The Double Taxation Avoidance Agreement (DTAA) between any two countries is designed to prevent businesses/citizens from paying tax twice on the same income, offering relief, certainty, and smoother cross-border operations. For US and UK businesses operating in India—or Indian companies expanding into these markets—DTAAs can be a powerful tool to optimise tax exposure and stay compliant. However, incorrect claims, missing documentation, or misinterpreting treaty provisions can quickly lead to double taxation, denied credits, interest, and penalties.
This article outlines the top DTAA mistakes to avoid in India, helping global entrepreneurs, investors, and companies make full and compliant use of DTAA India US and DTAA India UK benefits.
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Failing to Obtain a Valid Tax Residency Certificate (TRC)
A Tax Residency Certificate (TRC) is mandatory for claiming DTAA benefits and proving tax residence in the US, UK, or India. Without it, Indian payers are required to deduct tax at default rates (20–30%), and treaty relief may be denied.
✅ Get a TRC from Your Home Authority
- US residents: Request IRS Form 6166 (via Form 8802).
- UK residents: Request an HMRC Certificate of Residence (CoR) (available online).
✅ Ensure TRC Accuracy
- The TRC must include the correct financial year, residency confirmation, and all key particulars.
- Avoid pitfalls: Relying on expired or incomplete TRCs, or assuming old certificates are valid for new tax years.
✅ Submit TRC with Every Claim
- Attach the TRC each time you claim treaty benefits to ensure smooth processing and avoid disputes.
2. Skipping Essential Documentation, Paperwork, and Deadlines
Even with a valid TRC, missing supporting paperwork or filing late can trigger default withholding, denied credits, or tax notices.
✅ Form 10F: File this if your TRC doesn’t include all mandatory details (address, nationality, or tax ID).
✅ PAN (if required): Obtain an Indian PAN for recurring or high-value India-source income to ensure correct withholding.
✅ Declarations: Provide confirmations of beneficial ownership and income type—often requested by Indian payers.
✅ Timely Filing: Submit ITR, DTAA claims, and Form 67 (for foreign tax credit) on time to avoid rejection of claims.
✅ Record-Keeping: Maintain organized records of TRCs, filings, and payment proofs for audits or dispute resolution.
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Misreading Residency and the Permanent Establishment (PE) Test
Many taxpayers wrongly assume that citizenship alone drives treaty relief. In reality, DTAA benefits depend on residency status and whether a Permanent Establishment (PE) exists in India.
✅ Residency vs. Citizenship
DTAA relief is based on where you are a tax resident, not your passport. If you maintain homes in both countries, apply the treaty’s tiebreaker rules to determine your residency.
✅ Check for PE Triggers
A PE can arise from a fixed office, dependent agent, long project duration, or even servers and signing authority in India. Under Article 7 of both the India–US DTAA and the India–UK DTAA, business profits attributable to a PE can be taxed in India.
✅ Why It Matters
If you inadvertently create a PE, India may tax profits you thought were protected. This is a classic area of dispute.
✅ Action Step
Map your India footprint carefully against PE definitions in the treaty. Document activities, contracts, and personnel authority to support your position.
✅ Residency Proofs
- US residents: IRS Form 6166 (via Form 8802).
- UK residents: HMRC Certificate of Residence (CoR) (available online).
Indian authorities routinely request these when granting treaty relief.
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Using the Wrong Treaty Article (or Rate) for Your Income Type
Another frequent pitfall is misclassifying income under the wrong DTAA article, leading to under-withholding, disputes, or tax demands.
✅ Business Profits vs. Other Income
Not all cross-border income qualifies as “business profits.” Employment income, director fees, royalties, interest, and fees for technical services (FTS) have their own articles and rules.
✅ India–US DTAA
Check Articles on Business Profits (Art. 7), Royalties/FTS, and the “effectively connected” income rule. Income tied to a PE is taxed on a net basis in India, not just at source.
✅ India–UK DTAA
Review articles on Royalties/FTS and PE provisions, plus any protocols or amendments that adjust definitions or rates. The consolidated text on GOV.UK is the safest reference.
✅ Common Mistakes
- Treating FTS/royalties as general business profits.
- Ignoring “make-available” tests.
- Applying outdated rates from older treaty versions.
✅ Action Step
For each India-source payment, identify the correct article and capped rate. Support your position with contracts, payer memos, and documentation. If facts suggest a PE, switch to an Article 7 profit attribution analysis instead of flat withholding.
Pro Tip: Resolve Disputes Early with the MAP Route
If both India and the US/UK claim taxing rights over the same income—or there’s disagreement over PE status or profit attribution—consider invoking the Mutual Agreement Procedure (MAP) under the DTAA.
- Who can use MAP: Available to both businesses and individuals, not just large multinationals.
- Time limits: Most treaties require you to file within three years of first being notified of a tax assessment or withholding that conflicts with the treaty’s provisions.
- Parallel remedies: You can often pursue MAP alongside domestic appeals.
- Implementation: Successful MAP resolutions must be mutually executed by both countries. The CBDT’s MAP Guidance offers a step-by-step framework.
Final Word
To make the most of the DTAA for US citizens in India and DTAA for UK citizens in India, individuals and businesses must prioritise accurate documentation, timely filings, and a clear grasp of treaty provisions. Avoiding procedural lapses and misinterpretation of residency, PE rules, or income classification ensures access to reduced tax rates, exemptions, and credits—minimising double taxation and supporting efficient global tax planning. When in doubt, seek professional guidance to navigate complex requirements under the DTAA India–US and DTAA India–UK treaties.
