Double Taxation Avoidance Agreements



What is Double Taxation Avoidance Agreement (DTAA):


Double Taxation Avoidance Agreement, also known as the DTAA, is an international tax treaty signed between countries to avoid taxing the same income twice.


Advantages of DTAA:


DTAA makes countries an attractive destination to companies and individuals. For example, if someone is being transferred and is given some options to choose where he wants to go, he will want to choose the country which has a DTAA with its country because then he wouldn’t have to pay the taxes on his income twice.


Examples:


For example, a taxpayer, say Mr. A resides in the U.S but his income comes from India, then his income will only be taxed once, in either of the countries. The country where the income will be taxed will be determined by the DTAA arrangements as negotiated between these two countries.


What about Income from Immovable Property:


Immovable properties are the ones which are permanently fixed at a place and cannot be moved. It includes lands, houses, buildings and even wells, ponds, canals and many more. If an immovable property is producing any money, it will be taxed by the country where the property is located.


Disadvantages of DTAA:


A big disadvantage of DTAA is treaty shopping. For example, there is a DTAA agreement between country X and Y where Y is a tax haven (a country exempted from paying taxes). An investor can misuse the DTAA between them by rooting his income earned in country X which taxes income into country Y where tax is exempted on income.


Even though DTAA was introduced to benefit investors, many have found out ways to misuse it.


Written by Rishita Arora


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