DTAA between India and USA
June 16, 2022|
14 mins read
DTAA between India and USA
The Double Taxation Avoidance Agreement DTAA between India and USA has been entered for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income .
This DTAA between India and USA shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention.
This DTAA between India and USA shall also contain Memorandum of understanding concerning fee for included services in Article 12 .
Thus, it contains commentary and numerous examples on Fee for Technical Services or Included services which is really helpful for interpreting clauses of Fee for Technical services.
This DTAA between India and USA contains following articles :
Article 1 – GENERAL SCOPE
Article 2 – TAXES COVERED
Article 3 – GENERAL DEFINITIONS
Article 4 – RESIDENCE
Article 5 – PERMANENT ESTABLISHMENT
Article 6 – INCOME FROM IMMOVABLE PROPERTY (REAL PROPERTY)
Article 7 – BUSINESS PROFITS
Article 8 – SHIPPING AND AIR TRANSPORT
Article 9 – ASSOCIATED ENTERPRISES
Article 10 – DIVIDENDS
Article 11 – INTEREST
Article 12 – ROYALTIES AND FEES FOR INCLUDED SERVICES
Article 13 – GAINS
Article 14 – PERMANENT ESTABLISHMENT TAX
Article 15 – INDEPENDENT PERSONAL SERVICES
Article 16 – DEPENDENT PERSONAL SERVICES
Article 17 – DIRECTORS’ FEES
Article 18 – INCOME EARNED BY ENTERTAINERS AND ATHLETES
Article 19 – REMUNERATION AND PENSIONS IN RESPECT OF GOVERNMENT SERVICE
Article 20 – PRIVATE PENSIONS, ANNUITIES, ALIMONY AND CHILD SUPPORT
Article 21 – PAYMENTS RECEIVED BY STUDENTS AND APPRENTICES
Article 22 – PAYMENTS RECEIVED BY PROFESSORS, TEACHERS AND RESEARCH SCHOLARS
Article 23 – OTHER INCOME
Article 24 – LIMITATION ON BENEFITS
Article 25 – RELIEF FROM DOUBLE TAXATION
Article 26 – NON-DISCRIMINATION
Article 27 – MUTUAL AGREEMENT PROCEDURE
Article 28 – EXCHANGE OF INFORMATION AND ADMINISTRATIVE ASSISTANCE
Article 29 – DIPLOMATIC AGENTS AND CONSULAR OFFICERS
Article 30 – ENTRY INTO FORCE
Article 31 – TERMINATION
Article 1 of the DTAA between India and USA – Applicability
Article 1 , Paragraph 1 , of the DTAA between India and USA , deals with the General Scope of the DTAA . This Article provides that the DTAA shall apply to the following persons : –
- Persons who are residents of India ;
- Persons who are residents of USA ;
- Persons who are residents of both India and USA .
The term person generally covers an individual or an estate, a trust, a partnership, a company, any other body of persons, or other taxable entity having income in both India and the USA.
Paragraph 2 of Article 1 provides that any of the following benefits available to person covered under the DTAA, by the laws of either India or USA, cannot be denied by the application of the DTAA : –
- Exclusion from taxable income ;
- Exemption of taxable income ;
- Deduction of expenditure or any allowance
Article 2 of the DTAA between India and USA – Taxes covered
The Taxes covered under India USA DTAA, for which benefit can be claimed include the following
- In India , benefit can be claimed for Indian income-tax, including any surcharge thereon
- In United States, Federal income taxes imposed by the Internal Revenue Code (but excluding the accumulated earnings tax, the personal holding company tax, and social security taxes
However, any payment for any default in respect of the income tax, or any penalty paid relating to the taxes shall not be allowed as a deduction.
Article 3 of the DTAA between India and USA – General Definitions
Article 3 General Definitions, defines certain terms for the purpose of the DTAA between India and USA. It further provides that any term which is not defined in the DTAA, shall have the meaning ascribed to it under the local laws of the country, which is applying the tax laws.
Article 4 of the DTAA between India and USA – Residence
The benefit of the DTAA between India and USA, is available only to person who qualify as a resident of either India or USA . Therefore, it is important to determine the residential status of the taxpayer, else the benefit of the tax treaty will not be available .
As per India – US DTAA, a person shall be considered as a resident of contracting state , if he is liable to tax in either India or USA, by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.
In certain cases, the application of the above rule, can result in a person, becoming a resident of more than one country. in such a case, that tie breaker rule has to be applied , to ascertain the country of which a person is a resident .
In the case of an individual, who becomes a tax resident of both countries , the following steps will be followed –
- An individual would be considered as a resident of a state, if he has a permanent home available therein.
- If the permanent home is available in both of the contracting states, then he would be considered to be a resident of the state in which he has closer economic and personal relations
- If the taxpayer does not have a permanent home in either of the states, then he would be resident of a state where he has a habitual abode. If he has a habitual abode in both of the states then he will be a resident of a state of which he is a national.
- If the taxpayer is a national of both of the states or neither of them, then the residency will be decided by mutual agreement.
In the case of an company, who becomes a tax resident of both countries , the Company shall be outside the scope of the tax treaty , except for the purpose of prescribed Article
In the case a person other than an individual or a company, becomes a tax resident of both countries the Competent Authorities of both the countries shall settle this question by mutual agreement.
Article 5 of the DTAA between India and USA – Permanent Establishment
The taxation of business profit derived by a foreign enterprise, from business operation in the state of source, are generally taxable only when the foreign enterprise has a Permanent Establishment in the state of source. Article 5 provides various situations, under which a foreign enterprise can have a PE in the State of Source . This could be in the form of an office, place of management, agent or otherwise. The illustrative condition under which an enterprise may have a permanent establishment in source country are provided in Article 5. The various type of PE which can arise, under the India USA treaty are as under : –
- Fixed place PE – This Article provides the rule for Fixed Place PE, also called the Basic Rule of PE. A PE would exist where : –
- Foreign enterprise has a business ;
- Foreign enterprise has a fixed place of business in other Contracting State, which is at its disposal ;
- Such place of business is the one through which the business of the enterprise is carried on ;
- Business of the enterprise could be carried on wholly or partly through such place;
Article 5(2) provides , certain specific inclusions which create a PE through which an enterprise may be carrying on business in Source State .
- Article 5(3) of the Treaty provides cases, where certain activities, even when done through a fixed place of business in the source state do not constitute a permanent establishment because they are a preparatory or auxiliary character .
- Article 5(4) of the Treaty provides for the case of a dependent agent, who is acting in the source state on behalf of a Foreign entperise. Generally, the authority to conclude contract on behalf of the nonresident, as well as maintaining stock of goods in the source state , from which goods are regularly delivered, would result in a person being a dependent agent of the non resident and thereby constituting a Permanent Establishment .
- Article 5(5) of the Treaty provides for the case of an independent agent. an independent agent does not constitute a permanent establishment for the foreign enterprise, and is excluded from the applicability of Article 5(4) . generally, a broker, a general Commission agent or any other agent of an independent status would be covered within the meaning of this clause and therefore will not constitute a permanent establishment.
- Article 5(6) of the Treaty provides that, the mere fact that a foreign enterprise, controls another enterprise in the source state, would not result in the foreign enterprise having a permanent establishment in the source state.
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