Bilateral tax credit – Relief provided pursuant to DTAA between the two countries are known as Bilateral tax credit.
Exemption method – It refers to a situation wherein the Country of residence gives away the right to tax certain income in favour of source country. Mainly used by the developing countries as it wants to promote investments/ attract inflow of capital.
- Full exemption method –
Indian treaties in which such clause is found –
- India-Brazil DTAA : Full exemption method is applied in realtion to dividend income. Article 23 (3) and (4) of the said DTAA reads as under :
ARTICLE 23 – Methods for the elimination of double taxation – 3. Where a company which is a resident of a Contracting State derives dividends which, in accordance with the provisions of paragraph 2 of Article 10 may be taxed in the other Contracting State, the first-mentioned State shall exempt such dividends from tax.
4. Where a resident of India derives profits which, in accordance with the provisions of
paragraph 5 of Article 10 may be taxed in Brazil, India shall exempt such profits from tax.
- India-Greece DTAA : Full exemption method is applied in realtion to dividend income. However, the same is not found in Elimination of double taxation article rather it is found in dividend article.
‘Dividends paid by a company which is a resident of one of the territories to a resident of the other territory may be taxed only in the first-mentioned territory‘
Exemption with progression method – Many DTAA which India has signed follows exemption with progression method. Some of the DTAA’s are – (Malaysia, Italy, Australia, Canada, China, Denmark, Hungary etc.)
Wordings from India-Singapore DTAA are –
“6. Income which, in accordance with the provisions of this Agreement, is not to be subjected to tax in a Contracting State, may be taken into account for calculating the rate of tax to be imposed in that Contracting State.”
Illustration explaining both the methods –