Double Taxation Avoidance Agreements (DTAA):
DTAA is a bilateral agreement between two countries. The basic intent of such an agreement is to accelerate and facilitate economic trade and investment between the two countries by avoiding double taxation.
This would mean that the double taxation of similar income by various countries would add to a restrictive burden on the innocent taxpayer. The domestic laws of most of these countries decrease the problem by making unilateral relief in respect of such doubly taxed income available. There arises a necessity for an agreement on Double Tax Avoidance due to different rules in two distinct countries about the changeability of income on the receipt and accrual basis or residential status.
Types of Double Taxation Avoidance Agreements (DTAAs)
Bilateral Treaties
These two-nation agreements are the most frequently occurring form of DTAA. For example, the DTAA between India and the United States is a bilateral agreement or treaty between just those two countries. These agreements are exclusively customized toward the two countries' prevailing economic and taxation contexts.
Multilateral Treaties
These agreements include more than two nations and are not as frequent as bilateral treaties. Multilateral conventions normally partake in wider regional and international cooperation, such as the APAC or SAARC conventions. This would standardize tax regulations for several countries and would make international trade and investment easier for nations within a particular group.
Limited Agreements
A limited DTAA has a narrower scope and applies only to specific forms of income. For example, a limited DTAA may cover an income arising solely from the operation of ships or aircraft in international traffic. Such agreements are usually made by countries which are experiencing extensive commercial transactions on one or two areas of operation and where a comprehensive DTAA covering all types of income is not needed.
Each variety of DTAA has been serving a different purpose under the broad spectrum of international taxation in reducing or, for that matter, trying to eliminate the issue of double taxation, thereby encouraging cross-border economic activities.
Objectives and Scope of Double Taxation Avoidance Agreements
Avoidance of Double Taxation: This forms the very backbone of any DTAA. What it ensures is that income earned in one country by a resident of another is taxed in only one of the two countries so that the same income is not taxed twice. This becomes especially important for multinational corporations and people operating across borders.
DTAA agreements sometimes contain certain provisions that will deter tax evasion, wherein the loopholes in the international tax regime would be such that these cannot be manipulated for evasion of taxes.
Information Exchange: Many of the agreements provide the ways and manners for exchanging information between the tax departments of the countries. The sharing of information is needed to operate the tax laws and stem the growth of illegal activities like evasion of tax payment and money laundering.
Comprehensive vs. Specific Agreements: DTAAs may be comprehensive, dealing with all forms of Income and capital, or limited to particular fields or classes of Income. While the comprehensive ones deal broadly with a wide range of sources of income, sector-specific agreements focus on particular areas such as Income derived from aviation, shipping, etc.
Advantages of Double Taxation Avoidance Agreement (DTAA)
Exemption: Sometimes, DTAA extends exemptions in those cases where exemption is beneficial to businessmen and traders. Capital gains, for example, may be exempted under DTAA, but one has to understand the terms and conditions for the same so that requirement of claiming such exemptions has been met for all intents and purposes.
Tax Credit: This simply means crediting, in one's home country, various taxes paid in the country where the Income is sourced. This shall, in effect, ensure that one doesn't pay tax on the same Income twice and will grease operations and international revenue transfers.
Legal Certainty: DTAA lays down a lucid policy with respect to the taxing of international income. Such clarity enhances the level of legal certainty. As a matter of fact, this also offers encouragement to developing countries desirous of attracting foreign investments.
Reduced TDS Rates: This agreement also reduced the TDS rates on dividends received in India. This results in enormous savings for those who receive substantial dividend income.
Tax Refund Opportunities: When a company resident of one country has paid Income tax in another country, the country of residence sometimes grants a refund or a part of the tax paid. Under DTAA, this rebate provides financial relief to businesses operating across borders.
List of Countries Having Double Taxation Treaty with India
