DTAA - Double taxation avoidance agreements

What are Double taxation avoidance agreements ?

Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset(in the case of capital taxes), or financial transaction (in the case of sales taxes). Double liability is mitigated in a number of ways, for example:

  • the main taxing jurisdiction may exempt foreign-source income from tax,
  • the main taxing jurisdiction may exempt foreign-source income from tax if tax had been paid on it in another jurisdiction, or above some benchmark to not include tax haven jurisdictions,
  • the main taxing jurisdiction may tax the foreign-source income but give a credit for foreign jurisdiction taxes paid.

Another approach is for the jurisdictions affected to enter into a tax treaty which sets out rules to avoid double taxation.

The term "double taxation" can also refer to the double taxation of some income or activity. For example, in some jurisdictions, corporate profits are taxed twice, once when earned by the corporation and again when the profits are distributed to shareholders as a dividend or other distribution. It should be invoked only if necessary by an assessee.

Certain provisions in relation to Indo – US DTAA

  • Make available clause: The term ‘make available’ means that the person acquiring the technical service is enabled to independently apply the technology. The word ‘enable’ is used in the sense that the technical services should be such that they make the recipient able or wiser in the subject matter. Thus, where the recipient of technical services does not get equipped with the knowledge or expertise and the recipient would not be able to apply it in future independently without support from the service provider, it will not be a case of technical service having been ‘made available’.
  • Service PE: Service by employee or other personnel constitutes to PE if services last beyond a period aggregating more than 90 days within any 12 month period. However, in case of related party the 90 days period gets replaced with 30 days period.
  • Important documents – Tax Residency Certificate and Permanent Account Number.