December 19, 2022Dated: | Byadmin admin | The Double Tax Avoidance Agreement (DTAA) is a tax treaty signed between two or more countries to help taxpayers avoid paying double taxes on the same income. A DTAA becomes applicable in cases where an individual is a resident of one nation, but earns income in another. The government of two countries come to an agreement to avoid double taxation and ensure that the tax is collected wherever applicable. These treaties are based on the general principles laid down in the model draft of the OECD-Organization for Economic Cooperation and Development with relevant modification agreed by the contracting countries. What is Double Taxation? When the same taxpayer pays/ supposed to pay similar taxes in two or more different countries on the same tax base is called double taxation. This affects the exchange of goods, services and capital and technology transfer and trade across the border. The purpose of avoidance of Double Taxation Agreement Diversify the sources of National Income.Promote the exchange of Good & Services and Capital Movement.Relieve discrimination between taxpayers.Eliminate the cross border trade and investment flow difficulties.Remove double taxation and Tax evasion.Consider the taxation issues and changes in global financial sector. The DTAA is not only made to avoid the double taxation but also for many other reason which are as follows along with their supporting objectives and clauses- 01. Protection and promotion of investments – Ensure the free transfer of profits and returns in a transferable and acceptable currency. Fair compensation to the investors without discrimination Promote the establishment and growth of investments. 02. Exchange of Information for tax purposes – For any country to give relief on the double taxation it is very important to make sure that the tax is collected in either of the contracting country, if there is a tax implication in that country. To ensure the same there should be exchange of information between the countries who have signed DTAA treaty. The information must be effective. Objective and Achievements These agreements also strengthen the reputation of the UAE as a global financial and trade hub in the international level.To avoid the tax evasion, treaty shopping. What is Treaty Shopping? The situation when/where a person is a resident in one country (home country) and earns income or capital gain from another country (source country) takes the advantage of the tax treaty source country and another country which is a third country. Rule of Income taxation – Source of Income – The tax is levied where the establishment is situated/located. Here the residency status doesn’t matters for tax on income earned.Residential Tax – The tax levied is based on the residential status of the individual and the permanent establishment of the company in that country. And the resident status is determined on the basis of –Individual – Place of residence, NationalityCompany – Place and control of Management, A branch/office/factory/workshop, a contract that last of more than 12 months etc Type of DTAA – Comprehensive DTAAs – The agreement between two countries that covers almost all type of taxes levied on income of any/either of the contracting country. Example – wealth tax, gift, entertainment tax etc.Limited DTAAs – The agreement between the two countries that covers only the limited types of income that is to be taxed. Implementation method of DTAA – Exemption Method – When an income is taxed in the source country it will be either wholly or partly exempt from taxation in the resident country.Credit Method – When an income is taxed in the source country it is also taken into consideration in the residence country. The residence country gives the credit on the tax paid in the source country. The credit is allowed against the tax payable in the resident country. If the tax paid in the source country is in excess to the tax chargeable in the resident country, the excess tax is ignored and credit is given only up to the amount of tax payable in the country of residence. The acceptance of either of the method depends on the treaty between the contracting countries. To take the benefit of double taxation agreement treaty the individual/company should have a TRC. How to get TRC? Let’s us take your pain! We at FlyingColours are in the market for 18+ years, our team of professional, qualified accountants and tax advisors bring maximum benefit to our clients while choosing the right accounting software that suits your business and pocket friendly, by analyzing their nature of business, work pattern, and their requirement. Our team is up-to-date with UAE commercial laws and taxation rules. Our team of expert tax consultants evaluates your current situation for residence and source country and the applicable treaty and get you the TRC to get rid of double taxation payment.