Dual Taxation - DTAA and

how it helps Non Residents

One of the major concerns that NRIs have is dual taxation. No one wants to pay taxes in two countries and many countries tax their residents on their worldwide income. To provide some relief from dual taxation to their citizens, many nations have signed bilateral double taxation agreements with each other. These agreements are known as 'Double Tax Avoidance Agreements' (DTAA). The main purpose of double taxation agreements between two countries is the avoidance of double taxation, on income earned in any of these countries. Normally, under such agreements, a credit is usually allowed against the tax levied by the country in which the taxpayer resides, for taxes levied in the other treaty country. As a result of this credit, the tax payer pays no more than the higher of the two tax rates. The easiest way to explain double taxation avoidance is by example: Naveen, an OCI holder in Canada, moves back to India after several years. At some point of time he becomes a resident in India for taxation purposes (ROR) and as per rules, his worldwide income becomes taxable in India. Let's assume he has investments in Canada that earn him $20,000 a year. 1. Naveen would be liable to pay tax in Canada on his $20,000 income, as the income is generated in Canada. 2. He would also be liable to pay tax on the $20,000 to the Indian tax authorities, as his worldwide income would be taxable in India. This of course would mean that Naveen would be paying tax on the same income twice! Fortunately this is where the DTAA helps. Canada and India have signed the DTAA. Let's assume Naveen pays tax in Canada @20% which works out to $4000. He pays this tax to the Canadian tax authorities. He then has to declare his Canadian income to Indian tax authorities. Under the DTAA Naveen will get credit for the taxes he has already paid in Canada. If the tax rate is lower or equal in India, he will not have to pay any additional tax in India on his Canadian income. On the other hand if the tax rate is slightly higher in India, he would simply pay the difference.

Double Taxation Avoidance

Agreements (DTAA)

India has 'Double Taxation Avoidance Agreements' with several countries. Even in cases where no DTAA exists, India is said to provide tax relief from dual taxation to its residents, to some extent. DTAA agreements and other agreements for sharing tax information between governments is an ongoing affair. A list of the countries with which India has already signed DTAA agreements is provided. To read DTTA agreements that India has signed with various countries visit the Indian income-tax website: http://law.incometaxindia.gov.in/DIT/intDtaa.aspx #with Under the Income Tax Act 1961 of India, Section 90, relief is provided for taxpayers who have paid tax to a country, with which India has signed a double tax avoidance agreement. (Vide Notification NO.91/2008, Dated 28-8-2008) India also offers relief to those who have paid tax to countries that do not have a double taxation avoidance agreement with India under Section 91 of the Income Tax Act 1961.

Points to consider on tax treaties

(DTAA)

1. Even though individuals are considered resident under tax treaty, based on their primary place of residence, this is not the only criteria. 2. The United States, includes citizens and green card holders, wherever living, as subject to taxation in the United States, and therefore considered as residents for tax treaty purposes. 3. There can be a possibility where an individual may have a primary residence in two countries. Tax agreements take this point into consideration and each treaty will have provisions for such situations. To give you an example, Canada and India tax treaty address this issue as: (Excerpt from Canada/India DTAA) 1. For the purposes of this Agreement, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. 2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules: (a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (hereinafter referred to as his centre of vital interests); (b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; © if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

DTAA Summary:

1. India provides protection against double taxation, either by complete avoidance of overlapping tax or waiving a certain amount of the tax payable in India. 2. India currently has double taxation avoidance treaties signed with most countries in the world. These treaties are periodically reviewed and strengthened in view of the global concern of money laundering activities. Foreign nationals of several countries such as USA, Canada and UK are required to declare and pay taxes on their worldwide income. Double taxation avoidance treaties, actually help in either minimizing the tax payable to your home country or in some cases even eliminating further tax liabilities, depending on the tax rates applicable. Next Page: Paying taxes in India read now>>