Double Taxation Avoidance Agreement (DTAA)

Do you also feel the burden of paying taxes twice on the same income earned for the same purpose, just because of cross-border transactions or international deals?

Then you are not the only one who faces this tax problem;like you, many global investors often encounter this issue and are taxed by two different countries on the same income.

Here is the solution: a treaty known as the Double Tax Avoidance Agreement (DTAA) comes into effect.

So DTAA: Is an agreement between two countries that plays a crucial role in determining how your income is taxed and, more importantly, how much of it you get to keep.

India is among the countries with one of the largest networks of Double Taxation Avoidance Agreements (DTAAs), offering favourable tax rates and provisions designed to protect the taxpayers and promote cross-border investment.

Let’s understand the DTAA first and how it works.

What is DTAA?

A Double Tax Avoidance Agreement (DTAA) is a tax agreement, also known as a tax treaty, between two or multiple countries to prevent double taxation of income earned in both countries. It is the agreement that states the income of an individual should not be taxed twice, both in their country of origin and in the country in which they reside.

If you’re earning income in one country (called the source country) but you live or are taxed in another country (the resident country), both countries might want to tax that income. DTAA solves this by deciding which country gets to tax what, and how much.

Let’s break it down simply: You earn income in the U.S. and are an Indian resident, or vice versa. Without DTAA, you could be taxed in both countries. But with DTAA in place, the tax burden is adjusted so you don’t pay more than you need to. Sounds useful? It is.

Understanding how DTAA works can help you plan smarter—whether you’re a salaried employee, a freelancer, an NRI, or running a cross-border business.

Objectives of DTAAs

• To avoid double taxation or liability

• To promote cross-border trade and investment

• To provide tax certainty and fairness

• To prevent fiscal evasion

• To reduce the overall tax burden

• To encourage the transfer of technology globally

• To strengthen the bilateral relations

Methods used in DTAAs

Double taxation can be avoided in two key ways, often outlined in DTAAs.

• OECD (Organisation for Economic Co-operation and Development Model) – It is also known as residence-based taxation, used by developed countries, which gives more taxing rights to the country where taxpayers reside, rather than where income originates, and is best suited for capital-exporting countries (investors).

• UN Model Tax Convention – It is based on source-based taxation, used by developing countries, gives more taxing rights to the country where the income is generated (source country), even if the taxpayer resides elsewhere, best suited for Capital-importing countries (hosts of investments).

Key Differences Between OECD and UN Models

Country-Specific Methods

US Model Income Tax Convention– Followed for entering DTAAs with the USA, hybrid approach with features from both OECD and UN models, emphasizes anti-abuse rules, tax transparency, and protecting the U.S tax base. Detailed Limitation on Benefits (LOB) clauses to prevent treaty shopping.

Andean Community Income and Capital Tax Convention– Adopted by member states, namely, Bolivia, Chile, Ecuador, Colombia, Peru, and Venezuela.

India’s Perspective: Availing Benefits of DTAA

India has an extensive network of DTAA agreements in 85 countries, which include all varieties such as Comprehensive, inter-governmental agreements to improve international tax compliance, Limited Agreements, Limited Multilateral Agreements, Specified Associations Agreement, Tax Information Exchange Agreement, and other agreements.

The Income Tax Act has two provisions, section 90 and section 91, that provide relief to taxpayers, saving them from double taxation.

Section 90 is for taxpayers who have paid tax to a country with which India has signed an agreement

Section 91 provides unilateral relief to Indian residents, offering benefits to taxpayers who have paid tax to a country with which India has not signed a tax treaty.

Here, the fact is India gives relief to both kinds of taxpayers, but the rates differ from country to country.

Withholding Tax Rates under India’s DTAAs

Note: The rates may vary based on specific conditions outlined in each DTAA, such as ownership percentages or the nature of the income. For instance, some treaties offer lower rates if the recipient company holds a significant share in the paying company.

In addition to DTAA, India has signed several Social Security Agreements (SSAs) with 20 countries as of 2024. Much like DTAAs, these agreements are designed to protect the interests of both Indian professionals working abroad and foreign nationals working in India.

Key Benefits of India’s SSAs

Detachment benefits: Exemption from contributing to the host country’s social security if already covered in the home country

Totalization of benefits: Combine service periods from both countries for eligibility

Export of benefits: Social security benefits (like pensions) can be paid even if the person relocates

How can foreign investors benefit from India’s DTAA?

Foreign investors (NRIs) can easily benefit from India’s DTAs, which are designed to provide clarity and tax efficiency when investing in or earning income from India.

DTAAs allow investors to claim credit for the tax paid in India against their home country tax liability.

It reduces withholding tax rates as DTAAs captures the rates at which India can deduct TDS on cross-border payments such as dividends, Interest, Royalties, and fees from technical services.

Additionally, royalties may be reduced to 10% to 15%, depending on the treaty and dividend, which have reduced rates applicable if a minimum shareholding condition is met.

Some treaties, like the Indian – Mauritius provide exemptions or preferential rates for capital gains on the sale of Indian shares.

They provide defined rules on permanent establishment (PE), which determines when a foreign business is taxable in India.

Important Notes

• Tax residency certificate (TRC) is mandatory to claim DTAA benefits in India.

• Some DTAAs have Limitation of Benefits (LOB) clauses to prevent treaty shopping.

• Investors should consult with tax professionals for treaty-specific planning.

• If a foreign investor faces double taxation due to conflicting interpretations, the DTAA provides a MAP mechanism for resolving disputes between the tax authorities of both countries.

Documents Required to Avail the Benefits of DTAA

• TRC (Tax Residency Certificate) – This is the first step. You need to prove that you’re a tax resident of your home country. Issued by the tax authorities of the resident country. Must contain details like name, status (individual/company), nationality, tax identification number, and the period for which the certificate is applicable

• Form 10F – This is a form where you declare details like your name, address, country of residence, and the nature of your income. It’s required when you submit documents to the Indian tax department to support your DTAA claim.

• PAN Card (for India) – Mandatory if you’re claiming DTAA benefits in India

• Valid Visa and Passport Copies – To prove the period of stay outside the home country and establish non-resident status.

• DTAA Claim Letter / Covering Letter- A formal request to the relevant income payer (like banks, companies, etc.) stating your intention to claim DTAA benefits.

Conclusion

The treaty does not create any additional tax burden. Yes, they are designed not to increase your tax burden but to reduce it. That’s the true advantage—or the “magic”—of these treaties: they allow taxpayers to legitimately benefit from favourable tax jurisdictions and avoid being taxed twice on the same income.

Due to a lack of awareness about international tax treaties and agreements, many individuals unknowingly become victims of double taxation—paying tax on the same income in two countries. With proper professional guidance, you can navigate these complexities effectively and take advantage of tax relief provisions, ensuring you don’t pay more than you owe.

If you need guidance in interpreting DTAA provisions or assessing your international tax liabilities, our team of seasoned tax professionals is here to assist. With a network of over 400 experts, we offer a client-centric approach that prioritizes accuracy, compliance, and personalized service. Every detail of your crucial tax filings is handled with utmost precision and care.