Understanding DTAA

When a person begins to reside in another country for employment or business, the same income of that person is taxed by two different countries: the country where the income originates from (the source country), and the country where the taxpayer is considered a resident (the resident country). In simpler words, if an Indian resides in USA for business or work, then he is liable to pay tax in USA (the source country) and in India (the resident country). So, in order to help Non-Resident Indians (NRIs) avoid this situation of double taxation, India has established Double Taxation Avoidance Agreements (DTAAs) with over 94 countries, including Australia, Canada, France, Germany, Hong Kong, Portugal, Singapore, the UAE, the USA, the UK, and many others.

A Double Taxation Avoidance Agreement (DTAA) is a pact signed by two nations that promotes capital investment, liberal trade in goods and services, and other economic activities between the two countries by preventing International Double Taxation. DTAAs are designed to prevent individuals from being taxed twice on the same income.

Usually, International Income arises the issue of Double Taxation. Depending upon the types of businesses/holdings that citizens of one country have in another, the DTAA may either cover all types of income or may focus on a particular type of income. The Double Taxation Avoidance Agreements covers the following categories:

  1. Salary
  2. Capital Gains
  3. Interests
  4. Services
  5. Dividends
  6. Property
  7. Savings
  8. Fixed Deposit Accounts

Benefits of DTAA

  1. Taxation relief is that goals of a DTAA, which attracts people towards a nation to invest.
    This Double Taxation relief is made possible by offering credit for foreign taxes paid or by exempting income earned abroad from taxation in the country where the taxpayer resides.
  2. Many taxpayers find the DTAA to be favourable. This is very beneficial for business people and individuals who live in one country but have set up offices, shipping companies, or other types of businesses in some other country.
  3. Not only DTAA avoids Double Taxation, but also offers Tax Exemptions. It specifies a number of terms and conditions under which people may apply for a tax exemption.
  4. The Capital Gain Taxes are replaced by this exemption, which is favourable to taxpayers and businesspersons in relation with trading and business.
  5. Additionally, it offers a tax credit in the country where the revenue is generated, preventing the payment of the same income tax twice.
  6. Based on these advantages, it is necessary to sign DTAA for a country, to properly transfer revenue and establish relationships, so that businesses abroad can be carried out smoothly without the hassle of paying taxes on the same profit twice.
  7. DTAA provide legal surety as it contains specific guidelines for levying tax on international income. Due to the clear tax instructions, it promotes foreign investment in developing nations.

NRIs may use the following methods at the time of filing ITR to take the benefits of DTAA:

  1. Foreign Tax Credit (FTC): Residents of India can claim a credit for taxes paid in a foreign country, as per the applicable tax laws. Credit for foreign taxes paid can be claimed by filing Form 67 with the income tax department.
  2. Exemption Method: Certain types of income may be completely exempt from taxation in one country, depending on the provisions outlined in the Double Taxation Avoidance Agreement (DTAA) between the two countries.
  3. Reduced Tax Rate: Taxes may be paid at a lower rate compared to the standard rate under the Income Tax Act, 1961. For example, a tax resident of the United States can claim a concessional tax rate, such as 15%, on interest earned in India under the DTAA.

List of Paperwork Needed to Claim DTAA Advantages

In order to be eligible to receive benefits under this DTAA agreement, an individual must provide the Tax Residency Certificate to the authority deducting tax or tax deductor, in addition to the following records:

  1. Indemnity/Self-Declaration Form
  2. Tax Residency Certificate (In order to apply for a Tax Residency Certificate under sections 90A and 90 of the Income Tax Act), you must submit Form 10FA).
  3. Copy of PAN
  4. Self-Attested Visa
  5. Photo copy of the Passport
  6. PIO Proof Copy 

How to Claim DTAA Benefits

  1. Eligibility: Verify that your country has signed a DTAA with the country where you have established a business, along with the type of income qualifying for DTAA Benefits. 
  2. Application of Tax Residency Certificate (TRC): Apply for a TRC from the tax authority in your country of residence. This certificate proves your status of citizenship and residency.
  3. Provide Documents: Collect other supporting documents such as statements of income, proof of taxes paid in the source country, or any other document related to the income.
  4. Filing of Required Forms: India uses Form 10F of the Income tax Act for moving forward for availing benefits of DTAA.
  5. Filing Declaration: It is required to fill a declaration form that is to be submitted to the tax authority of source country.
  6. Claiming Tax Credits or exemptions in resident country: While filing tax return in resident country, one should claim the credit for taxes paid in the source country or the exemption as provided under DTAA.

Conclusion

The Double Taxation Avoidance Agreement (DTAA) is a crucial tool for Non-Resident Indians (NRIs) to minimize their tax liability while ensuring compliance with international tax laws. By leveraging DTAA benefits, NRIs can avoid paying taxes on the same income in both India and their country of residence, leading to significant financial savings.

Understanding the types of tax relief available under DTAA, such as exemption methods and tax credits, is essential for optimizing tax planning. Proper documentation, including a Tax Residency Certificate (TRC) and filing the appropriate forms, ensures seamless access to these benefits.

However, tax laws and treaties differ across countries, making it necessary for NRIs to stay updated on bilateral agreements and amendments that may impact their tax obligations. Seeking professional tax advice can help NRIs navigate the complexities of DTAA claims, TDS refunds, and investment planning.

By strategically using DTAA provisions, NRIs can reduce tax burdens, enhance financial efficiency, and ensure compliance with both Indian and international tax regulations. For personalized guidance, consult a tax expert to maximize your DTAA benefits and secure your financial future.