What exactly is DTAA?

Double taxation is the practise of taxing the same income or subject-matter twice, for the same purpose, over the same time period, and in the same tax jurisdiction. When such income is taxed in two countries, the total tax liability will constitute a sizable portion of his total income.

As an example, In 1920, the League of Nations formed a group of four world-renowned economists, Prof. Gijsbert, Prof. Luigi Einaudi, Prof. Edwin Seligman, and Prof. Josiah Stamp, to recommend certain International taxation rules for allocating taxing rights under Double Taxation Avoidance in order to avoid multiple taxes on the same income. The Group had suggested dividing the right to taxation between the country of residence and the country of origin while recognising taxing rights.

The current Rules, without a doubt, are an extension of those recommendations. The Double Taxation Avoidance Agreement (DTAA) is an agreement between two countries that non-residents' income should not be taxed in both their country of origin and the country where they live. The Fiscal Committee of the League of Nations created the first model forms in 1927.

In April 1976, its successor, the United Nations Social and Economic Council, published its Model Convention in Geneva. Later, in July 1963, the Organization for European Economic Cooperation (OEEC) Fiscal Committee published its Draft Version. Meanwhile, the Organisation for Economic Co-operation and Development (OECD) was established in September 1961 to succeed the OEEC. The OEEC draught version was approved and renamed the OECD Model Tax Convention.

They were modified further in 1974, 1977, and, most recently, in April 2019, it was proposed to modify further to accommodate the most recent developments. The OECD provides its own commentaries on the technical terms and clauses covered by the aforementioned Model Convention.

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

The DTAAs are fundamentally based on four models, namely:

1. OECD Model Tax Convention - Based on the principle of residence.
2. United Nations Model Double Taxation Convention - Based on the combination of residence and source. With a strong emphasis on the latter. 3. US Model Income Tax Convention - Used when negotiating DTAAs with the US.
3. Andean Community Income and Capital Tax Convention - Adopted by Bolivia, Chile, Ecuador, Columbia, Peru, and Venezuela as members.

DTAAs have two goals:

1. to encourage technology transfer and
2. to prevent tax avoidance and evasion by providing relief and tax credits.
3. To avoid discrimination among taxpayers
4. To enhance collaboration between two different taxing authorities.
5. To entice foreign investment by removing the burden of double taxation.
6. To encourage the exchange of goods and services, as well as the movement of capital and people.
7. To clarify how specific cross-border transactions will be taxed.
8. To establish "Specific Rules" for the distribution of revenue between two countries.
9. To exempt certain incomes from taxation in both countries.
10. To reduce the applicable tax rates on certain incomes even further.

DTAA Duration and Rates: In general, these agreements will last indefinitely unless officially terminated by either party. The DTAA rates and rules will differ from country to country. TDS rates on interest earned, for example, will be charged at either 10% or 15%.

India and the DTAA:

In terms of India, its agreements are based on the UN model of double taxation avoidance agreements. As previously stated, these agreements are used to allocate jurisdiction between the source and residency. The Agreements themselves specify the maximum rate of taxation that can be charged in the source country, which is generally lower than the rate of taxation in that country. Sections 90 to 91 of Chapter IX of the Income Tax Act of 1961 are concerned with 'Double Taxation Relief.'

As a result, India has entered into DTAA agreements with 88 countries of various types, including Comprehensive, Intergovernmental Agreement to Improve International Tax Compliance, Limited Agreements, Limited Multilateral Agreements, Specified Associations Agreement, Tax Information Exchange Agreement, and other agreements.

In the first instance, the Hon'ble Andhra Pradesh High Court held in CIT v. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP) that the provisions of DTAA are as much as part of local tax law and that where something is taxable under local law but subject to tax avoidance under these agreements, the authorities at whatever stage of proceedings can and are duty bound to impose tax avoidance under these agreements.

Later, in R.M. Muthiah, reported in (1993) 202 ITR 508, the Hon'ble Karnataka High Court held that the effect of an Agreement would be:

1. No provision of the Agreement or Article may impose a levy unless the liability is imposed by the Income Tax Act of 1961.
2. If the Income Tax Act of 1961 imposes a tax liability, the Agreement or Article may seek to reduce it. In the event of a conflict between the Income Tax Act of 1961 and the Agreement or Articles, the Income Tax Act of 1961 will take precedence.
   
   Later, in UoI v. Azadi Bachao Andolan, reported in (2003) 263 ITR 706, the Hon'ble Supreme Court upheld this ruling (SC).

Taking Advantage of DTAA Benefits - From India's perspective:

A non-resident assessee must provide a 'Tax Residency Certificate (TRC) or Form 10F obtained from the tax authorities of the other country where he resides in order to be subject to DTAA Arraignments. As previously stated, the income will be completely exempt or taxed at a lower rate. If it is taxable under DTAA arrangements, the non-resident assessee must pay the tax in India and then claim a refund of such taxes paid against his home country's tax liability.

Concluding Remarks: However, India must confront the reality of multinational entities abusing the DTAA provisions. Treaty shopping, a method of avoiding taxes, has become the norm. It is unlikely that the United States will enter into DTAA agreements with the rest of the world.

There have been signs of significant changes in recent times, such as revised DTAAs with Mauritius, Singapore, Cyprus, and other tax havens. However, a complete overhaul of the Double Taxation Avoidance mechanism is urgently required. After consulting with OECD countries, the Taskforce on Direct Tax Code can recommend appropriate measures.