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Double taxation avoidance agreement (DTAA) - A simplistic overview of a DTAA

Double taxation is a levy of tax in two or more countries on the same taxpayer in respect of the same income for identical periods.

A DTAA is a treaty between two countries to provide relief for income which has been doubly taxed and to avoid double taxation of income in both the countries. It also facilitates exchange of information for prevention of evasion or avoidance of tax by a person in the respective countries.

• Who is it relevant for?

A DTAA is relevant for a person who is resident of one or both of the contracting states.

• For what is it relevant?

It is relevant for taxation of income.

A DTAA establishes rules with regards to different classes of income and the right of the countries to tax such classes of income. It is done by granting limited/exclusive rights to tax such income to the country of source or country of residence.

• When is it relevant?

A DTAA is relevant when a person is deriving income and is liable to pay tax in a country other than its own country of residence.

• Why is it relevant?

It is relevant to understand how much tax is payable in each of the contracting states by a person and to ascertain the relief available in respect of income which has been doubly taxed.

• Where is it relevant?

A DTAA being bilateral in nature, is relevant in both the contracting states.

Example

India - US DTAA

'Article 17 - Directors fees - Directors' fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.”

  • The extract reproduced above is relevant for a resident of India serving on the board of directors of a company resident in USA & a resident of USA serving on the board of directors of a company resident in India.
  • It establishes the right to tax such fee with the country of source and not the country of residence.
  • The DTAA was relevant as the person was deriving income from a country other than the country of residence.
  • Article 25 of the India - US DTAA prescribes relief from double taxation available to a person when the income is taxed both in India and the USA.

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Category Income Tax, Other Articles by - CA Amar Kumar 



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