Double Taxation Avoidance Agreement (DTAA)

What is DTAA?

The full form of DTAA is Double Taxation Avoidance Agreement. It is a treaty or agreement signed by different countries to avoid double taxation internationally. This agreement includes individuals who are living in one country and generating income for another country. India has signed this agreement with over 100 countries to prevent its people from being taxed on the same income twice. There are three types of the DTAA:

1. Bilateral Treaties
2. Exemption Methods
3. Tax Credits

DTAA promotes the trade in goods and services, economic activities, and capital investment between two nations. Both countries must agree on a specific tax rate for income earned by a resident of one country and generated in the other country. Some specific types of income categories come under DTAA income tax, and it is given below:

1. Property
2. Sales
3. Capital Gains
4. Services
5. Savings
6. Fixed deposit accounts, etc.

Benefits of DTAA

There are many DTAA benefits that an individual can enjoy under the agreement signed by their government wth the other nations. These benefits are listed below:

Tax Credit

Taxpayers are eligible to claim the credits on the tax they pay internationally against their domestic tax liabilities. It also prevents the individual from paying the same tax twice. Wth the help of this treaty, you can avoid paying tax twice on the same income, establish a business abroad successfully, and transfer the revenue.

Provide Legal Certainty

It promotes legal certainty because DTAA has some specific guidelines about the taxation of income earned internationally. It also has another benefit, which is that this legal certainty promotes the developing countries in making foreign investments.

Lowers DTAA TDS Rates

In many cases, DTAA results in reducing the tax deduction at source or TDS. To understand this better, take an example: Interest, loyalty, or dividends paid to Indian residents from other countries may be taxed at lower rates, which is beneficial for the investors and service providers.