DTAA, TRC, TDS & The Interlinking
While making foreign remittance we deduct TDS whether as per Income Tax Act,1961 or as per DTAA or provide the benefit of DTAA, whichever is more beneficial to clients.
Case-1: If we are taking benefit of DTAA:
- Section 90(4) of the Income Tax Act mandates the requirement of TRC (Tax Residency Certificate) if we want to claim any relief under DTAA otherwise no relief under DTAA will be provided.
- Section 90(5) of the Income Tax Act mandates the requirement of 10F in addition to TRC.
Therefore, to claim any benefit under DTAA, TRC & 10F are a must along with the No-PE declaration.
Case-2: If we are deducting TDS as per rate mentioned in Income Tax Act
Section 206AA of the Income Tax Act mandates a person who is entitled to receive any amount on which tax is deductible to furnish PAN to the deductor, failing which TDS will be deducted at higher of the following rates:
- at the rate specified in the relevant provision of this Act; or
- at the rate or rates in force; or
- at the rate of 20%
However, a relaxation under Rule 37BC has been provided here in case of non-resident or foreign company if the nature of payment is Interest, Royalty, Fee for Technical Services or it is on the Transfer of any Capital Asset, but non-resident or foreign company has to furnish following details:
- Name, Email ID & Contact Number
- Tax Identification Number in foreign country or Unique Number of that country
Accordingly, as you can see, even if we are applying the TDS rate as per the Income Tax Act, we would be needing TRC otherwise TDS would be deducted at 20% or higher rate followed by cess in non-PAN cases.
*DTAA: The Double Tax Avoidance Agreement is a tax treaty signed between two or more countries to help taxpayers avoid paying double taxes on the same income. A DTAA becomes applicable in cases where an individual is a resident of one nation, but earns income in another.
*TRC: Tax Residency Certificate is required from the resident country tax authorities to claim applicable relief under the DTAA.
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