DTAA Between India and USA
When dealing with cross-border income, one of the major concerns individuals and businesses face is the risk of double taxation—where income is taxed both in the country where it is earned and in the taxpayer's country of residence. To address this issue, India has established Double Taxation Avoidance Agreements (DTAAs) with various countries, including the United States. These agreements help taxpayers avoid paying taxes twice on the same income, promoting smoother economic relations and providing clarity for businesses and individuals engaging in international transactions.
In this article, we will explore the DTAA between India and the USA, how it works, and discuss how you can benefit from its provisions to avoid unnecessary tax burdens.
Table of Contents
What is DTAA?
A double taxation avoidance agreement is a treaty signed between two countries. The purpose of this treaty is to protect the respective citizen's interests and make the country an attractive destination for trading and investment. While this agreement makes sure that taxpayers do not have to pay taxes in both countries. It does not mean that they need to evade tax.
What is India and USA DTAA?
The DTAA plays an important role in promoting trade and investment between India and the USA. It provides a framework to prevent the double taxation of income and fosters economic cooperation. This agreement provides clarity and confidence to businesses and people engaged in cross-border economic activities.
How does DTAA between India and USA work?
DTAA is an agreement that aims to protect such people who pay tax twice. Before this agreement, the income earned abroad was taxable in India. So, DTAA is an agreement that aims to protect such people who pay tax twice. This relief is offered in two ways-
Firstly, we exempt the entire income earned in one country. Like income earned in the USA is exempted from tax in India
To provide credit for the tax amount that has been paid in the USA.
Conditions for the Applicability of Agreement
Conditions for the Applicability of the Agreement:
The Double Taxation Avoidance Agreement (DTAA) between India and the USA applies to the following taxes:
In the USA:
Federal Income Tax (Imposed by the Internal Revenue Code): The agreement applies to federal income tax levied by the USA. However, it does not cover certain specific taxes such as:
Accumulated Earnings Tax: This tax is imposed on companies that retain earnings beyond reasonable limits without distributing dividends to shareholders. The objective is to encourage companies to declare dividends and avoid unreasonable accumulation of profits.
Personal Holding Company Tax: This tax applies to closely-held corporations that retain earnings to prevent shareholders from being subjected to higher personal income tax rates.
Social Security Taxes: These are imposed on both salaried and self-employed individuals, used to fund social security programs in the USA. DTAA does not apply to social security taxes.
Excise Taxes: Specifically, this refers to taxes imposed on insurance premiums paid to foreign insurers. The DTAA applies only to the extent that the premiums paid are not reinsured with entities that are not eligible for tax exemptions under the agreement.
In India:
Income Tax: The DTAA applies to income tax, excluding income tax on undistributed profits of companies.
Surtax: The agreement also covers surtax, which is an additional tax imposed on certain types of income, depending on the provisions within the DTAA between India and the USA.
Residential status in DTAA between India and USA
If the person is a resident of both India and the USA, then residential status will be checked by the following situations-
Situations | Verified to be a resident of the country selected according to the below provisions |
Has a permanent home in both countries | Economic and personal relations |
No permanent home in both countries | A habitual home is there |
Habitual homes in both states | Person is National |
National citizen of both countries or neither of them | Concerned authorities need to check the residential status by mutual agreement |
How is different income tax charged under DTAA between India and USA?
Income from immovable property Under agreement with USA
If the resident generates income from immovable property, then he or she has to pay income tax in the country where immovable property is situated. It covers the following kinds of income-
Income from the letting out of immovable property
Income from agriculture or forestry activities
Income from the immovable property used for personal services
Income earned through enterprise from the immovable property
Dividend under DTAA between India and USA
When a resident company in one country pays dividends to a resident of another country, the DTAA helps avoid double taxation on the earnings. For example, if a USA-based company pays dividends to a shareholder residing in India, the income becomes taxable in India. However, the dividends are also subject to tax in the country where the income is paid (the USA in this case).
Under the India-USA DTAA, dividend taxation is capped to ensure fairness:
15% of the gross dividend amount if the shareholder receiving the dividend is a company that owns at least 10% of the shares of the dividend-paying company.
25% of the gross dividend amount in all other cases.
Interest income under agreement with USA
If the interest income arises in the country that has been paid to a resident of another country. The tax is charged in the country where the receiver lives. This income gets taxed in the country where it arises and the taxpayer is receiving the country’s resident then the interest cannot increase more than-
10 % of the gross amount if interest is paid on a loan from a bank
15% of the gross amount in other situations
Payment received by teachers, professors, and scholars
The income of a teacher, professor, and scholar moving to a different country is exempted from tax. If they fulfill the two conditions listed below-
Living in a foreign country for at least 6 months or 1 year
If they are resident of the previous country before shifting to another country
Relief from Double Taxation in DTAA between India and USA
DTAA relief in India
If the Indian resident earns an income that is a table in the USA, then such taxpayer claims a deduction in tax paid in the USA. However, the total deduction claimed must not exceed the total tax payable on foreign income in India.
DTAA relief in the USA
A USA resident can claim credit against the US tax amount of-
Income tax paid in India by the resident or on his behalf
Income tax received by the government of India from Indian company on dividends paid to USA company that holds 10% of voting rights of Indian company
How to report income under DTAA between India and USA?
NRIs are required to report their income and assets in ITR and pay tax on foreign income.
