Double Taxation Avoidance Agreement (DTAA) [CS Hera Siddiqui]



Legal Entities/Corporations:

For Legal entities the test applied for its residency is place of its Incorporation or Place of effective management.

Legal entities are resident of that state in which it has its incorporation. Place of incorporation is certain and preferable test as place of incorporation does not change from time to time and provides simplicity in determination of residency.

Place of effective management is less certain as now a days business is controlled from many countries. This creates confusion and complications.

This is how a person is Determined as resident. And once a person becomes resident of any of the states he can apply the treaty for avoidance of double tax.

General interpretations of Principles of DTAA

  • Tax treaty is based on mutual understanding between two states, if more than one language in involved, there must be a common / uniform interpretation which must be applied.

  • Tax treaties are primarily relieving in nature and do not impose tax

  • Life of a treaty is long to adapt changes in the domestic law while continuing to reflect the original negotiated balance of obligations and concessions – Static Approach vs. Ambulatory Approach of interpretation

  • Requires broad and literal interpretation as compared to domestic laws

  • Words which are not explained in treaty find their meaning in Domestic Law

  • Treaties entered into by a State are a part of its domestic laws and can be applied only to seek relief from taxes imposed by the domestic laws of a state.

  • Where there is ambiguity in the provisions of the treaty, the interpretation which is harmonious with the provisions of the IT Act should be adopted.

The above listed are the interpretation basics of treaty. The Provisions of DTAA are applicable as follows:

The Treaty

The Local Law

Remarks

If Treaty is silent about any dispute

But Income Tax law states some Provisions for the same

Refer law in this regard

If treaty states some Provisions

But law is silent about any dispute

Refer treaty

If Treaty Explains a provision

Law States the same provision differently

Follow Whatever is beneficial for the assesse

If Treaty has some provisions

Law Contradicts the verdict of Treaty

Treaty will prevail in that case


How to determine Which DTAA is Applicable

The following Step Needs to be followed to determine which DTAA is applicable.

Steps for Determination of the DTAA to be applied

Step No

Description

1

Transaction having Income taxable under IT Act

2

One of the parties to the transaction is a non-resident (NR)/Foreign Company (FC)

3

Determine the residential Status of NR/FC

4

Tax Treaty between India and country in which the NR/FC is a Resident is the DTAA applicable


How to Apply DTAA?

The following steps mentioned below provides for answer as to how to apply DTAA

Steps for Determination as to how to apply DTAA

Steps

Description

1

Determine the nature of income arising to the NR / FC according to the articles of DTAA (specific and general) and also under the IT Act.

2

Determine the tax liability to the NR / FC under the IT Act

3

If any of the Specific articles for taxation are applicable then the income is taxed according to that article

4

If the NR / FC has a Permanent Establishment (PE) in India then general articles for taxation would be applicable

5

Accordingly determine the tax liability under the DTAA

6

Applying section 90(2), determine whether IT Act / DTAA is more beneficial (Treaty Override)

7

Final tax liability of the NR / FC as per the provisions more beneficial


relief under section 90 and Section 91 of Income Tax Act, 1961

If a person who is resident in India in any previous year, in respect of his income, accrued or arose outside India has paid tax on such income in any country outside India, he shall be entitled deduction from the Income Tax payable by him of a sum calculated on such doubly taxed income:

Under section 90 if the country in which tax is paid has entered double taxation avoidance agreement with the Government of India.

Under section 91 if the country in which tax is paid has not entered into any agreement with the Government of India.

Calculation of Relief under section 90/91

Relief allowed under section 90/ 91 is lower of following accounts

1) Tax paid on double-taxed income outside India.

2) Tax payable on double-taxed income under Income Tax Act.

Procedural Requirements

Following documents is required to be furnished by the assesse

1. Statement of income from a country or specified territory outside India offered for the previous year and of foreign tax paid and deducted on such income in form 67 before the due date of filing of Income Tax Return.

2. A statement or certificate specifying the nature of income and amount of tax deducted or paid thereof:

  • from the tax authority of the country of specified territory outside India.

  • from the person responsible for such deduction

  • signed by the assesse

A signed statement by the Assesse is valid only if it is accompanied by the proof of deduction of tax or an acknowledgment of the online payment of tax.

FORM 10F MUST BE VERIFIED BY THE GOVERNMENT OF THE COUNTRY IN WHICH THE ASSESSEE IS A RESIDENT FOR THE PERIOD APPLICABLE. IT IS A DECLARATION THAT THE ASSESSEE RESIDED IN THE FOREIGN COUNTRY WHICH IS COVERED UNDER A DTAA WITH INDIA AND HENCE THE TAX RATE APLICABLE TO THE INCOME IS AT THE RATE MENTIONED IN THE DTAA.

 THE FOLLOWING ARE THE 2 METHODS OF AVOIDANCE OF DOUBLE TAXATION:

  1. EXEMPTION METHOD- A particular income is taxed in only one of the two countries.

  2. TAX CREDIT METHOD- Income is taxable in both countries in accordance with their respective taxes read with double taxation avoidance agreement. However, the country of residence of the tax payer, allows him credit for the tax charged thereon in the country of source.

CONCEPT OF PERMANENT ESTABLISHMENT

PE INCLUDES:

  1. A place of management

  2. A branch

  3. An office

  4. A factory

  5. A workshop

  6. A mine, an oil or gas well, a quarry or any other place of extraction of resources.

THE DTTA PROVIDE THAT ICOME OF A FOREIGN COMPANY RECEIVED FROM INDIA SHALL BE TAXABLE IN INDIA, ONLY IF, THE FOREIGN COMPANY HAS A PERMANENT ESTABLISHMENT IN INDIA.

THE PROFIT ATTRIBUTABLE TO SUCH PESHALL BE TAXABLE IN INDIA. THE DTAA, THEREFORE, PROVIDES THAT IF THE FOREIGN COMPANY DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA, THEN INCOME EARNED IN INDIA IS NOT TAXABLE IN HANDS OF FOREIGN COMPANY IN INDIA.

INCOME ARISING TO FOREIGN COMPANY FROM INDIA

IF THERE IS A DTAA

  1. If there is PE in India- Income is taxable in India as per DTAA

  2. If there is no PE in India- Income is not taxable in India as per DTAA.

Even if there is a Business Connection but there is no PE, DTAA shall not apply since DTAA provides that income is not taxable in India in absence of PE. DTAA or Income Tax Act, whichever is beneficial to assessee shall apply.

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