How to Get Double Taxation Relief?

12 December 2022
6 min read

When taxes are levied twice on an income, it is known as Double Taxation. There are two ways that Double Taxation can occur: Juridically and Economically. Legally, the money you make outside of India is taxed twice, making you liable for both domestic and foreign taxes.

Economic Double Taxation occurs when a person's income, or a portion of it, is taxed twice in the same nation while being held by two different people. As an alternative, if the same person is subjected to two taxes on the same income earned outside of India—one abroad and one at home—this is known as Juridical Double Taxation. When a taxpayer's income is taxed twice, this unusual circumstance burdens them unfairly.

Thus, in this blog let us look at some strategies for resolving your tax problems and obtaining relief from Double Taxation whenever possible.

What is Double Taxation?

The taxation of corporations and their shareholders is frequently referred to as "Double Taxation." After the corporation has already paid taxes on its profits or earnings, shareholders of corporations, which include independent investors and corporate executives, pay taxes on dividends they obtain a share of the corporation's earnings. It can also mean that a business or person is subject to taxation in two nations on the same income.

Types of Double Taxation

Double Taxation primarily takes the following two forms:

  1. Corporate Double Taxation - The taxation of corporate profits through both corporate taxation and dividend taxation is known as Corporate Double Taxation (imposed on dividend payouts).
  2. International Double Taxation - International Double Taxation is the practice of taxing foreign income in both the nation from which it is derived and the nation in which the investor resides.

Double Taxation Relief: A Synopsis

Double Taxation puts people who pay taxes under unnecessary financial strain. However, you can apply for relief under Sections 90, 90A, and 91 of the Income Tax Act to stop paying taxes twice on your income. You have the option to request relief from double taxation both domestically and abroad. The following methods are available for requesting relief:

  • If India and a foreign country have a DTAA (Double Taxation Avoidance Agreement), relief is available under Section 90.
  • If a DTAA exists with a particular association, there is tax relief under Section 90A.
  • If India and a foreign country do not have a DTAA, relief is available under Section 91.

Relief from Double Taxation occurs in two ways:

a.) Bilateral Tax Relief: In the event that two countries have an agreement, this Tax Relief will be calculated in accordance with the terms of the agreement. Any of the following methods can help you feel relief on both sides:

  1. Exemption Method: Your income will only be subject to taxation in this case in one nation.
  2. Tax Relief Method: In this case, both countries will tax your income. You will, however, be exempt from paying taxes in your country of residence.

b.) Unilateral Relief: If your home country and another country do not reach a mutual agreement, you may be eligible for this kind of Double Taxation Relief. In such circumstances, your home country will offer Double Taxation Relief.

Double Taxation Relief on Double Corporate Taxation

  1. Legislation: Double Taxation is inefficient and deters investment, so legislation must be passed to eliminate it. Investors will be more likely to invest more money if they can obtain their dividends tax-free, especially for established businesses with low capital requirements.
  1. Move-Through Taxation: It entails setting up the company as an LLC, partnership, or sole proprietorship and implementing pass-through taxation features. Such structures do not pay dividends because the owners or partners split the profits. The tactic, though, is only useful for small businesses.
  1. Lack of Dividend Payments: Ignoring dividend payments and keeping profits in the company to spur growth. The approach is effective for start-ups and businesses that are in the growth stage of their business life cycles. Increasing product scope and market share depend on it. Investors in mature businesses with consistent cash flows and little appetite for additional capital anticipate dividend payments.
  1. Individual Personal Income Tax Status: Although shareholders can be hired as employees in smaller businesses or as executive directors in larger businesses and receive a salary, they would still be subject to personal income tax on that salary. It would not be considered double taxation. 

Double Taxation Relief on Double Taxation Abroad

Creating tax treaties between nations and judicial systems is the best way to handle the problem of international Double Taxation. The treaties entail information sharing and cooperation between jurisdictions. They were created to curtail or end unfair taxation, advance international trade efficiency, stop tax evasion, and guarantee tax certainty.

Double Taxation Avoidance Agreements (DTAA):

An agreement to prevent or reduce the territorial Double Taxation of the same income by the two countries is known as a Double Taxation Avoidance Agreement (DTAA). DTAs are established to ensure that they reduce double taxation, which unquestionably inhibits global trade. Double Taxation is counterproductive in the global village that the world has become and deters investment. 

DTAAs promote bilateral investment and trade between nations. When trade between two nations is expanding and both nations expect it to continue growing, they typically facilitate the signing of a DTAA to end Double Taxation and advance trade. The DTAA establishes guidelines for how income from cross-border transactions is handled and makes sure that it is not subject to Double Taxation. A DTAA may stipulate that tax be levied in the investor's country of residence and exempt in the nation where the income is produced. As an alternative, an investor may be taxed where the income is generated and receive a foreign tax credit in their country of residence.

The following are some notable nations with which India has DTAA agreements:

United States of America

United Kingdom

Ukraine

UAE

Thailand

Sweden

South Africa

Saudi Arabia

Italy

Japan

China

Australia

Section 90 of Income Tax Act:

The Sec 90 of the Income Tax Act provides relief for taxpayers who double-tax, that is, who pay taxes in India and in another country or territory outside of India. The Central Government will undoubtedly be able to enter into an agreement with the government of any nation outside of India or a specific territory outside of India thanks to provisions found in Section 90. The purpose of Section 90 is to provide relief with regard to any of the possible relevant circumstances listed below:

  • Income that has been taxed under the Income Tax Act of 1961 and the local income tax laws in that particular nation or territory.
  • Income tax imposed under the Income Tax Act of 1961 and in accordance with the relevant legislation in effect in that nation or designated territory in order to promote economic cooperation, trade, and investment.
  • In order to prevent income from being taxed twice under the Income Tax Act of 1961 and the applicable local law.
  • For the purpose of exchanging information concerning the avoidance of evasion or avoidance of income tax payable under the Income Tax Act of 1962 or under the applicable local law, as well as the investigation of evasion or avoidance cases.
  • For the purpose of recovering income tax owed under the applicable provisions of the Indian Income Tax Act and any applicable provisions of the country's or territory's equivalent law.

Only citizens of the nations that have signed the agreement may apply for the Double Tax Relief described in Section 90. A Tax Residence Certificate (TRC), issued by the government of a specific nation, must be obtained if a resident of another nation wants to make a claim for relief from the Double Taxation phenomenon.

Conclusion

In conclusion, Double Taxation can be a major hassle in terms of taxes, but you will undoubtedly be able to get Double Taxation Relief with the assistance of the special provisions referenced above and with the help of particular sections of the IT Act. This will significantly lower your tax liability for you. We sincerely hope that the information in this blog aids you in selecting the appropriate methods for avoiding Double Taxation.

Disclaimer: This blog is solely for educational purposes. The information mentioned here is not recommendatory.

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