Applicability and Key Provisions of India USA DTAA

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Applicability and Key Provisions of India USA DTAA

It might be possible that you are a resident of one country but your source of earnings is from a different country. In such a case, you might end up paying taxes in both countries. To avoid such scenarios of double taxation, Double Taxation Avoidance Agreements (DTAAs) are entered between countries. DTAAs lays down explicit provisions of how different incomes will be taxed and which country shall be responsible to collect taxes from that person.
Similarly, a DTAA has been entered between India and USA. However, before discussing detailed provisions of India-USA DTAA, let’s understand the documents required to take advantage of DTAA.


Documents Required for Taking Advantage of India-USA DTAA 

Following are the documents required for taking advantage of the India-USA DTAA:

  • Self-attested copy of your PAN card
  • Copy of PIO proof (Person of Indian Origin, if applicable)
  • Self-attested copy of VISA
  • Copy of passport
  • Certificate of Tax Residence

Applicability of India-USA DTAA

The India-USA DTAA shall be applicable to the residents of one or both the contracting states (i.e., India and the USA). Further, the DTAA shall not restrict any exemption, exclusion, deduction, credit or any other allowance as is provided by the laws of either India or the USA or in any agreement between both the countries.

Further, the following taxes shall be covered under the DTAA:

Taxes of the USA:

  • The Federal income taxes imposed by the Internal Revenue Code (but excluding the accumulated earnings tax, the personal holding company tax, and social security taxes),

  • The excise taxes imposed on insurance premiums paid to foreign insurers and with respect to private foundations (hereinafter referred to as "United States Tax"); provided, however, the Convention shall apply to the excise taxes imposed on insurance premiums paid to foreign insurers only to the extent that the risks covered by such premiums are not reinsured with a person not entitled to exemption from such taxes under this or any other Convention which applies to these taxes

Taxes of India:

  • The income tax including any surcharge thereon, but excluding income-tax on undistributed income of companies, imposed under the Income-tax Act;

  • The surtax


Key Highlights of India-USA DTAA

Following are some of the important provisions under the India-USA DTAA that can affect the taxability of your income:

Income From Immovable Property (Article 6):

Income derived by a person resident of any contracting state from the immovable property situated in the other contracting state shall be taxable in that other state. Therefore, if you are situated in India and you are earning income from your immovable property located in the USA, then that income shall be taxable in the USA. This shall also include income from agriculture, forestry, direct use, letting out, etc.

Business Profits (Article 7):

The profits from the business of an enterprise situated in a contracting state shall be taxable in that state only. Therefore, if your enterprise is situated in India, then the business profits shall be taxable in India only. However, if you have a permanent establishment in the USA, then your income shall be taxable in the USA as well. However, only the following portion of your income shall be taxable in the USA:

  • Profits attributable to that permanent establishment in the USA

  • Sales of goods or merchandise in the USA of the same or similar kind as those that are sold by the permanent establishment

  • Other business activities carried on in the USA of the same or similar kind as those carried out by the permanent establishment

Dividend Income (Article 10):

Dividend paid by a company of one contracting state to a resident of another contracting state shall be taxable in that other contracting state. Therefore, a US company paying dividends to a resident in India shall be taxable in India.
However, it has also been provided that the dividends may be taxed in the contracting state in which the company is resident (i.e., USA in the above example). In such case, if the beneficial owner of the dividend is resident in India, then the tax shall not exceed:

  • 15% of the gross dividend if the beneficial owner is a company that holds at least 10% of the voting stock of the dividend-paying company

  • 25% of the gross dividend in other cases

Interest (Article 11):

Interest income arising in a contracting state and paid to a resident of another contracting state may be taxed in that other state. Therefore, like dividend income, interest income arising from the USA to an Indian resident may be taxed in India. Further, such interest income can be taxed in the contracting state where the income originated as well (i.e., USA in the above example). But if the beneficial owner of the interest income is a resident of other state (i.e., India as per the above example), then the tax shall not exceed:

  • 10% of the gross interest income if such interest is paid on a loan given by a bank carrying bona fide banking business or by a similar financial institution (including an insurance company)

  • 15% in other cases

Independent Personal Services (Article 15):

Income derived by an individual or firm of individuals (other than a company) that are resident of a contracting state from the performance of professional or other independent personal services shall be taxable in the first-mentioned state except in the following cases:

  • If such person has a fixed base in the other contracting state from where he is providing services in the other contracting state, then the income attributable to the fixed base shall be taxed in the other contracting state

  • If the person stays in the other contracting state for a period or periods amounting to or exceeding 90 days in the relevant year

  • Here, the term professional services include artistic, literary, scientific, teaching or educational activities as well as independent activities of surgeons, engineers, physicians, lawyers, dentists, architects and accountants.

Director Fees (Article 17):

Director fees earned by a person of a contracting state from a company resident in other contracting states may be taxed in that other state. Therefore, if a person resident in India earns director fees from a US-resident company, then the director fees may be taxed in the USA.


In a Nutshell

Above were some of the common income sources that a person resident in India can have from the USA (and vice versa). If you are a resident of India and earning income from the USA (or vice-versa), then you need to have a thorough understanding of the India-USA DTAA provisions applicable to your income in order to avoid double taxation. For any assistance regarding the applicability of the India-USA DTAA or their provisions, feel free to reach out to your eAuditors. 
 


Author : Dipen

Date     : 01-Sep-2022


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