DTAA between India & USA
DTAA between India & USA
The Double Tax Avoidance Agreement (DTAA) is a treaty that is signed by two countries. The agreement is signed to make a country an attractive destination as well as to enable NRIs to take relief from having to pay taxes multiple times.
DTAA does not mean that the NRI can completely avoid taxes, but it means that the NRI can avoid paying higher taxes in both countries. DTAA allows an NRI to cut down on their tax implications on the income earned in India. DTAA also reduces the instances of tax evasion.
Introduction
- By either exempting the income earned abroad in its entirety, (In our example, the entire income earned by Mr X in the US will be exempt in India);
- By providing credit to the extent of tax already paid in the US (The tax paid by Mr X in the US will be eligible for deduction in India).
The DTAA applies to the residents of the contracting states i.e. India and USA, subject to certain exceptions.
Applicability of the agreement:
Applicability of the agreement:
The DTAA applies to the following taxes:
United States:
- Federal Income Tax imposed by the Internal Revenue Code (IRC):The DTAA applies to the Federal Income Tax of the US or in other words, the US income tax. However, the agreement does not apply to the following taxes:
- Accumulated Earnings Tax: This tax is usually levied on companies whose retention ratio of earnings is unreasonable. The main intention of the introduction of this tax is to encourage companies to declare a dividend to the shareholders.
- Personal Holding Company Tax: This tax is levied on closely held corporations where earnings are retained with an intent to avoid higher individual tax rates.
- Social Security Taxes: This tax is leviable on salaried individuals as well as self-employed taxpayers. This amount is used for maintaining the social security of the nation.
- Exercise taxes imposed on insurance premiums and with respect to private foundations: The DTAA applies to the premium paid to foreign insurers only to the extent the risks are not re-insured with a person who is not entitled to exemption from such taxes.
In India:
- Income Tax including a surcharge (excluding income tax on undistributed income of companies)
- Surtax
Residential Status
Resident: A Resident refers to a person who as per the relevant laws of the Contracting States, i.e. India and the US are liable to pay tax by reason of domicile, residence, citizenship, place of management, place of incorporation, etc.
If a person is a resident of both contracting states, then residence will be determined as follows:
General Rule: Individual is deemed to be a resident of the state where his permanent home is available
| Situation | Deemed to be a resident of the country in which: |
|---|---|
| A permanent home in both states | Personal and economic relations are closer. |
| If the above rule is not determinable or no permanent home in either state is there | Habitual abode is present |
| Habitual abode in both states | He is a National |
| National of both states or neither of them | Competent Authorities shall determine the residential status by mutual agreement. |
Income from Immovable Property
General Rule: Income derived by a resident from immovable property is to be taxed in the state where the immovable property is situated. Eg: If a US Resident derives rental income from immovable property situated in India, then the rental income will be liable to tax in India. Applicability as per the agreement: For instance, the following points will be considered as income from the immovable property:
- Income from agriculture or forestry
- Income derived from the direct use, letting or use in any other form of the immovable property
- Income from immovable property of an enterprise
- Income from Immovable property used for the performance of independent personal services
Dividend
General Rule: Dividend paid by a resident company of a contracting state to a resident of the other contracting state, may be taxed in that other state.
Eg: If a US Company pays a dividend to an Indian Resident shareholder, then the dividend income will be liable to tax in India. Further, USA (Company paying the dividend) also has a right to tax the said dividend in their state. However, if the beneficial shareholder is a resident of India i.e. a resident of the other contracting state, then the tax so charged shall not exceed: Eg: If a US Company pays a dividend to an Indian Resident shareholder, then the dividend income will be liable to tax in India. Further, USA (Company paying the dividend) also has a right to tax the said dividend in their state. However, if the beneficial shareholder is a resident of India i.e. a resident of the other contracting state, then the tax so charged shall not exceed:
| a | The beneficial owner is a company which owns at least 10% of the voting stock of the company paying the dividend | 15% of the gross amount of dividend |
| b | Other Cases | 25% of the gross amount of dividend |
Interest
General Rule: Interest arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other State.
As per the DTAA, if interest income arises in India and the amount belongs to a US Resident, then the said amount shall be taxable in the US. However, such interest may be liable to tax in India as per the Indian Income Tax Act (ie the contracting state where the interest has arisen).
Exception : If the beneficial owner of the interest is a resident of the USA (resident of the other contracting state), then the tax charged in India shall not exceed:
| a | Interest paid on a bank loan (involved in bonafide banking business) or a similar financial institution (including an insurance company) | 10% of the gross amount of interest |
| b | In other cases | 15% of the gross amount |
