What is Double Taxation Avoidance Agreement?

A Double taxation avoidance agreement or DTAA is a government level agreement, where taxation in one country is recognized by the other country. Thus, tax paid in one country is taken into account for the tax liability in the other country. To give relief to the tax payers, the governments of the U.S. and India entered into a double taxation avoidance agreement. India and the United States of America signed a comprehensive DTAA in the year 1989, and the provisions went into effect for residents of India and the U.S. on December 18, 1990. Over the years, new provisions have been added such as the FATCA notification.

The taxes that are applicable under the DTAA are the Federal Income Tax as imposed by the Internal Revenue Code and in India, the income tax as imposed by Income Tax Act of 1961.

The DTAA can come into affect in the following ways:

• Exemption Method - Here, the country of residence exempts the income earned in the foreign country.
• Deduction Method - Here, tax paid in the country of source of income is deducted from the global income and then from the residual amount the tax is paid
• Tax Credit Method - Here, the country of residence gives credit of the taxes paid in the foreign country. This can also be sub divided into :
  • Ordinary Credit Method
  • Underlying Tax Credit Method and
  • Tax Reserve Method

How do we Determine Residency?

As per the Indian Income tax laws a resident is a person who has been in India for a period of 182 days or more in the financial year or who has been in India for 60 days or more in a financial year and 365 days or more in the 4 years before the particular financial year.

Under the tax laws of the U.S. the residency status is described in Internal Revenue Code 7701(b). If a person is not a citizen, a person is considered non resident alien, unless he satisfies one of the two tests, to qualify as a resident alien:

1. Green Card test - A test based on the immigration laws to determine the residency status, or
2. Substantial presence test - A test based on numerical formula, which measure the days you are present in the U.S.

There can be scenarios where one person used to be a resident of U.S., but has income generated in India or similarly, a person is resident in India and generates their income from the U.S. In both scenarios, the taxes are payable in both U.S. and India, due to the residency laws and the taxation.

Steps to claim the benefit from DTAA:

1. Check the DTAA status between the countries. In the case of India and the U.S. it is applicable, since the DTAA is already in place.
2. Submit the below documents to avail the DTAA clauses
   • DTAA application form
   • Tax Residency Certificate
   • Self attested copy of PAN Card ( Permanent Account number)
   • Any other documents that are relevant to the specific case