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Interpretation of double tax avoidance agreements
November, 06th 2007

The Central Government has signed with several countries, including the U.S. Agreements for the Avoidance of Double Taxation. By this, I am given to understand that in the case of an Indian who is a perm anent resident in the U.S. (green card holder) but who may have taxable income in India, as also in the U.S., double taxation is sought to be avoided as per the following. If his tax liability is A in the U.S. and B in India, calculated independently on the respective incomes, if B is less than A in rupee equivalent, no tax is payable in India. On the other hand, if B is more than A, the difference between B and A, that is, (B-A) alone is payable in India. Kindly clarify whether the above position remains the same, or whether it has undergone any change.

The reader is incorrectly advised as to the method of relief under the Double Tax Avoidance Agreement.

Each country taxes the income arising within its borders. Entitlement of relief under Double Tax Avoidance Agreement is only in the country in which the taxpayer is permanently resident as decided under the terms of the Agreement and not merely with reference to passport, green card and stay. Relief is contemplated only, where the same income is assessed in both countries.

For interest, dividend, royalty and technical fees, there is a stipulated lower rate in the country of origin of such income, subject to credit of tax paid in the country, where such income is included in the assessment.

Some items like capital gains on sale of immovable property is taxable under the Agreement only where the property is situated, so that the question of double tax relief does not arise at all.

Salary is taxed where employment is exercised, but the country where the employee is permanent resident will give credit for such tax paid in the place of service, if the same income is taxable.

If it is business income, it may be taxable in both countries, where business is located and where such business has permanent establishment, through which income is earned.

The country where business is located would give credit for tax paid on the doubly taxed income at the lesser of the two rates.

This is a broad pattern of Double Tax Avoidance Agreement with minor differences possible in some agreements.

S. RAJARATNAM

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