Avoidance of Double Taxation agreement

ABSTRACT

Double taxation arises when the same income or profits are taxed twice by two or more nations, placing a heavy burden on organizations and people who conduct business internationally. Countries have signed Double Taxation Avoidance Agreements (DTAAs) to address this issue. These agreements spell out the guidelines for identifying which jurisdiction has the right to tax particular forms of income or profit. DTAAs generally include provisions addressing tax residency, different forms of income, taxation procedures, and dispute resolution procedures. With the provision of transparency and certainty regarding the taxation of income, the reduction of compliance costs, and the promotion of economic growth, the adoption of DTAAs has assisted in promoting cross-border commerce and investment. In general, DTAAs are a crucial tool for people and companies doing business internationally. Profits and offer strategies for avoiding or eliminating double taxation

1. INTRODUCTION

Double taxation is when the same income or profits are taxed twice by two or more nations, placing a heavy burden on organizations and people who conduct business internationally. Double Taxation Avoidance Agreements (DTAAs), which aim to eliminate or reduce double taxation by laying out the guidelines for determining which country has the right to tax particular types of income or profits and by offering strategies to avoid or eliminate double taxation, have been signed by countries to address this issue. DTAAs frequently include clauses addressing tax residency, different forms of income, taxation procedures, and dispute resolution procedures. Through the provision of clarity and certainty regarding the taxation of income, the reduction of compliance costs, and the promotion of economic growth, the introduction of DTAAs has assisted in promoting cross-border trade and investment. In general, DTAAs are a crucial tool for people and companies doing business internationally. When two or more countries tax the same income or profits more than once, this is known as double taxation. This can occur when a person or business makes money in one nation but is taxed on the same money in a different nation. Cross-border trade and investment can be severely hampered by double taxation, which can also impede economic expansion. Countries have agreements known as double taxation avoidance agreements to address this issue (DTAAs). These agreements establish the guidelines for establishing which nation has the right to tax particular forms of income or profits and offer strategies to preventor reduce double taxation in order to eliminate or reduce it.

The Double Taxation Avoidance Agreement (DTAA), a bilateral agreement between the two nations, often covers a wide variety of taxes, including income tax, corporate tax, and capital gains tax. It also includes clauses for settling disagreements between the tax officials of the two nations. Cross-border commerce and investment have increased as a result of the DTAA’s implementation since it makes income taxation clear and definite, reduces compliance costs, and stimulates economic growth. Multiple DTAAs have been signed by many nations with other nations, resulting in a complicated web of agreements that facilitate international trade and investment. Double taxation can put a heavy financial burden on people and enterprises who operate internationally.

The idea of double taxation has occasionally caught the attention of courts in both India and other countries. In the case Laxmipat Singhania v. CIT2¹, the Supreme Court has made it quite obvious that, unless expressly stated differently, income cannot be taxed more than once.

This is a fundamental principle of tax law. Once more, the Income Tax Officer is not permitted to disregard the accrual of income and instead tax it as income from a different year on the basis of receipt if it has accrued to the assessee and is required to be included in the total income of a specific year.

The Income Tax Act has also formally recognised the Supreme Court’s espoused premise.

Without DTAAs, they might have to pay taxes in both their home country and the one where they make money, which would increase their tax obligations and decrease their profits. Since a nation can only tax the worldwide income of its tax residents, DTAAs frequently include sections that specify the standards for identifying a person’s tax residency status. They also detail how double taxation is prevented or eliminated as well as the sorts of income or profits that are taxed in each nation. Tax credits, exemptions, and deductions are often used strategies to reduce or completely eliminate double taxation. Tax credits enable taxpayers to use the tax they have already paid in one country to offset the tax they owe in another. Some types of revenue may be exempted, and expenses involved in generating that income may be deductible.

The Mutual Agreement Process (MAP), a dispute resolution mechanism included in DTAAs, enables tax officials from the two nations to settle disagreements involving double taxation. This system aids in ensuring that any double taxation-related issues are handled fairly and effectively. Overall, by bringing clarity and certainty to the taxation of income, lowering compliance costs, and promoting economic growth, the introduction of DTAAs has aided in promoting cross-border commerce and investment. Thus, these contracts are a crucial tool for businesses and individuals doing business abroad.

2. ADVANTAGES OF DTAA:

The following are a few benefits of double taxation avoidance agreements:

1. Encourages International Investment: By creating a stable tax environment and lowering the possibility of double taxation, DTAAs encourage foreign investment. This promotes foreign investment, which boosts economic activity and growth in a nation.

