Double Taxation Avoidance Agreement

A Double Taxation Avoidance Agreement refers to a treaty signed between two or more countries.
Purpose of DTAAs:
• Granting Relief
• Avoidance of Double Taxation
• Exchange of Information
Treaty– A tax treaty is a bilateral agreement made by two countries to resolve issues involving double taxation on income. Agreement generally determines the amount of tax that a country can apply to a taxpayer’s income, capital, estate, and wealth.
Objective: Its main objective is that tax payers in these countries can avoid being taxed twice for the same income. Income earned outside India is taxed in the hands of individual based on his/her residential status. Income received from outside India is taxed in the hands of Resident. So, if DTAA exists with the respective country, then benefit can be claimed as per Sec 90 and 90A. If DTAA does not exist, then benefit can be claimed as per section 91.
Applicable: A DTAA applies in cases where a tax-payer resides in one country and earns income in another country.
Importance: DTAAs are intended to make a country attractive by providing relief on dual taxation. Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad. DTAAs also provide for concessional rates of tax in some cases.
How to avail benefits under the DTAA
A non-resident to whom a DTAA applies shall be entitled to claim any relief under such DTAA only if he obtains a Tax Residency Certificate (TRC) of his being a resident of any foreign country from the government (tax authorities) of such country. Further, he shall be required to furnish some additional information in Form No. 10F electronically.
A resident person can make an application in Form No. 10FA to the assessing officer to obtain a Tax Residency Certificate to claim relief under a DTAA entered into with the source country. The tax residency certificate to a resident person is provided in Form No. 10FB.
Following are the methods to claim tax relief
Exemption method: Income is taxed in only one country.
Tax Credit method: where the income is taxed in both countries, tax relief can be claimed in the country of residence.