Saturday, December 31, 2011

[] What is DTAA (Double Taxation Avoidance Agreements)?


Double Taxation Relief
The incidence of Double taxation occurs when an individual is required to pay tax more than one time for the same income he generated from a country different from his home country. Double taxation occurs mainly due to overlapping tax laws and regulations of the countries where an individual operates his business or employs. . Consistent with the practice adopted in most of the countries in the world that have taken to levy tax on income / capital, India has adopted the system under which Income Tax on residents is imposed on the "total world income" i.e. income earned anywhere in the world. Whereas a tax payer's own country (referred to as home country) has a sovereign right to tax him, the source of income may be in some other country (referred to as host country) which country also claims a right to tax the income arising in that country. The result is that income arising to a resident out of India is subjected to tax in India as it is part of total world income and, also in host country which provides the source for that income.
India has entered into Avoidance of Double Taxation Agreement (DTAA) with 65 countries including countries like U.S.A., U.K., Japan, France, Germany, etc. The agreement provides relief from the double taxation in respect of incomes by providing exemption and also by providing credits for taxes paid in one of the countries. These treaties are based on the general principles laid down in the model draft of the Organization for Economic Cooperation and Development (OECD) with suitable modifications as agreed to by the other contracting countries. In case of countries with which India has double taxation avoidance agreements, the tax rates are determined by such agreements and vary between countries.  Apart from providing ways and means to avoid double taxation of same income, the agreements generally provide for other matters of common interest of the two countries such as exchange of information, mutual assistance procedure for resolution of disputes and for mutual assistance in effecting recovery of taxes
Unilateral Relief
The Indian government provides relief from double taxation irrespective of whether there is a DTAA between India and the other country concerned, if
  1. The person or company has been a resident of India in the previous year.
  2. The same income must be accrued to and received by the tax payer outside India in the previous year.
  3. The income should have been taxed in India and in another country with which there is no tax treaty.
  4. The person or company has paid tax under the laws of the foreign country concerned.
Best Regards
Prakash Nair

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