Double Taxation Avoidance Agreement between India and Japan: What You Need to Know
Double taxation is a common problem faced by businesses that operate in more than one country. To address this issue, India and Japan signed a Double Taxation Avoidance Agreement (DTAA) in 1989. This agreement helps businesses and individuals avoid paying taxes on the same income in both countries. In this article, we will look at the salient features of the DTAA between India and Japan.
Scope of DTAA
The DTAA between India and Japan applies to income tax and corporation tax. In India, income tax is levied on individuals and corporations, while corporation tax is levied on domestic companies and foreign companies that have a permanent establishment (PE) in India. In Japan, income tax is levied on individuals and corporations, while corporation tax is levied on domestic companies and foreign companies that have a PE in Japan.
Residential Status
Under the DTAA, a person who is a resident of India or Japan is entitled to certain benefits. A person is considered a resident of a country if they are liable to tax in that country. In India, an individual is considered a resident if they have spent more than 182 days in India during the financial year. In Japan, an individual is considered a resident if they have a domicile or a PE in Japan. A company is a resident of a country if it is incorporated in that country.
Permanent Establishment
The DTAA defines a PE as a fixed place of business through which a company carries on business. The presence of a PE in a country gives that country the right to tax the income that is attributable to that PE. The DTAA specifies the circumstances under which a PE is deemed to exist in a country. For example, a building site, construction or installation project, and a place of management are examples of PEs.
Taxation of Income
Under the DTAA, income from certain sources is only taxable in the country of residence of the recipient. For example, dividend income, interest income, and royalties are taxable only in the country of residence of the recipient. However, income from other sources is taxable in the country where it arises. For example, income from a PE is taxable in the country where the PE is located.
Tax Credits
To avoid double taxation, the DTAA provides for a tax credit mechanism. When a person pays tax in one country and is also liable to pay tax in the other country, they can claim a tax credit in the country of residence for the tax paid in the other country. This helps to avoid double taxation and promote cross-border trade and investment.
Conclusion
The DTAA between India and Japan provides certainty and clarity to businesses and individuals who operate in both countries. It helps to avoid double taxation and promote cross-border trade and investment. Businesses and individuals should be aware of the provisions of the DTAA and seek professional advice to optimize their tax position.
