Double Taxation Avoidance Agreement (DTAA)

To prepare for INTERNATIONAL RELATIONS for any competitive exam, aspirants have to know AGREEMENTS. Here we will study about the Double Tax Avoidance Agreement (DTAA). It gives an idea of all the important topics for the IAS Exam and the Governance syllabus (GS-II.). Double Tax Avoidance Agreement (DTAA) terms are important from International Relations perspectives in the UPSC exam. IAS aspirants should thoroughly understand their meaning and application, as questions can be asked from this static portion of the IAS Syllabus in both the UPSC Prelims and the UPSC Mains exams. Even these topics are also highly linked with current affairs. Almost every question asked from them is related to current events. So, apart from standard textbooks, you should rely on newspapers and news analyses as well for these sections.

Double Taxation Avoidance Agreement (DTAA) Overview #

• A DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-payers in these countries can avoid being taxed twice for the same income. A Double Taxation Avoidance Agreement applies in cases where a tax-payer resides in one country and earns income in another.
• DTAAs can either be comprehensive to cover all sources of income or be limited to certain areas such as taxing income from shipping, air transport, inheritance, etc.
• India recently amended its Double Taxation Avoidance Agreement with Mauritius to plug certain loopholes.
• Now, a Mauritian entity will have to pay capital gains tax here while selling shares in a company in India from April 2017.
• Earlier, the company could avoid tax as it was not a ‘resident’ in India. It could get away from the taxman in Mauritius too, due to non-taxation of capital gains for its residents.
• As a result, many shell entities sprang up in Mauritius to profit from investments in India and get away without paying taxes anywhere.

Importance of DTAA: #

• DTAAs are intended to make a country an attractive investment destination by providing relief on dual taxation.
• Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad. Double Taxation Avoidance Agreements also provide for concessional rates of tax in some cases.

India has DTAAs with which nations? #

• India has DTAAs with more than eighty countries, of which comprehensive agreements include those with Australia, Canada, Germany, Mauritius, Singapore, UAE, UK and USA.

What are the benefits of DTAA? #

• DTAAs are intended to make a country an attractive investment destination by providing relief on dual taxation.
• Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad. For example, if a person is sent on deputation abroad and receives emoluments during a stint away from home, income may sometimes be subject to tax in both the countries.
• The person can claim relief when filing a tax return for that financial year, if there is an applicable DTAA.
• Similarly, if the person is an NRI having investments in India, DTAA provisions may also be applicable to income from these investments or from their sale. Double Taxation Avoidance Agreements also provide for concessional rates of tax in some cases.
• For instance, interest on NRI bank deposits attract 30 per cent TDS (tax deduction at source) here. But under the DTAAs that India has signed with several countries, tax is deducted at only 10 to 15 per cent. Many of India’s Double Taxation Avoidance Agreements also have lower tax rates for royalty, fee for technical services, etc.

Categories covered under the Double Taxation Avoidance Agreements (DTAA) #

• The following categories are covered under the Double Taxation Avoidance Agreements:

1. services
2. salary
3. property
4. capital gains
5. savings/fixed deposit accounts

Base Erosion and Profit Shifting (BEPS) #

• BEPS is a term used to describe tax planning strategies that exploit mismatches and gaps that exist between the tax rules of different jurisdictions.
• It is done to minimize the corporation tax that is payable overall, by either making tax profits ‘disappear’ or shift profits to low tax jurisdictions where there is little or no genuine activity.
• In general BEPS strategies are not illegal; rather they take advantage of different tax rules operating in different jurisdictions.
• BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs).
• The BEPS initiative is an OECD initiative, approved by the G20, to identify ways of providing more standardised tax rules globally.

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India Sri Lanka DTAA Amended #

• Recently, the Union Cabinet approved the signing and ratification of the protocol amending the agreement between India and Sri Lanka for the avoidance of double taxation and the prevention of fiscal evasion.
• The existing Double Taxation Avoidance Agreement between India and Sri Lanka was signed on January 22, 2013, and entered into force on October 22, 2013.
• India and Sri Lanka are members of the Inclusive Framework and as such are required to implement the minimum standards in respect of their DTAAs with Inclusive Framework countries.
• India is a signatory to the MLI, however, Sri Lanka is not a signatory to the MLI as of now.
• Therefore, amendment of the India-Sri Lanka DTAA bilaterally is required to update the Preamble and also to insert Principal Purpose Test (PPT) provisions to meet the minimum standards.