has this agreement signed with more than 80 countries globally, to help make the lives of citizens easier. DTAA can be implemented on all types of income or specific incomes depending on the circumstances. The categories covered under this agreement are:
  • Services
  • Salary
  • Property
  • Capital Gains
  • Savings/Fixed Deposit Accounts

Double Taxation Avoidance Agreement Duration and Rates

This agreement stays in effect for an infinite time period, unless one party formally terminates the agreement. The rates and regulations are subject to change depending on the terms agreed upon by both parties and from one country to another. The range for the TDS rate on interest earned varies from 7.5% to 15%.

Benefits of Double Taxation Avoidance Agreement

  1. This agreement aims to promote a nation as a lucrative investment location.
  2. This agreement benefits people who live in one country but have set up offices, companies, or businesses in other countries. It helps prevent double taxation on the same income that could have caused financial strain.
  3. The Double Taxation Avoidance Agreement even provides tax exemptions under specific circumstances. The terms are specified in the agreement, and the capital gains taxes are replaced with this agreement to make things easier for people in trading and with businesses.
  4. It also offers a tax credit for the revenue generated in the source country, which helps prevent double taxation on the same profit income.
  5. The Double Taxation Avoidance Agreement provides a firm legal certainty that goes a long way to promote foreign investment in developing nations.
  6. Many anti-abusive clauses are in place to ensure that only genuine citizens benefit.

List of documents required to avail the Double Taxation Avoidance Agreement

NRIs must provide these documents mentioned below, to the concerned department, in order to avail the benefits of the Double Taxation Avoidance Agreement. The documents are:
  • Indemnity or a self-declaration form
  • Tax residency certificate
  • Self-attested copy of the PAN card
  • Self-attested visa
  • Self-attested photocopy of passport
  • PIO proof copy

Types of DTAA

There are a few types of Double Taxation Avoidance Agreements which are:

Bilateral Treaties

As the name suggests, this is an agreement between two countries, and the relief is calculated based on the mutual agreement between the involved parties. There are two ways a bilateral treaty can be granted:
  1. Exemption method: With this method, a taxpayer’s income is taxed in only one country.
  2. Tax credit: Income is taxed in both countries involved. However, relief is granted in the country where the taxpayer is the resident.

Unilateral relief

This is the type of agreement where a treaty is signed between many countries. For example, the convention between APAC or SAARC countries. The home nation provides relief if there is no mutual agreement to be found between the countries.

Limited Agreements

Limited Double Taxation Avoidance Agreements are only applicable for certain types of income. For example, the DTAA between India and Pakistan only covers the profits from shipping and airline businesses.

Comprehensive Agreements

This type of agreement covers almost all income found in any model convention. Most of the DTAA agreements that India is a part of, are Comprehensive.

Methods used in DTAA

The different types of methods used in the Double Taxation Avoidance Agreement are:

Exemption Approach

Under this method, the income already taxed in the source country is exempted from taxation in the resident country, either partially or whole. The Double Taxation Avoidance Agreement signed by countries has stipulations that state the rules of exemption.
The two types of exemptions that we will discuss are:
  1. Full exemption: With this, the income taxed in the source country is not considered for taxation in the resident country.
  2. Progressive exemption: In this method, the tax levied in the source country is not taxed in the resident country but used in the resident country to arrive at a tax rate.

Credit Method

This method provides credit for the tax that is already paid. The income tax in the source country is included in the calculation of the total income of the residence country. The individual may arrive at the tax liability in their resident country. With this method, the resident country deducts tax from the source country.
  1. Full credit method: When one pays tax in the source country, the resident country provides the individual with credits for that tax paid, without any restrictions.
  2. Ordinary credit method: This method is applicable to agreements allowing a credit against tax payable in the resident country. It is only applicable if the income is subjected to tax in a foreign jurisdiction. Suppose the tax paid in the overseas jurisdiction is an excess of tax that is chargeable in the resident country. In that case, the excess tax is exempted, and credit is provided for the tax payable in the resident country.
The rules of DTAA vary from one country to the other. To find a more specific context, search for the agreement terms between specific countries that fulfil your requirements.

Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.

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