Double Taxation Avoidance Agreements (DTAA)

Double Taxation Avoidance Agreements (DTAA)

Subject: Economy

Section: Fiscal Policy

Holcim CEO Jan Jenisch on Monday said the company’s $10.5-billion sale of its stakes in Ambuja Cements and ACC to the Adani Group will not attract any capital gains tax.

Details:

As it will sell the shares in the Indian companies to the Adani family’s offshore special purpose vehicle (SPV) through a Mauritius-incorporated entity. This will likely give the Swiss company the cover of India’s tax treaty with the island nation. Capital gains from the sale of these stakes to the overseas SPV won’t be taxed in India.

Concept: 

Double Taxation Avoidance Agreements (DTAA)  is a treaty signed between two or more countries and is applicable in cases where a taxpayer residing in one country has to earn his/her income from another country.

It is signed between two countries, which, through the elimination of international double taxation, promotes the exchange of goods, services, and investment of capital between the two countries. This implies that there are consented tax rates and jurisdiction on specified kinds of incomes arising in one country to a tax resident of another nation. 

India establishes DTAAs with other countries through Section 90 of the Income Tax Act, 1961. India has DTAAs with more than 80 countries. It is legislated on a reciprocal basis and covers residents of India as well as the residents of the negotiating country. An individual or a corporation not a resident of India or the country with which DTAA is signed cannot claim benefits under DTAAs.

DTAA can either cover all types of income or can target a specific type of income depending upon the types of businesses/holdings of citizens of one country in another. The following categories are covered under the Double Taxation Avoidance Agreements (DTAA):

• services
• salary
• property
• capital gains
• savings/fixed deposit accounts

Benefits:

Sections 90 and 91 under the Income Tax Act 1961 offer specific relief to taxpayers to avoid double taxation.

• Section 90 deals with those provisions involving taxpayers who have paid tax to another country with which India has a DTAA.
• Section 91 is for those countries with which India does not have a DTAA.

Some of the major benefits of Double Taxation Avoidance Agreements (DTAA) are mentioned below:

• Relief on double taxation is provided by the exemption of incomes earned abroad from tax in the resident country or by providing credit to the extent taxes that have already been paid abroad.
• In some cases, the DTAA also provides concessional rates of tax.
• DTAA can become an incentive for even legitimate investors to route investments through low-tax regimes to sidestep taxation.
• DTAA also provides tax certainty to the various investors and businesses of both the countries through the clear allocation of taxing rights between the contracting states by Agreement.