Double Taxation Avoidance Agreement (DTAA) is an agreement that is signed between two countries to avoid double taxation on the same income. This is done to prevent the erosion of a country’s tax base and ensure that taxpayers are not taxed twice on the same income in different jurisdictions. The United States of America has entered into DTAA with a number of countries, including India, to promote cross-border trade and investment.
The DTAA between India and the USA was signed in 1989 and came into force in 1991. This agreement ensures that income earned by residents of one country is not taxed in both countries. It also provides for the exchange of information between the two countries to prevent tax evasion. The agreement covers all types of income, including income from business, profession, and capital gains.
Under the agreement, a resident of one country is taxed only in that country unless he has a permanent establishment (PE) in the other country. A PE can be a branch office, factory, or any other fixed place of business. If a person has a PE in the USA, he will be taxed on the income earned in the USA. However, if he has no PE in the USA, he will be taxed only in India.
The agreement also provides for the elimination of double taxation on dividends, interest, and royalties. Dividends paid by a US company to an Indian resident are subject to a maximum tax of 15% in the USA, while interest and royalties are subject to a maximum tax of 10%. The tax rates are negotiated under the agreement to ensure that they are not discriminatory.
In addition, the agreement provides for provisions for the prevention of evasion or avoidance of taxes. This includes the exchange of information between the tax authorities of both countries. The agreement also provides for mutual assistance in the collection of taxes.
The DTAA between India and the USA has played a significant role in promoting cross-border trade and investment. It has provided a stable and predictable tax environment for taxpayers from both countries. The agreement has also helped to prevent double taxation and tax evasion.
In conclusion, the Double Taxation Avoidance Agreement between India and the USA is an essential tool for promoting cross-border trade and investment. It ensures that taxpayers are not taxed twice on the same income in different jurisdictions. The agreement provides for a stable and predictable tax environment and helps to prevent double taxation and tax evasion. The DTAA is an important agreement that has benefits for taxpayers from both countries.