2. Avoiding Double Taxation: The fundamental goal of DTAAs is to stop taxing people or businesses operating in both countries twice on revenue. This lessens the tax burden and encourages trade between the two nations because they only have to pay taxes in one of them.

3. Strengthen Economic Ties: By encouraging cross-border commerce and investment, DTAAs can aid in fostering stronger economic relations between two nations. Businesses find it simpler to grow their operations and make investments in the other nation by receiving tax reduction and predictability.

4. More Transparency: The tax treatment of cross-border transactions is more transparent and predictable thanks to DTAAs. This is so that there are clear guidelines on how income should be taxed and how disputes should be resolved.

5. Promote Collaboration: DTAAs encourage collaboration between tax administrations of various nations, which can aid in lowering tax evasion and avoidance. The tax authorities may share information more frequently as a result, making it easier to find tax cheats and reclaim stolen funds.

In a nutshell, Double Taxation Avoidance Agreements are beneficial to both individuals and businesses operating across borders as they help reduce the burden of taxation, promote economic ties, and increase transparency and cooperation between countries.

• The fundamental goal of the DTAA is to encourage investments to the nation by providing tax advantages while preventing double taxation. For instance, where will the corporation pay taxes if a company invests in infrastructure in another nation?² There will be no double taxes thanks to the DTAA agreement between the nations. The agreement guarantees that the business will actually pay taxes in only one nation. Although there are specified guidelines for imposing taxes on income from abroad, DTAAs provide legal clarity. By assuming anti-abusive clauses, the DTAA also makes sure that the benefits only apply to actual inhabitants of the two participating nations.

According to DTAA provisions, concessional tax rates may be provided in particular circumstances.

3. DOCUMENTS REQUIRED TO AVAIL THE BENEFITS UNDER DTAA

The DTAA (Double Taxation Avoidance Agreement) is a contract made by two nations to avoid taxing the same revenue twice. The following documentation may be needed in order to get DTAA benefits:

A Tax Residency Certificate (TRC) is a document that certifies a taxpayer’s residency in a country for tax reasons. It is issued by the tax authorities of the country where the taxpayer resides. To collect the benefits under the DTAA, this certificate could be necessary.

Self-declaration: The taxpayer can also be needed to submit a self-declaration confirming their eligibility for DTAA benefits and include information such their name, residence, taxpayer identification number, and other required details.

Income proof: To support their claim for benefits under the DTAA, the taxpayer may also be asked to show income documentation, such as pay slip, bank statements, or other pertinent records.³

Evidence of taxes paid: To support their claim for benefits under the DTAA, the taxpayer may also be asked to submit proof of taxes paid in both countries, such as copies of their tax returns, tax payment receipts, or other pertinent documents.

Passport: As identification, the taxpayer might be asked to submit a copy of their passport.⁴

It is crucial to keep in mind that the documentation needed to utilize DTAA benefits may differ based on the specific agreement between the two nations and the type of income being received.⁵

4. HOW TO APPLY DTAA

In the nation in which a person resides, income tax must be paid. Be that as it may, on the off chance that you are a NRI you can try not to pay charge two times according to DTAA. The Double Tax Avoidance Agreement is the full acronym for DTAA. Most of the time, Non-Resident Indians earn money in India and must pay tax in both India and their home country. The government has taken good steps to relieve the assessee to avoid this. Learn how to claim DTAA benefits.

Both countries sign a Double Taxation Avoidance Agreement (DTAA) to avoid paying double or more taxes in the above scenario and to encourage and support economic trade and investment.

The elimination of double taxation is provided for by DTAA in one of the following ways:

(a) Giving one nation exclusive taxing authority;

(b) granting taxing authority to both nations while stipulating that each nation’s tax rate be limited;

(c) Allowing residents of other nations to receive credit for taxes paid in the source nation.

The DTAA includes provisions that grant tax breaks on a variety of income types, including

• interest income,
• dividend income,
• earnings from employment,
• capital gains,
• income from consulting and royalty work,
• business income, and
• Any other type of income.

