USA ‘s Updated DTA Agreements

DTAA is an acronym for Double Tax Avoidance Agreement. Double Tax Avoidance Agreement refers to a tax treaty signed between any two countries so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country. These agreements are also called double tax treaties.

The need for DTAA arises out of the imbalance in tax collection on global income of individuals and businesses. If a person does business in a foreign country, he may end up paying income taxes in both the country where the income is earned and the country where he resides. For instance, an income earned in Singapore by a company resident in the USA may be subject to tax in both countries. This will amount to paying twice the tax over the same income.

According to a data prepared by KPMG, the US has entered Double Tax Avoidance Agreements with about sixty-six (66) countries as at March 31, 2019. The earliest of this agreement was effected in 1976 with the then Union of Soviet Socialist Republics (USSR), which has now been broken into independent nations. These countries are Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan and Uzbekistan. The latest Double Tax Agreement of the US was signed with Singapore in November 2018. However, the agreements is yet to have the force of law as it has not been ratified.

The treaty withholding rates on dividend vary from country to country, according to the terms of the agreement; it ranges from 10% to 30%. Russia’s is at 10%, Sweden and UK at 15%, Tunisia at 20%, Philippines at 25% and Pakistan at 30% amongst others.

As part of the terms in the treaty, there is also the treaty withholding rate on interest which ranges from 0% to 30%. South Africa’s is at 0%, Slovenia at 5%, Romania at 10%, Korea at 12%, Jamaica at 12.5%, Philippines at 15%, Israel at 17.5% and Trinidad & Tobago at 30% amongst many others.

The USA has updated many of her double tax avoidance agreements to suit her present economic realities. For instance, the Hungary-U.S. treaty signed on February 4, 2010 has been made to replace the 1979 treaty in effect. The principal focus of the new treaty is the addition of a limitation on benefits article that is consistent with other recent U.S. treaties.

The United States of America’s Double Tax Treaties follow the United States Model Income Tax Convention. Although Article 23 relates to relief from double taxation, it does not mention the procedure for claiming refunds in cases of double taxation. Instead, it provides that double taxation will be relieved in accordance with the provisions and subject to the limitations of the law of the United States (as amended from time to time).

It also provides that the United States shall allow a resident or citizen of the United States claim as a credit against the United States, tax on the income tax paid or accrued to a country with which the USA has double tax agreement by or on behalf of such resident or citizen.

Foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived. Generally, only income taxes paid or accrued to a foreign country or a U.S. possession, or taxes paid or accrued to a foreign country or U.S. possession in lieu of an income tax, qualify for the foreign tax credit.

To claim tax credit, a taxpayer may itemize deductions on Form 1040. Form 1116 must also be filled to choose foreign tax credit. It is to be attached to Form 1040.

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