Double Taxation Avoidance Agreement with United States of America: A Brief Overview

The United States of America (USA) is one of the largest trading partners of India with bilateral trade worth billions of dollars. As Indian companies expand their global reach and seek opportunities in the US market, it becomes imperative to understand the taxation laws of both countries. The Double Taxation Avoidance Agreement (DTAA) signed between India and USA is an important tool for avoiding double taxation on income earned in both countries.

What is Double Taxation?

Double taxation is a situation where an individual or a company has to pay taxes twice on the same income. It may occur when income is earned in one country and taxed in another country where it is also subjected to taxes. Double taxation can be a huge burden for businesses and individuals who have to bear the cost of taxes twice.

Double Taxation Avoidance Agreement (DTAA)

DTAA is a bilateral agreement signed between two countries to prevent double taxation and promote economic ties. India signed the DTAA agreement with the United States in 1989, which came into force in 1991. The agreement has been revised several times since then to align with the changing tax laws and business environment.

Under the DTAA agreement, taxpayers can claim tax relief in their home country for any taxes paid in the other country on the same income. This means that they do not have to pay taxes twice on the same income. The agreement also provides a framework for tax authorities to resolve disputes arising due to taxation issues.

Key Provisions of DTAA with the USA

The DTAA agreement with the USA covers a wide range of income categories, including business profits, dividends, interest, royalties, capital gains, and income from employment. The key provisions of the agreement are as follows:

1. Business Profits: Profits earned by a company in one country are taxed in that country. However, if the company has a permanent establishment (PE) in the other country, it may be taxed in that country as well. The agreement provides guidelines for determining the existence of a PE and the allocation of profits between the two countries.

2. Dividends: Dividends paid by a company to residents of the other country are taxed in the country where the company is based. However, the tax rate cannot exceed 15% of the gross amount.

3. Interest: Interest earned by a resident of one country from the other country is taxed in the home country. The tax rate cannot exceed 10% of the gross amount.

4. Royalties: Royalties earned by a resident of one country from the other country are taxed in the home country. The tax rate cannot exceed 15% of the gross amount.

5. Capital Gains: Capital gains arising from the sale of movable property are taxed in the home country. However, if immovable property is sold, the gains may be taxed in the country where the property is located.

6. Income from Employment: Income earned by a resident of one country from employment in the other country is taxed in the country where the employment is exercised. However, if the employment period exceeds 183 days in a financial year, the income may be taxed in both countries.

Conclusion

The DTAA agreement with the USA provides a framework for avoiding double taxation and promoting economic ties between the two countries. The agreement simplifies the tax system and reduces the burden of compliance for taxpayers. As India continues to strengthen its ties with the USA in trade and investment, the DTAA agreement remains a vital tool for ensuring a fair and equitable tax system for businesses and individuals.