India USA DTAA:Double Taxation Avoidance Agreement (DTAA) Between India and USA

India USA DTAA. The Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between India and the United States of America (USA) to prevent double taxation of income earned in one country by a resident of the other country. The DTAA between India and the USA was signed on September 12, 1989 and has been in force since December 18, 1990. This comprehensive agreement aims to promote economic cooperation and investment between the two nations by providing clarity on taxation rules and eliminating double taxation.

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Key Objectives of the India USA DTAA

The main objectives of the DTAA between India and the USA are:

• Avoiding double taxation: Preventing the same income from being taxed in both countries
• Promoting economic ties: Encouraging mutual trade and investment by providing a clear and fair tax framework
• Preventing tax evasion: Enabling exchange of information between tax authorities to combat tax avoidance
• Providing tax clarity: Specifying how different types of income such as dividends, interest, royalties etc. will be taxed

Applicability and Scope of India USA DTAA.

The India-USA DTAA applies to persons who are residents of one or both of the countries. The term “person” includes individuals, companies, and any other entity that is taxable. The agreement covers income taxes, including the federal income tax imposed by the Internal Revenue Code in the USA, and the income tax, surcharge and surtax in India.

Determining Tax Residency.

One of the key aspects of the DTAA is determining an individual or entity’s country of residence for tax purposes. The treaty provides tie-breaker rules to resolve cases where a taxpayer qualifies as a resident of both countries:

1. Permanent home test: The individual will be deemed a resident where their permanent home is located
2. Center of vital interests test: If they have a permanent home in both countries, the country where they have closer personal and economic relations will be considered their residence
3. Habitual abode test: If the center of vital interests cannot be determined, the country where the individual has a habitual abode will be their residence
4. Nationality test: If they have a habitual abode in both or neither countries, the country of their nationality will be treated as their residence for tax purposes

Key Provisions and Tax Rate As per the India USA DTAA

The DTAA between India and the USA contains several important provisions that govern how different types of income are taxed:

Taxation of Business Profits.

• Business profits are taxable in the country where the company has a permanent establishment (PE)
• If an enterprise carries on business through a PE in the other country, the profits attributable to that PE may be taxed in that other country
• The definition of PE includes a fixed place of business, dependent agents habitually exercising authority to conclude contracts, and furnishing of services beyond a specified duration

Dividends, Interest and Royalties.

• Dividends: Taxed at a maximum rate of 15% in the source country if the beneficial owner is a company holding at least 10% of the shares, and 25% in all other cases
• Interest: Generally taxed at a maximum rate of 15% in the source country
• Royalties and Fees for Technical Services: Taxed at a maximum rate of 15% in the source country for royalties and 10% for fees for included services

Capital Gains.

• Gains from the sale of immovable property are taxable in the country where the property is located
• Gains from the alienation of movable property forming part of a PE are taxable where the PE is situated
• Gains from the alienation of shares of a company may be taxed in the country where the company is a resident

Income of Professors, Teachers and Research Scholars

• Professors, teachers or research scholars who visit the other country for teaching or research for up to 2 years are exempt from tax in that country on their remuneration, subject to certain conditions

Relief from Double Taxation.

• The country of residence provides a foreign tax credit for taxes paid in the source country, subject to domestic law limitations
• The treaty also contains provisions for mutual agreement procedure (MAP) to resolve instances of double taxation not addressed by the foreign tax credit mechanism

The Saving Clause and Its Implications.

A key feature of the India-USA DTAA is the “Saving Clause” which allows both countries to tax their own residents and citizens as if the treaty did not exist, notwithstanding any provisions in the agreement. However, there are some exceptions to the Saving Clause:

• Benefits conferred under the Non-Discrimination Article
• Benefits provided to professors, teachers, students, trainees and researchers
• Relief from double taxation
• Mutual agreement procedure
• Exchange of information
• Assistance in collection of taxes
• Benefits of members of diplomatic missions or consular posts

This means that the Saving Clause can override many of the benefits and exemptions provided by the DTAA, making it crucial for taxpayers to carefully analyze its implications in their specific situation.

Claiming DTAA Benefits and Compliance Requirements.

To avail the benefits under the India-USA DTAA, taxpayers must provide a Tax Residency Certificate (TRC) issued by the tax authorities of their country of residence. Additionally, they may need to file Form 10F in India, containing prescribed particulars.

Taxpayers must also disclose their foreign income and assets in their tax returns and comply with domestic tax laws and reporting requirements in both countries. Non-disclosure or non-compliance can attract penalties and scrutiny from tax authorities.

Recent Developments and Future Outlook

In recent years, there have been some notable developments related to the India-USA DTAA:

• Introduction of the Multilateral Instrument (MLI) under the OECD’s Base Erosion and Profit Shifting (BEPS) project, which modifies bilateral tax treaties to implement BEPS measures
• Increased exchange of information between tax authorities to combat tax evasion and money laundering
• Proposal to amend the DTAA to provide for source-based taxation of digital services
• Discussions on updating the treaty to address emerging challenges and opportunities in the global economy

As economic ties between India and the USA continue to grow, the DTAA is expected to play a crucial role in fostering cross-border trade and investment by providing a stable and transparent tax framework. However, taxpayers must stay abreast of any amendments or new interpretations of the treaty provisions to ensure compliance and optimize their tax planning.

Wrapping Up:

The Double Taxation Avoidance Agreement between India and the USA is a comprehensive tax treaty that aims to eliminate double taxation, prevent fiscal evasion, and promote economic cooperation between the two countries. By providing clarity on how various types of income are taxed and specifying thresholds for taxation, the DTAA offers certainty and benefits to taxpayers engaged in cross-border transactions.

However, the Saving Clause in the treaty can limit many of these benefits, making it essential for individuals and businesses to carefully examine its applicability to their specific circumstances. Proper disclosure and compliance with domestic tax laws and reporting requirements are also crucial to avoid penalties and legal issues.

As the global tax landscape evolves, the India-USA DTAA is likely to undergo changes to keep pace with emerging trends and challenges. Taxpayers must therefore stay informed about any updates to the treaty and seek professional advice to navigate the complexities of international taxation effectively.