DTAA Full Form, History, Types, Benefits

What is DTAA?

DTAA stands for Double Taxation Avoidance Agreement. A DTAA is a tax agreement that forbids double taxation of the same income. The DTAA covers a person if they live in one country while earning their living in another.

This indicates that tax rates and taxing jurisdictions for income originating in the concerned nations have been agreed upon. Mr Arjun, for instance, is an Indian who lives in the UK. He has invested in India and is getting profits.

Both India and the United Kingdom may now tax this income. However, Mr Arjun won't be subject to taxation in both nations for the same income because of the DTAA.

History of DTAA

The Double Taxation Avoidance Agreement (DTAA) is a pact that prohibits two nations from taxing non-residents' income in both their home country and their country of origin. In 1927, the Fiscal Committee of the League of Nations created the first model forms.

In April 1976, Geneva saw the publication of the Model Convention by its successor, the United Nations Social and Economic Council. Further, In July 1963, the Organization for European Economic Cooperation's Fiscal Committee issued its draft version.

In September 1961, the Organization for Economic Cooperation and Development (OECD) was established to succeed the OEEC. The OECD Model Tax Convention was given to a validated draught of the OEEC.

They were amended again in 1974, 1977, and most recently, in April 2019, it was proposed that they be modified once more to reflect the most recent advances. The OECD comments on the technical terms and clauses included in the Model above Convention.

The language used in DTAAs has been referred to as the "Internal Tax Language" by Lord Radcliffe in Ostime v. Australian Mutual Provident Society Reported in (1960) AC 459 (HL) 480 (Eng.).

Types of DTAA

To avoid double taxation, there are two options:

• Bilateral Treaties: When two countries reach an agreement under the DTAA, the relief is determined by their mutual understanding. Bilateral relief can be granted using the following methods.
• Unilateral Relief: When there is no common agreement between the countries, the home country grants unilateral relief.

Benefits of DTAA

The Income Tax Act of 1961, Sections 90 and 91, provides particular relief for taxpayers to prevent double taxation. The provisions about taxpayers who have paid taxes to another nation by which India has a DTAA are covered by Section 90. For nations with which India doesn't have a DTAA, see Section 91. India offers relief to both categories of taxpayers.

Following are some of the key advantages of double taxation avoidance agreements (DTAA):

• The DTAA offers two-fold taxation relief to the participating nations. Double taxation is avoided by exempting income earned abroad from taxation in the country of residence, or by granting credit for taxes paid abroad.
• The DATA also offers reduced tax rates on occasion.
• The DTAA may encourage even legitimate investors to route their funds through low-tax jurisdictions in order to avoid paying taxes. As a result, the nation loses tax money.
• By clearly dividing taxation powers between the contracting nations, the DTAA also offers tax certainty to the different investors and enterprises of the two countries with the help of an agreement.

DTAA Rates

India has DTAA agreements with more than 80 nations. The IT Department deducts TDS at a fixed rate from income paid to citizens of foreign nations. TDS rates vary by nation and are based on the DTAA clauses in each agreement. The DTAA's income tax rates range from 7.5 to 15%.

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