How to avail benefits under DTAA:

1. Tax Residency Certificate (TRC) obtained from Government of home country

2. Self-attested copy of Passport and Visa

3. Indemnity-cum-declaration (in case of Banks)

4. OCI card (if applicable)

5. Self-attested copy of PAN Card (if available)

Mandatory details to be mentioned in the Tax residency certificate:

1. Name of the assessee

2. Status (individual, company, firm etc.) of the assessee

3. Nationality of the assessee

4. Assessee’s tax identification number in the country or specified territory of residence or in case no such number, then a unique number on the basis of which the person is identified by the Government of the country or the specified territory

5. Period for which the residential status as mentioned in TRC is applicable

6. Address of the applicant (outside India) for the period for which TRC is applicable

A NRI can claim profit benefits under DTAA by convenient accommodation of records recorded beneath to the payer of pay:-

that the government of the country or specified territory uses to identify the person. The time frame for which the TRC’s residential status applies for Address of the candidate (outside India) for the period for which TRC is relevant.

A TRC containing the above subtleties ought to be properly confirmed by the Public authority of the Nation or the Predefined Region of which the NRI professes to be an occupant for charge purposes.

The steps involved in acquiring TRC are as follows:

• To acquire a TRC, an NRI may approach the appropriate Income Tax or Government Authorities of the nation in which they reside. For more information on how to obtain TRC, a Chartered Accountant can be consulted by NRIs.
• The Income Tax Department accepts Form 10FA applications for TRC from Indian residents. The Income Tax Department will then send the Indian resident a TRC in Form 10FB after verifying the provided information.

TRC Validity:

A TRC is usually only good for one year, and no other document can be used in place of a TRC to get DTAA benefits. Therefore, in order to obtain the DTAA benefit without difficulty, TRC must be submitted annually.

5. CASE LAWS RELATED TO DTAA

1. Vodafone International Holdings BV v Union of India ,2012.

In the case of Vodafone International Holdings BV v. Union of India⁶, the Indian tax authorities made an effort to tax Vodafone on a transaction involving the acquisition of shares in an Indian firm by a foreign company. Vodafone contended that because the transaction took place outside of India, it was not taxable there. The India-Netherlands DTAA, which prevented capital gains from being subject to double taxation, was upheld by the Supreme Court of India in a decision in favor of Vodafone.

In 2012, a dispute over a foreign business’s purchase of stock in an Indian company was brought up by Vodafone International Holdings BV (VIHBV) to the Indian tax authorities. The Indian tax authorities attempted to tax VIHBV for capital gains that resulted from the deal, claiming that because the transaction involved an Indian asset, it was subject to Indian taxation.

Although the transaction involved two foreign entities and occurred outside of India, VIHBV asserted that it was not taxable in India. VIHBV also made use of the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands, which prevented capital gains from being taxed twice. The India-Netherlands DTAA, according to the Indian tax authorities, did not apply because the transaction involved a Dutch business and a Cayman Islands firm rather than two Dutch companies.

The Supreme Court of India eventually heard the issue and decided in VIHBV’s favor. The court ruled that because the transaction took place outside of India and the capital gains it generated were not taxable in India, the transaction was exempt from taxation under the India-Netherlands DTAA.The ruling in the Vodafone case by the court has important ramifications for foreign businesses investing in India and emphasizes the significance of DTAAs in giving certainty and clarity on the taxation of income. The case also emphasizes the necessity of consistency in domestic tax laws and international agreements to prevent double taxation disputes.

2. In Azadi BachaoAndolan v. Union of India (2003)⁷, the Supreme Court of India ruled that, to the extent of any discrepancy between them, the provisions of a DTAA supersede those of the Income Tax Act, 1961. The court also ruled that the tax authorities are responsible for demonstrating that a taxpayer is not eligible to receive the benefits of a DTAA.

2. The Supreme Court of India ruled in National Agricultural Cooperative Marketing Federation of India Ltd. v. Union of India (2018)⁸ that the terms of a DTAA take precedence over the rules of the 0

3. General Anti-Avoidance Regulation (GAAR) that was enacted into the Income Tax Act, 1961.

CONCLUSION

For every individual or businessman who earns income could not be paid as tax as it may reduce a major portion of his revenue. For business enhancement and economic development they had to enter into economic transactions with another countries enabling capital investment. Economic activities should be done by firms, assesses, individuals, companies. Like minded countries make agreements to avoid the doubling taxation for supporting their assesses to build perfect economy. Even though there’s Trade war it’s very vital to have such bilateral agreement for benefits of economy so that there will be hindrance of resource flow for Technology importing, business transactions, labour movement. Business opportunities can be enhanced only if the economy tries to have such bilateral agreement to value the efforts of their assesses including businesses and individuals.

