Double Taxation Avoidance Agreements (DTAA): formula sheet

Key formulas

Section 160 relief (no treaty)

Relief = doubly taxed income × lower of (Indian rate, foreign rate)

If both rates are equal, the Indian rate applies. Available to a person resident in India who paid foreign income-tax on income accruing outside India. This is the statutory rule for countries with no agreement.

Indian rate of tax

Indian income-tax (after reliefs under the Act, before section 160 relief) ÷ total income

This is the average rate, not the slab or marginal rate.

Rate of tax of the said country

Tax actually paid in that country (after its reliefs, before its double-tax relief) ÷ income as assessed in that country

Again an average rate on the foreign assessed income.

Exemption method

Tax payable on foreign income in residence country = 0

Foreign income may still be used to decide the rate on other income (exemption with progression), depending on the treaty.

Credit method (general model, not the section 160 rule)

Credit = lower of (foreign tax paid, residence-country tax on that income)

This is a generic model of ordinary credit, used to explain the method. Section 160 works differently: it applies the lower of the two average rates to the doubly taxed income. Use the section 160 formula for no-treaty problems.

Deduction method

Taxable income = total income − foreign tax paid

Tax is then computed on the reduced income.

Power to enter agreements

Central Government + (any other country OR specified territory) → agreement + notification to implement

Section 159(1). The agreement is implemented by notification.

Four purposes of an agreement

Relief [(i) and (ii)] | Avoidance of double taxation | Exchange of information | Recovery of tax

Section 159(3)(a) to (d). Relief has two limbs, (a)(i) and (a)(ii); the trade and investment wording attaches to (a)(ii). The avoidance purpose must not create non-taxation or reduced taxation through evasion or avoidance, including treaty-shopping.

Beneficial-provision rule

Agreement applies to assessee → provisions of the Act apply to the extent more beneficial to him

Section 159(4). Applies to an agreement under 159(1), or a notified agreement under 159(2).

Exception to the beneficial rule

Chapter XI applies even if not beneficial

Section 159(6) overrides 159(4).

Non-resident claiming relief

Residency certificate from foreign Government + other prescribed documents and information

Section 159(8). Both conditions are needed to claim relief under the agreement.

Higher rate on foreign company

Higher rate on foreign company than domestic company ≠ less favourable charge

Section 159(5).

Association route

Specified association in India + specified association in specified territory → agreement → Central Government notification

Section 159(2). The notification adopts and implements the agreement.

Specified association

Body (incorporated or not) functioning under a law in India or the specified territory AND notified by the Central Government

Section 159(9)(a). Both conditions are needed.

Specified territory

Any area outside India notified by the Central Government

Section 159(9)(b).

Purposes of the agreement

Relief on doubly taxed income; avoidance of double taxation; exchange of information; recovery of tax

Section 159(3). Avoidance must not create non-taxation or reduced taxation through evasion or avoidance, including treaty shopping.

Effect of adopted agreement

Act applies only to the extent more beneficial to the assessee

Section 159(4). Applies where the association agreement is notified.

Chapter XI override

Chapter XI applies even if not beneficial

Section 159(6) overrides sub-section (4).

Non-resident claim

Residence certificate from that country or territory's Government + prescribed documents and information

Section 159(8). Both are needed to claim relief.

More beneficial rule

Tax payable = lower of (tax under the Act, tax under the treaty), item by item

Section 159(4). Applies to the assessee to whom the agreement applies. Compare each income stream separately.

Chapter XI exception

Chapter XI (GAAR) applies even if not beneficial

Section 159(6). Overrides the more beneficial rule.

Residency certificate condition

Non-resident relief = certificate of residence + prescribed documents and information

Section 159(8). Both conditions must be met.

Meaning of terms

Treaty definition → Act definition (with Central Government explanation) → notification → other Central law

Section 159(7), in that order of priority.

Foreign company rate

Higher rate on foreign company than on domestic company ≠ less favourable charge

Section 159(5).

Core philosophy

OECD Model → residence country gets priority; UN Model → source country gets wider taxing rights

This is the one-line answer to most comparison questions.

Permanent establishment (PE) threshold

UN Model: PE is easier to create (e.g. services PE, building site threshold shorter, insurance agent PE); OECD Model: stricter PE test

A lower PE threshold means more business profits taxable in the source country. Check the exact period in the specific treaty.

Business profits attribution

OECD: profits attributable to the PE; UN: includes a limited 'force of attraction' idea for similar sales or business activities

The UN Model allows the source country to tax some profits beyond those strictly attributable to the PE.

Withholding on passive income

OECD: dividends and interest taxable at source at limited rates (5%/15% suggested for dividends, 10% for interest); royalties taxable only in the residence country. UN: source country may also tax royalties and fees, with rates left to negotiation

The UN Model leaves the rates blank for the treaty partners to negotiate. The OECD Model suggests rates for dividends and interest but gives royalties to the residence country alone.

Fees for technical services

UN Model (2017 update) added Article 12A on fees for technical services, letting the source country tax them; OECD Model has no equivalent article

Many Indian treaties include fees for technical or included services taxed at source. Verify the particular treaty.

Relief methods

Exemption method or credit method (both models offer both)

The relief article decides how the residence country removes double taxation.

Tie-breaker order for individuals

Permanent home → Centre of vital interests → Habitual abode → Nationality → Mutual agreement

Apply in sequence. Stop at the first test that gives a single answer. Confirm the order in the treaty given.

