Double taxation agreement

The Double Tax Avoidance Agreements (DTAA) is essentially bilateral agreements entered into between two countries, in our case, between India and another foreign state. The basic objective is to avoid, taxation of income in both the countries (i. e. Double taxation of same income) and to promote and foster economic trade and investment between the two countries. The advantages of DTAA are as under. ADVANTAGES AND DISADVANTAGES OF DOUBLE TAXATION AVOIDANCE AGREEMENTS Advantages.

1) Lower Withholding Taxes (Tax Deduction at Source) 2) Complete exemption of income from taxes. 3) Underlying tax credits 4) Tax sparing credits 5) Formulating the fair Arms Length Price or the Transfer Price for the transaction Disadvantages 1) DTAA are signed with only a few countries. So, the country with which no DTAA is signed, the income from that country will be doubly taxed. 2) It’s a cumbersome procedure to arrive at the Arms Length Price and depends upon the discretion of the Transfer Pricing Officer (TPO).

WORKING OF DTAA In order to provide tax relief to avoid double taxation, various countries have entered into Double Taxation Avoidance Agreements (Tax Treaty). One of the ways to avoid double taxation is by way of an exemption from tax in the source country where the income is accrued or received. In the context of India, a tax resident of a tax treaty country (say US) can claim tax exemption on his salary income in India for his short stay in India irrespective of whether the income arises or is received in India.

This implies that the tax payer has to be tax resident of US and Non Resident (NR) in India. Hither to the recent changes in Indian tax law, NR taxpayers were not required to obtain and/ or furnish proof of being tax resident of a tax treaty country. Recently, India has amended its tax laws, vide Finance Act, 2012, to mandate NR taxpayers to obtain Tax Residency Certificate (TRC) if they are claiming benefits under the Tax Treaty.

The Indian Tax Authorities (ITA) have notified Rules on 17 September 2012 prescribing the particulars that are required in the TRC which inter-alia include: name, status (individual or otherwise), nationality, tax identification number, residential status for the purpose of tax, period for which the certificate is applicable and address of the NR taxpayer, which is issued by the Country of Residence (COR). The requirement to furnish the TRC is effective from the Financial Year (FY) 2012 13 (i. e. , 1 April 2012 to March 31, 2013).