Schedule foreign sources of income
In this, taxpayers needed to report the income arising from any source outside India. The taxpayer has to enter the following details-
Country code
Identification number
Income earned outside India
Taxes paid outside India
Taxes payable in India
Tax relief available
Relevant DTAA article to claim relief
Schedule tax relief: In this, details under schedule TR are automatically included. The double taxation relief is decreased from tax calculation.
Schedule foreign assets: Under this, if taxpayers have foreign assets located outside India, then they should be reported in ITR under foreign assets.
Form 67: Form 67 in the income tax form is important to claim foreign tax credits. This form includes foreign income details and tax relief. It can be filed online on the income tax department website before filing the ITR.
Applying Process of India - USA DTAA
To claim the benefit from this India-USA agreement, people or businesses should follow this simple process. Below are the steps mentioned to guide you through the application process for DTAA benefits-
To understand eligibility: Check whether you qualify for the benefits mentioned under the agreement. It applies to residents of both countries who earn income in the other country.
Select the correct forms: Depending upon the taxpayer's status, you need to fill out the right tax forms. For Indian residents, fill out form 10F that certifies their Indian residency. For US residents, fill out the form W-8BEN for individuals and the W-8BEN-E form for businesses to verify their US residency.
Collect supporting documents: Prepare the documents that establish residency in the home country. Like tax residency certificates, and address proof.
Fill out the complete forms: Fill out the relevant forms completely and accurately. Errors or incomplete information can delay the application process.
Forms submission: Submit the completed form to the tax authorities of the resident country where you earn income.
Records maintenance: Keep copies of all the forms and supporting documents for the records
Check correspondence: Watch for any communication from the tax authorities related to the application. You can be asked to offer additional details or clarification.
How to claim DTAA benefits?
To claim the DTAA benefits, taxpayers must follow a specific process. To ensure proper support to the tax laws and regulations of both India and the USA. Below are the steps provided to help people and businesses claim the agreement benefits effectively-
Check the applicable tax rate
Once review the terms of the India -USA agreement to understand tax rates and exemptions on different types of income. Like interest, dividends, royalties, and capital gains.
Obtain the tax residency certificate
Secure TRC from tax authorities in the residence country. This certificate verifies the tax residency status and is important to claim the benefits.
Complete the required forms
Depending upon the residency status and type of income received. Complete the important forms such as 10f for Indian residents and W-8BEN-E for US residents.
Include the DTAA claim in the tax return
When you're preparing your tax return, make sure to let the tax authorities know if you're eligible for benefits under a Double Taxation Avoidance Agreement (DTAA). If you have income that's subject to lower tax rates due to a DTAA, clearly declare that income. Don't forget to attach the Tax Residency Certificate (TRC) or any other necessary paperwork to prove your eligibility."
Provide documents
Attach the important documents for the tax return. Like TRC, forms, and relevant paperwork. It proves the eligibility for DTAA benefits.
Taxes calculation
Calculate taxes based on applicable tax rates and exemptions as mentioned in the agreement. Instead of standard domestic rates.
Keep the records
To maintain the TRC copies, forms or any document related to the DTAA claim. These records can be required for verification and audit purposes.
Ensure tax law compliance
Stay updated with tax regulations and needs in both countries. To make sure that there is complete compliance to claim DTAA benefits.
FAQs
Q1. Why is DTAA important?
DTAA is crucial as it prevents double taxation, promotes cross-border trade and investment, and provides clarity on tax matters for international businesses and individuals.
Q2. When was the India-USA DTAA signed?
The India-USA DTAA was signed in 1989 and became effective on 21st December 1990.
Q3. Who does the India-USA DTAA apply to?
The DTAA applies to residents of both India and the USA who earn income in either or both countries.
Q4. Is a Tax Residency Certificate (TRC) mandatory for claiming DTAA benefits?
Yes, under Section 90(4) of the Income Tax Act, a Tax Residency Certificate (TRC) and the information in Form 10F are mandatory to claim DTAA benefits. These documents confirm the tax residency status and ensure eligibility under the DTAA agreement.
Q5. Which countries have DTAAs with India?
India has signed DTAAs with over 90 countries, including the USA, UK, Canada, Australia, and several others.
Q6. What is the difference between DTAA and a tax treaty?
While the terms are often used interchangeably, a tax treaty is a broader agreement that may encompass various tax-related issues, while a DTAA specifically focuses on avoiding double taxation.
Q7. How is 'residency' determined for DTAA purposes?
Residency is typically determined by factors such as domicile and the place of effective management, according to the specific DTAA provisions between the countries involved.
Q8. What is a 'Permanent Establishment' in DTAA?
A 'Permanent Establishment' refers to a fixed place of business where the operations of an enterprise are wholly or partly carried out, influencing the taxability of income.
Q9. What is the role of the OECD in DTAAs?
The OECD provides guidelines and a model tax convention, which many countries, including India and the USA, use as a reference for drafting their DTAAs.
Q10. Are DTAAs static agreements?
No, DTAAs are periodically reviewed and updated based on changing economic conditions and tax policies to remain relevant and fair.
Q11. Are DTAAs only about avoiding double taxation?
While the primary aim is to prevent double taxation, DTAAs also focus on preventing tax discrimination, ensuring fiscal stability, and fostering international cooperation.
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