INR 5 Million in taxes were saved by using the tax treaties the right way.

A foreign client* recently leveraged the Double Taxation Avoidance Agreement (DTAA or tax treaties) to save a substantial tax of INR 5 million on payments made from India. India taxes income at source for non-residents and when the taxpayer is a resident (Resident and Source-based taxation). While making a payment to a non-resident (i.e. income for the non-resident), withholding tax (TDS) provisions apply, which can be governed by the Income-tax Act, 1961 or the DTAA between the countries. As per the law, the taxpayer could choose to be taxed under the Income-tax law or opt for the provision of tax treaties, whichever is beneficial. In some tax treaties, such as provisions of withholding tax, are either absent, or at a lower rate or the taxing rights are provided to the treaty partner. In such a case, TDS may not be applicable or could be applicable at a lower rate than what is prescribed under the income-tax law.

The successful application of DTAA highlights the importance of understanding and adhering to specific documentation and compliance requirements, which are key to availing tax benefits and ensuring efficient international business operations.

The required documentation includes the following:

(1) Permanent Account Number (PAN) from the Indian- Income tax department - yes, even a non-resident can apply for the Indian PAN,

(2) Form 10F (to be generated online on the Income-tax website)

(3) Tax Residency Certificate (TRC) of the country of residence proving the taxpayer's residency status,

(4) Declaration of No Permanent Establishment (PE) in India.

(5) A substance-based document proving that there is a commercial reason behind exploiting the treaty from a GAAR perspective and addressing the principle purpose test (PPT) - consult your advisor for this.

(6) A return of income to be filed as per Section 139 of the Act and transfer pricing return in Form 3CEB in case payment is to a related party.

(7) Opening of Foreign non-resident bank account in case of a tax refund.

These documents are crucial for non-residents seeking to benefit from DTAA provisions. They enable them to navigate the complexities of tax regulations and mitigate the risk of double taxation.

These steps are essential for leveraging benefits under Double Taxation Avoidance Agreements (DTAA), which can significantly reduce the tax burden. By following these guidelines, non-residents can ensure they meet all regulatory requirements, thereby facilitating accurate tax assessments and enhancing their financial performance in the competitive global market. These compliance measures underscore the strategic importance of rigorous documentation and adherence to tax laws for maintaining fiscal health and maximizing business efficiency. You may need to consult your international tax and transfer pricing advisor for advice on no or lower withholding benefits in your case.

If you think your company, being a non-resident in India, is overpaying its tax obligation, that may need some thinking and structuring in order to enable the taxpayer to pay the right level of taxes. You can reach out to the author at [email protected]

*the foreign client is only considered an example and does not correlate with the actual case on hand.