DTAA vs. Domestic Income Tax Laws

Introduction:

“In this world, nothing can be said to be certain, except death and taxes.” Such a quote defines how taxes are vital and valuable in our lives. In our day-to-day activities, we’re paying the taxes and being part of it unknowingly. Nowadays, goods and services are exported across borders, and taxation between domestic and international laws seems difficult for the exporters. In India, people find more complexity between domestic laws and Double Taxation Avoidance Agreements (DTAAs) and pay hefty fines through penalties. Let’s dive deep into these laws and bring out the possible ways to tackle them.

India - Domestic Law:

India is a taxpayer-friendly country that encourages its citizens to benefit from various provisions. While the system is flexible, challenges arise in execution and enforcement.

Under Section 90(2) of the Indian Income Tax Act, when there is a conflict between the provisions of the Act and the DTAA, the provision that is more beneficial to the taxpayer takes precedence. They encourage exporters to involve cross-border investments and simplify the taxation as per laws.

· If the domestic law imposes a higher tax rate than the DTAA, the taxpayer can prefer the lower DTAA rate.

· Reversely, if the domestic law offers a tax exemption than DTAA, the domestic law suits with them.

Let’s explain with a scenario.

Scenario: Mr. Kalias, an Indian resident, receives dividend income from a US-based company around ₹10 lakh.

Solution:

1. According to the Domestic tax law of India, foreign dividend incomes are taxed at 20%.

2. As per the India - USA DTAA, the tax rate on dividends is capped at 15%.

Since the DTAA rate (15%) is lower than the domestic rate of India (20%), Mr. Kalias can prefer the lower DTAA rate and pay ₹1.5 lakh (15% of ₹10 lakh) instead of ₹2 lakh under Indian law.

USA – Later Principle:

USA performs "later-in-time" rule during the conflict between a domestic law and an international treaty (such as a DTAA). These principles allow newer laws from either domestic or international exits.

· If the USA amends its domestic tax laws after a DTAA, the new law can surpass the treaty, even if it is less favorable.

· A later renegotiated treaty will override its earlier domestic provisions.

Scenario 1: Treaty Signed First, Law Passed Later

Imagine India and the U.S. have an existing tax treaty (DTAA) in which the dividends paid to Indian investors are taxed at 10% in the U.S. In 2025, the U.S. Congress passes a new tax law to increase the tax on dividends to 15%.

· Since U.S. law follows the "later-in-time" rule, the new domestic law overrides the existing treaty.

· So, Indian investors will pay 15% tax instead of 10% on dividends from U.S. companies

Scenario 2: Law Exists First, Treaty Signed Later

Imagine an Indian investor who owns shares in a U.S. company and earns dividends ($1000) from them. Even before 2025, the U.S. government had a tax law that compelled Indian investors to pay 30% tax on dividends. But in 2025, the U.S. and India signed a new tax treaty (DTAA) that reduces the tax rate to 10%.

· Since the treaty was signed after the existing law, it overrides the tax rate.

· Now, the investor will pay only $100 (10% of $1000) rather than $300 as tax.

· It’s a money-saving treaty for Indian Investors.

From these scenarios, it’s clear that a treaty or law passed later will surpass the existing one.

Super Sorcerer – The Global Taxation:

To alleviate these tax sufferings and deductions, Global tax planning will assist in reducing the tax liabilities by complying with international tax laws. These taxation highlights the importance of local rules by structuring cross-border transactions and international taxes.

Benefits:

· Reducing overall tax liability by utilizing tax treaties, incentives, and lower tax jurisdictions.

· Ensures income is not taxed twice through Double Taxation Avoidance Agreements (DTAA).

· Retention of capital for reinvestment, expansion, or distribution through Global planning.

· Maximizes after-tax earnings by performing business operations across multiple countries.

International Tax Regulatory:

As businesses expand globally, they must comply with international laws and regulations to avoid legal risks and penalties. International tax laws are influenced by frameworks like the OECD BEPS, GAAR, and DTAA, which aim to prevent tax avoidance and promote fair taxation. Some of them are explained below.

1. OECD - BEPS Project (Base Erosion and Profit Shifting):

The OECD's BEPS project is a global initiative Multinational Companies (MNC) used to prevent tax avoidance strategies that shift profits to low-tax jurisdictions and erode the tax base of higher-tax countries.

· Reduces profit shifting to low-tax jurisdictions, disputes, and compliance risks for businesses.

· Encourage taxpayers to pay taxes where they operate their business.

· Requires multinational corporations to disclose financial activities through Country-by-Country Reporting (CbCR).

2. GAAR (General Anti-Avoidance Rules):

· GAAR is a set of tax regulations used to prevent aggressive tax planning strategies that exploit loopholes for undue tax benefits.

· It empowers tax authorities to disregard tax-avoidance transactions, even if it is legal.

Conclusion:

Whether you’re a business owner, a tax professional, or someone curious about global tax, international laws and regulations are vital in executing business operations globally. Understanding the domestic and international treaties will help to reduce the unwanted risks, penalties, and punishments. Redesign your business while complying with global laws and fair transactions.