In this Liberalized economy no company can exist independently without cooperation, assistances of other countries for getting advantage of core competencies that other economies possess. Double taxation avoidance agreements should be continuously maintained to avoid trade war .problems of Capital deficiency, technology deficiency, labour deficiency, Building core competencies etc. which can be mitigated only through joint arrangements like associate enterprises, collaboration agreements, joint ventures etc. For this the double taxation avoidance agreements could not be withheld over a long time .Countries can suspend these agreements for some time considering their sovereignty but cannot suspend for long as it may harm the global free trade order.

So from the above study it can be said Double Taxation Avoidance Agreement is very much helpful for avoiding double taxation not only that double taxation avoidance agreement can override the Income Tax act; if it is beneficial for the assessee. But it should not be used in wrong manners like to promote double non taxation or to unnecessarily or illegally reduce the tax liability or treaty shopping. It is essential that the Double Taxation Avoidance Agreements should have a clear provision which prevent DTAA from misuse (example: provision for anti-treaty shopping etc).

So to conclude it can be said the Double taxation avoidance agreement should be used for good purpose like for the beneficial of the assessee or to prevent a person from being taxed twice for the same income it should not be misused.

BIBLIOGRAPHY

BOOKS

• GIRISH AHUJA & RAVI GUPTA, PRACTICAL APPROACH TO INCOME TAX
• P MITTAL, TAXMAN’S INDIAN DOUBLE TAXATION AGREEMENTS & TAX LAWS

ARTICLES

• SHARMENDRA CHAUDHRY, DOUBLE TAXATION AVOIDANCE AGREEMENTS, available at, http://dx.doi.org/10.2139/ssrn.2036494
• APOORVA SHARMA, Double Taxation Avoidance Agreement and Impact of Advanced Pricing Agreement on Indian Regime: A Comparative Study with Other Nations, available at, http://dx.doi.org/10.2139/ssrn.2338920
• DTAA, available at http://businesstoday.intoday.in/story/how-treaties-with-foreign-countries-can-help-nris-save-tax/1/194401.html
• NRI TAX SERVICES, available at http://www.nritaxservices.com/

WEB SITES

• http://www.oecd.org/dataoecd/52/34/1914467.pdf,

http://www.unclefed.com/ForTaxProfs/Treaties/india.pdf

• Clausing, Kimberly A. “Multinational Firm Tax Avoidance and Tax Policy.” National Tax Journal, vol. 70, no. 1, 2017, pp. 121-152. JSTOR, jstor.org/stable/10.17310/ntj.2017.1.05.
• “Model Tax Convention on Income and on Capital: Condensed Version 2017.” Organisation for Economic Co-operation and Development, 2017, www.oecd.org/tax/treaties/model-tax-convention-on-income-and-on-capital-condensed-version-2074540x.htm.
• Avi-Yonah, Reuven S., and Haiyan Xu. “The Challenges of International Taxation and Global Tax Governance.” Annual Review of Law and Social Science, vol. 14, no. 1, 2018, pp. 329-350. DOI: 10.1146/annurev-lawsocsci-110317-031955.
• Lang, Michael, et al. “Improving Dispute Resolution Mechanisms in Tax Treaties.” European Taxation, vol. 57, no. 10, 2017, pp. 470-482. HeinOnline, https://heinonline.org/doi/abs/10.21552/etax/2017/10/14.
• World Bank. “Global Investment Competitiveness Report 2019/2020: FDI and Cluster Development.”
• https://openknowledge.worldbank.org/bitstream/handle/10986/32520/9781464814390.pdf?sequence=5&isAllowed=y.

¹ (1969) 72 ITR 291 (SC)

2 Person, U. (2023, March 20). Double tax avoidance agreement – meaning and advantages. DTAA – Advantages of Double Taxation Relief, Avoidance Agreement – ABC of Money. Retrieved March 31, 2023, from https://www.adityabirlacapital.com/abc-of-money/advantages-of-double-taxation-agreement#:~:text=Double%20tax%20avoidance%20agreement%20ensures,country%20investments%20without%2 0any%20ambiguity.

3 https://www.incometaxindia.gov.in/Forms/DTAA-Certificates/67-TRC.htm

⁴ https://www.incometaxindia.gov.in/communications/notification/notification392019.pdf

5 https://www.incometaxindia.gov.in/pages/international-taxation/double-taxation-avoidance-agreements.aspx

6 6 SCC 613 : [2012] 1 SCR 573

7 263 ITR 706

8 193 ITR 624 201 ITR 338 SC: 1994 (Supp.)