Double Taxation Avoidance Agreement
Also called: DTAA, Tax treaty, Treaty shopping · Topic: Taxation: Direct and Indirect Taxes, GST and Global Tax Issues · NCERT: Beyond NCERT
Meaning
A Double Taxation Avoidance Agreement (DTAA), or tax treaty, is an agreement between two countries so that the same income is not taxed twice. It works through the credit method (tax paid abroad is subtracted from tax due at home) or the exemption method (the income is taxed in only one country). Treaty shopping is misuse of a treaty: routing investment through a treaty country only to get its tax benefits. India's ratification of the MLI in 2019 added a principal purpose test: treaty benefits are denied if getting them was a main purpose of the deal.
Example
Investors long routed money into India through Mauritius to avoid tax on capital gains. The India-Mauritius protocol of 2016 made gains on shares bought from April 2017 taxable in India.
Don't confuse with
- Automatic exchange of information: shares account data between countries. A DTAA divides the right to tax between them.
Related concepts
- Tax haven
- Transfer pricing
- Retrospective taxation
- Base Erosion and Profit Shifting
- Significant economic presence
- Equalisation levy
- Pillar One
- Global minimum tax
- Automatic exchange of information