Business profits rule

Taxable in source country only if profits are attributable to a PE there

No PE normally means business profits are taxable only in the residence country.

Section 59(1) conditions (all four needed)

Received from Government/Indian concern + under an agreement + PE or fixed place of profession in India + right/contract effectively connected with it

If met, royalty or FTS of a specified assessee is computed as business profits.

Specified assessee (section 59(5))

Non-resident (not a company) or a foreign company

Residents and domestic companies are outside this section.

Deductions barred under section 59(2)

No deduction for (a) expenditure not wholly and exclusively incurred for the PE/fixed place business; (b) amounts paid to head office or other offices, other than reimbursement of actual expenses

Notional internal royalty or interest to the head office is not allowed.

Section 59(4) compliance

Maintain books per section 62, get accounts audited by the specified date under section 63, furnish the audit report

This compliance applies to income computed under section 59(1).

Treaty or domestic law

Tax liability = the more beneficial of treaty and domestic provisions

The treaty applies to the extent it is more beneficial to the assessee, not otherwise.

Beneficial provision rule

Where an agreement applies: the provisions of the Act apply to the extent they are more beneficial to the assessee (Section 159(4))

Applies to the assessee to whom the agreement applies. Chapter XI is the exception (Section 159(6)).

Foreign tax credit limit

FTC allowed = lower of (foreign tax paid on the income) and (Indian tax on the same income)

General principle. Excess foreign tax is not refunded by India. Check the question for any specific treaty rate.

Indian tax on foreign income

Indian tax on foreign income = Average rate of Indian tax × foreign income

Average rate = Total Indian tax ÷ Total income. Use this when income is taxed at slab rates.

Net Indian tax payable

Net tax = Indian tax on total income − FTC

Add cess or surcharge as the question requires, and state your assumption.

Non-resident claim condition

Residence certificate from the other country + prescribed documents and information (Section 159(8))

Without both, treaty relief cannot be claimed.

Quick revision

• Section 159 lets the Central Government enter agreements with another country or a specified territory.
• A specified association in India may agree with one in a specified territory, and the Central Government notifies it.
• Agreement purposes: relief, avoidance of double taxation, exchange of information and recovery of tax.
• Avoidance of double taxation must not create non-taxation or reduced taxation, including through treaty-shopping.
• Under Section 159(4), the Act applies to the extent it is more beneficial to the assessee covered by the agreement.
• Chapter XI applies even where it is not beneficial to the assessee.
• A higher tax rate on a foreign company than on a domestic company is not treated as less favourable.
• A term defined in the agreement has that meaning; if undefined there, the Act's meaning applies, with the Central Government's explanation.
• A non-resident needs a residency certificate from the other government, plus prescribed documents and information.
• Section 160 applies where no Section 159 agreement exists with the country.
• Section 160 relief is at the Indian rate or the foreign rate, whichever is lower, or at the Indian rate if equal.
• Indian rate of tax is Indian tax after Act reliefs but before Part reliefs, divided by total income.

Common mistakes

• Mixing up juridical and economic double taxation. Fix: Ask: same taxpayer or different taxpayers? Same taxpayer is juridical. Different taxpayers (company and shareholder) is economic.
• Using the marginal or slab rate as the Indian rate in section 160. Fix: Use the average rate: Indian tax after Act reliefs divided by total income.
• Saying the agreement alone changes Indian tax law without notification. Fix: Write that the Central Government may, by notification, make provisions necessary to implement the agreement (159(1)).
• Stating that the treaty always overrides the Act. Fix: Where an agreement applies, the provisions of the Act apply to the extent they are more beneficial to the assessee (159(4)). Also remember Chapter XI applies even if not beneficial (159(6)).
• Saying the association agreement is effective once the two bodies sign it. Fix: State that the Central Government must notify provisions to adopt and implement it under 159(2).
• Defining a specified association only as a body functioning under law. Fix: Add the second limb: it must be notified by the Central Government for section 159.
• Saying the treaty always overrides the Act. Fix: Write that the Act applies to the extent more beneficial under section 159(4). The assessee gets the better of the two.
• Mixing treaty and Act provisions to pick the best of each within a single income. Fix: Choose one regime for each income and apply it as a whole. Do not cherry-pick parts from both.
• Treating a model convention as a binding treaty. Fix: Write that models are templates; only the signed bilateral DTAA, once in force, applies.
• Reversing the OECD and UN positions. Fix: Anchor on who they were written for: OECD for developed countries (residence), UN for developed-developing treaties (source).

Exam tips

• Start every answer by stating whether a treaty exists. It decides between section 159 and section 160.
• In numericals, show both average rates in separate lines. Marks are given for each rate and the lower-rate choice.
• For theory, give one real example for each type: royalty taxed in two countries for juridical, company profit and dividend for economic.
• In case-based answers, quote section 159(8) for non-residents (residency certificate and prescribed documents). Also note that under section 159(6) Chapter XI applies even if its provisions are not beneficial.
• Compare exemption, credit and deduction in a short list with one line each. It scores well in 5 to 7 mark questions.
• Quote the section number with each point: 159(1) power, 159(3) purposes, 159(4) beneficial rule, 159(6) Chapter XI, 159(8) certificate.
• In MCQs, watch for the word 'always': the treaty does not always override the Act.
• Distinguish section 159 (agreement exists) from section 160 (no agreement) in case-based questions.