Double Taxation Avoidance Agreement (DTAA)

• In today’s globalized economy, individuals and companies often earn income across borders. 
• This gives rise to the possibility of double taxation, i.e., the same income being taxed in both the source country (where the income is generated) and the residence country (where the taxpayer resides). 
• To resolve this, countries enter into Double Taxation Avoidance Agreements (DTAA).

What is DTAA?

• A Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty between two countries or territories aimed at eliminating double taxation on the same income. 
• It allocates taxing rights between the two jurisdictions and provides tax relief to individuals and corporations engaged in cross-border activities.
• Example:- 
• If an Indian resident earns income from the UK, the UK (source country) and India (residence country) both may seek to tax that income. 
• DTAA ensures that the income is taxed only once—either exempting it in one country or allowing a tax credit.

DTAA in India

• India signed its first DTAA with Mauritius in 1982, which was revised in 2016.
• India currently has over 90 DTAAs with countries like the USA, UK, Germany, UAE, Singapore, and others.
• These agreements help in tax planning and encourage foreign direct investment (FDI).

Types of DTAA

• Comprehensive DTAA – Covers all income types: salary, interest, dividends, royalties, etc.
• Limited DTAA – Applies only to certain types of income (e.g., shipping or airline services).

Key Benefits of DTAA

• Relief from Double Taxation – Prevents the same income from being taxed twice.
• Promotes Foreign Investment – Reduces tax burden for foreign investors.
• Provides Tax Certainty – Reduces the chances of tax disputes and ensures stability.
• Facilitates Cross-border Trade and Services – Encourages ease of doing business globally.

DTAA and Tax Planning

• In the past, treaty abuse like "treaty shopping" became a concern—where shell companies were set up in low-tax jurisdictions like Mauritius to avoid capital gains tax in India. To counter this:
• India revised the India-Mauritius DTAA in 2016.
• Introduced GAAR (General Anti Avoidance Rules) to curb tax avoidance.

Dispute Resolution Mechanisms under DTAA

Mutual Agreement Procedure (MAP):

• MAP is a dispute resolution mechanism included in DTAAs.
• It allows competent authorities of both countries to resolve disputes related to double taxation through negotiations.
• Especially useful in transfer pricing and residency disputes.

Advance Pricing Agreements (APA):

• APAs are proactive arrangements between taxpayers and tax authorities that determine the arm's length price for future international transactions.
• Helps avoid transfer pricing disputes before they arise.

MAP v/s APA Comparison:

Key Institutional Framework

Central Board of Direct Taxes (CBDT)

• Established under the Central Board of Revenue Act, 1963.
• Apex body responsible for administering direct tax laws through the Income Tax Department.
• Negotiates, drafts, and monitors DTAA agreements.
• Functions under the Department of Revenue, Ministry of Finance.

Global Perspective

• Many developed and developing countries have DTAAs to promote economic cooperation.
• OECD and G20 have initiated BEPS (Base Erosion and Profit Shifting) frameworks to prevent tax base erosion.
• India has adopted Multilateral Instrument (MLI) under BEPS to update multiple DTAAs and enhance transparency.

Challenges Associated with DTAA

• Abuse through Treaty Shopping – Using shell companies in tax havens.
• Tax Base Erosion – Leads to loss of revenue for source countries.
• Asymmetry in Negotiations – Developing countries often have weaker bargaining power.
• Need for Periodic Revision – Treaties must be updated in light of changing global tax rules (e.g., digital economy, crypto currencies).