Double Taxation Avoidance Agreement- DTAA

    The Double Taxation Avoidance Agreement (DTAA) basically refers to a tax treaty between India and many other countries to avoid double payment of taxes. In other words, it saves the taxpayers from paying double taxes from their earned income-where they are residing and at the place where hold their citizenship. For example, a person residing in India who might have shifted to the USA to earn then must pay the taxes in the USA where he is working as well as in India also where he has the citizenship. So, this agreement (DTAA) helps in avoiding these double tax payments suffered by the taxpayers.

    The basic purpose behind this agreement is to minimize the opportunity for tax evasion for the taxpayers. Some benefits of DTAA include: –

    • Helps in avoiding double payment of taxes
    • Lower Withholding Tax
    • Tax credits

    Lower Withholding tax provides an advantage to the taxpayers in the sense that they can pay lower TDS on their interest or dividend income in India. TDS rates on interests earned vary between 7.5% to 15%. Till now around 75-80 countries have signed this agreement with India. It is a boon for the taxpayers as it helps them lower their burden of paying taxes twice.

    The OECD model convention favors capital-exporting countries over capital-importing countries. It eliminates the problem of double taxation by asking the source country to remove taxes on certain categories of income earned by residents of other treaty countries.

    This feature reflects both the pros as well as its cons. On one hand, this is helpful where the flow of trade is equal between two countries and the residence country’s taxes are income exempted by the source country. But it may not be helpful for net capital-importing countries. So, as a result, the developing countries devise their own model according to their rules and regulations.

    Article 12 of the OECD model prevents the source country from imposing a tax on royalties paid by residents of the source country to a resident of another country. It does not give the source country increased taxing rights over the business income of non-residents. To say, convention furnishing services is a permanent establishment only if services are provided through a fixed place of business which generally exists for more than six months under this model.

    This model also reflects the position of the member countries of OECD. The countries that disagree with any of the aspects of the model can register for the reservation on the particular provision. A reservation indicates the intention of not adopting the particular provision of the OECD model. Many countries have entered such registration. Like, several countries have entered reservations on Article 12, dealing with royalties, by asserting their intention to levy withholding taxes on them.

    As the world is now in the recovery phase of the COVID-19 crisis, countries will need robust, resilient, and inclusive economic growth which will be necessary in supporting government finances in the future. Tax policy is a key component of governments’ strategies to respond to the pandemic and build a sustainable and inclusive recovery. Under the Italian G20 Presidency, the OECD has delivered key outputs related to COVID-19, highlighting some of the implications for public finances, and of tax systems, and presented a range of broader structural trends and challenges that countries face.

    As said above, there are some flaws in the model but it’s very difficult to bring the change by any new developments. One source of difficulty is that countries can bring their existing tax treaty networks into line with a revision to OECD Model Conventions only by renegotiating virtually all their existing treaties.

    In contrast, the Commentaries to OECD Model Conventions are much easier to change than the Model Convention itself. Therefore, if a Commentary is revised, it may be possible for the tax authorities of countries to interpret existing treaties in accordance with it without the need to renegotiate existing treaties. Interpreting the existing treaties accordingly would be easier instead of renegotiating and signing new treaties again. The signing of new treaties would destroy the foundation laid by the existing treaty.

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