What are the advantages of Double Taxation Avoidance Agreements (DTAAs)?

Double taxation avoidance agreements (DTAAs) are regular bilateral tax agreements between countries in this increasingly globalised world. India has signed nearly 84 DTAAs and has recently modified some of its DTAAs including the controversial India- Mauritius treaty.

What is double taxation?

Double taxation agreements simply try to eliminate double taxation in the case of cross national flow of income. They are widely pursued by countries to avoid a situation of discouraging cross national economic activities.

Main purpose of DTAA is that it provides the fundamental guidelines for taxation of income that flows from one country to the other. Different types of income are there like – profit, interest income, royalty etc. Each DTAA gives enough care by giving specific guidelines on how the income are to be taxed by the source and resident countries.  A more important feature of DTAAs is that they are they provide the final principles compared to domestic tax laws regarding taxation of international income.

What are the benefits of DTAAs?

Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as location of the source, residence of taxable entity, maintenance of Permanent Establishment and so on. The interaction of two tax systems each belonging to different country, can result in double taxation. Following are the main advantages of DTAAs.

(i) DTAAs avoid double taxation by considering the specific ax laws of the two countries (the two countries in the case of a bilateral DTAA).

(ii) DTAAs as international tax treaties often provide tax information exchange. This tax exchange information lowers the administrative costs of taxation.  

(iii) Another advantage is that there is legal certainty in DTAAs as there is specific rules for taxing international income. This encourages foreign investment to developing countries s there is tax certainty.

 (iv) DTAAs also incorporates anti-abusive provisions to ensure that the benefits of the DTAAs are availed by the genuine residents of the two countries.

With DTAA, investors need not depend on conflicting national tax rules; rather the taxation of international income falls under the rules of DTAAs.

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