DOUBLE TAXATION AVOIDANCE AGREEMENT(DTAA)

A Double Taxation Avoidance Agreement (DTAA) is a treaty between two countries that aims to prevent individuals or companies from being taxed twice on the same income. These agreements are designed to promote economic cooperation and trade between the signatory countries by eliminating or reducing double taxation.

Under a DTAA, the two countries agree on rules to allocate taxing rights over various types of income, such as dividends, interest, royalties, and capital gains. Typically, the agreement includes provisions to determine the residency status of taxpayers, which helps in determining which country has the primary right to tax specific types of income.

DTAAs often involve provisions for the exchange of information between tax authorities to ensure compliance and prevent tax evasion. They also usually include mechanisms for resolving disputes that may arise from differences in interpretation or application of the agreement

3. Benefits of Double Taxation Avoidance Agreements

Double Taxation Avoidance Agreements (DTAAs) offer several benefits to individuals and businesses operating in multiple countries.

Some of the key advantages include:

• One of the primary benefits of DTAAs is the prevention of double taxation on the same income or profits. By allocating taxing rights between countries and providing mechanisms for relief, DTAAs ensure that taxpayers are not subjected to taxation on the same income in both their home country and the country where the income is earned
• DTAAs often include provisions for reduced withholding tax rates on certain types of income, such as dividends, interest, and royalties. This can result in lower tax liabilities for individuals and businesses receiving such income from foreign sources
• By eliminating or reducing tax barriers, DTAAs facilitate cross-border trade and investment by providing certainty and clarity regarding tax obligations. This encourages businesses to expand their operations internationally and promotes economic cooperation between countries
• DTAAs foster economic cooperation between countries by promoting mutual investment and trade. By providing a framework for resolving tax disputes and exchanging information between tax authorities, DTAAs help build trust and confidence among countries, thereby facilitating greater economic collaboration
• DTAAs include provisions for the exchange of information between tax authorities to prevent tax evasion and avoidance. By promoting transparency and cooperation in tax matters, DTAAs help combat tax evasion and ensure compliance with tax laws in both countries
•  DTAAs often include provisions regarding the taxation of individuals working abroad. By providing clarity on tax residency rules and the taxation of employment income, DTAAs encourage international mobility and facilitate the movement of workers across borders
• DTAAs provide taxpayers with certainty and predictability regarding their tax obligations in foreign countries. By establishing clear rules for the allocation of taxing rights and the determination of tax liabilities, DTAAs reduce uncertainty and mitigate the risk of double taxation

• India and Mauritius have recently signed a protocol amending their Double Taxation Avoidance Agreement (DTAA) with the aim of curbing treaty abuse for tax evasion or avoidance.
• The updated agreement introduces the Principal Purpose Test (PPT), which stipulates that tax benefits under the treaty will not be applicable if it is found that obtaining those benefits was the primary purpose of any transaction or arrangement.
• Under the amended protocol, a new Article 27B has been added to the treaty, defining the concept of 'entitlement to benefits.'
• The PPT will deny treaty benefits, such as reduced withholding tax on interest, royalties, and dividends, if it is determined that obtaining those treaty benefits was one of the main purposes of the party involved in the transaction.
• The revision of the India-Mauritius treaty, signed on March 7 in Port Louis and made public recently, comes in response to Mauritius being a favored jurisdiction for investments in India, particularly due to the exemption of capital gains from the sale of shares in Indian companies until 2016.
• The treaty was last amended in May 2016, allowing for taxation of capital gains arising from the sale or transfer of shares of an Indian company acquired by a Mauritian tax resident, with investments made until March 31, 2017, being exempt from such taxation.
• Furthermore, the preamble of the treaty has been modified by both nations to emphasize the focus on preventing tax avoidance and evasion.
• The previous objective of 'mutual trade and investment' has been replaced with an intent to "eliminate double taxation" without allowing for opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through "treaty shopping arrangements" aimed at obtaining benefits provided under this treaty for the indirect benefit of residents of third jurisdictions