Home > Income Tax > NRI Tax Help Center > DTAA ExplainedLast Updated: Dec 12th 2023
DTAA - Double Taxation Avoidance Agreement Explained?
Cross-border trades are commonplace. Taxes affects foreign commerce and investment decisions. The impact of one country's internal tax policy on another's economy necessitates ongoing tax system assessments and reforms.
The impact of one country's domestic tax laws on another's economy necessitates ongoing tax reforms and assessments. This document covers DTAA, FTC, Form-67, Tax treaties, TRC importance, and more.
1. What is DTAA?
1.1 DTAA means
DTAA means Double Taxation Avoidance Agreement. When the taxpayer is resident in one country but has a source of income situated in another country, it gives rise to possibility of Double Taxation. Double Taxation means taxing the same income twice in the hands of the taxpayer. It is universally accepted principal that the same income should not be taxed twice.
1.2 Double Taxation
Double Taxation arises from 2 basic rules which enables both country of residence and Country of source of income to impose tax
- Source Rule: Income will be taxed in the country in which it arises. It does not take into account whether the income accrues to resident or non-resident.
- Residence Rule: Income will be taxed in the country in which the taxpayer resides.
1.3 DTAA Specifies
DTAA specifies the rules for taxation of income by the source country and residence country. Such rules are for various categories of income like salary, interest, dividend, remuneration, business, capital gains etc
In short DTAA means a treaty between 2 countries for granting of relief in respect of Income on which income tax has been paid in both countries or Income tax payable
India has DTAA with over 80+ countries. The major countries with which it has signed the DTAA are the United States of America (USA), the United Kingdom (UK), the United Arab Emirates (UAE), Canada, Australia, Austria, Belgium, Colombia, Denmark, Finland, France, Germany, Hong Kong, Iceland, Ireland, Italy, Israel, Japan, Korea, Malaysia, Netherlands, New Zealand, Norway, Philippines, Poland, Qatar, Saudi Arabia, Singapore, Spain, Sri Lanka, Sweden, Switzerland, Thailand to name a few.
2. What are the types of Relief under DTAA?
Double Taxation relief can be provided mainly in 2 ways
2.1 Bilateral Relief:
The Governments of 2 countries can enter into an agreement to provide double taxation relief by mutually working out the basis on which the relief is to be granted. There are 2 methods of granting relief under Bilateral relief.
- Exemption Method: A particular income is taxed in only source country and exempted in residence country
- Tax Credit Method: Income is taxable in both countries in accordance with their respective tax laws. The Resident country allows the credit for the tax charged in the country of source.
2.2 Unilateral Relief:
This method provides relief if no DTAA has been entered with the country. This provides relief unilaterally by a country to its resident for the taxes paid in other country.
3. Foreign Tax Credit (FTC)
- The resident taxpayer is eligible to claim foreign tax credit if he has paid the taxes in other countries
- If the income on which foreign tax has been paid is offered to tax in multiple years, the foreign tax credit will be allowed in the same proportion in which income is offered.
- Foreign tax credit is available against the amount of tax, surcharge and cess paid under the Income Tax Act 1961. It is not available in respect of any sum payable by way of interest, fee or penalty
- The foreign tax credit would be the lower of the Tax Payable under the Income tax act, 1961 on such income and the Foreign Tax Paid on such income
4. Form 67
Form 67 is a statement or form required to be submitted by the taxpayer to claim foreign tax credit. It needs to be filed in Income tax e filing portal if the taxpayer is claiming foreign tax credit.
Important
Form 67 has to be filed before eFiling the IT Return. A Digital Signature Certificate (DSC) or Electronic Verification Code (EVC) is mandatory to submit Form 67.
Income Tax Appellate Tribunal (ITAT) Reference on Form-67
Foreign Tax credit cannot be disallowed just because form 67 was not filed within due date. Refer Case Law: Ms. Brinda Ramakrishna vs Income Tax Officer.
But EZTax recommends not to use the above reference unless in extreme cases, as case laws are very specific to a region and the context.
5. What is Tax Residency Certificate (TRC)?
Indian Residents who earns income from countries outside India with which India have DTAA should get TRC from foreign countries. Following is the information required to be submitted by the taxpayer for getting TRC and claiming the DTAA benefits
Sample US TRC can be found @ Sample US TRC
- Status of taxpayer (Individual, Firm, Company etc)
- Nationality of Taxpayer
- Tax Identification number in the country of residence. If there is no such number, a unique number on the basis of which the person is identified by Government should be quoted.
- Period for which residential status is mentioned (as in TRC)
- Address of the taxpayer in the country outside India during which TRC is applicable.
Income Tax Appellate Tribunal (ITAT) Ruling on TRC
Late 2018, The Income Tax Appellate Tribunal (ITAT) ruling provided a much relief to the Indian Taxpayers who are availing FTC. ITAT ruled that not providing a TRC cannot preclude a non-resident from availing treaty benefits, as long as the taxpayer is able to substantiate their residency through other evidence.
EZTax.in recommend you to get the TRC from the country of arrival to avoid any issues or delays in processing your ITR.