Double Taxation Avoidance Agreement MCQs with Explanations
Practice MCQ Questions
Ques: 1
Consider the following statements regarding Double taxation avoidance agreement:
It is a tax treaty signed between only two countries.
It completely wave off tax on income for companies from signatories countries.
Mauritius is the biggest contributor of FDI to India in last 15 years because of this agreement.
Which of the statements given above is/are correct?
Correct Answer:
(C) 3 only
The DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-payers in these countries can avoid being taxed twice for the same income. Mauritius accounted for $93.65 billion or one-third of the total FDI flows into India between April 2000 and December 2015.
Ques: 2
Which of the following categories are covered under DTAA:
Correct Answer:
(D)
All of the above
DTAA can either cover all types of income or can target a specific type of income depending upon the types of businesses/holdings of citizens of one country in another. The following categories are covered under the Double Taxation Avoidance Agreements (DTAA):
services
salary
property
capital gains
savings/fixed deposit accounts
Ques: 3
Consider the following statements:
DTAA provides tax certainty to the various investors of both countries through allocation of taxing rights between them.
In some cases, the DTAA also provide concessional rates of tax.
Which of the statements given above is/are correct?
Correct Answer:
(C) Both 1 and 2
Major benefits of Double Taxation Avoidance Agreements (DTAA) are:
The countries under the DTAA are provided relief from double taxation. Relief on double taxation is provided by the exemption of incomes earned abroad from tax in the resident country or by providing credit to the extent taxes that have been already been paid abroad.
In some cases, the DTAA also provide concessional rates of tax.
DTAA can become an incentive for even legitimate investors to route investments through low-tax regimes to sidestep taxation. This leads to a loss of tax revenue for the country.
DTAA also provides tax certainty to the various investors and businesses of both the countries through the clear allocation of taxing rights between the contracting states by Agreement.
Ques: 4
Consider the following statements:
India signed DTAA with more than 100 countries.
It covers withholding tax on payments such as Dividend, Interest, Royalty etc.
Which of the statements given above is/are correct?
Correct Answer:
(B) 2 only
DTAA is a tax treaty signed between two or more countries.
Objective – Tax-payers in these countries can avoid being taxed twice for the same income.
It applies in cases where a tax-payer resides in one country and earns income in another.
Categories covered under DTAA: services, salary, property, capital gains, savings/fixed deposit accounts
India has signed DTAA agreements with 88 countries, of which 85 are currently in force.
It covers withholding tax on payments such as Dividend, Interest, Royalty etc.
Ques: 5
Identify the type(s) of Advance Pricing Agreement (APAs)?
Correct Answer:
(D)
All of the above
An APA is a formal arrangement between a taxpayer and a tax authority on transfer prices. APAs allow businesses to reduce the risk of their transaction prices being challenged by tax authorities.
Types of APAs:
Unilateral APAs: Limit risks for transactions between domestic entities. No guarantee of avoiding double taxation for transactions with foreign entities.
Relatively shorter proceedings compared to other APA types.
Bilateral APAs: Limit risks for transactions between a domestic entity and a foreign entity. Eliminate the risk of double taxation. Longer proceedings as two states must agree.
Multilateral arrangements: They mitigate risks for transactions between related entities in 3 or more states, serving as a protective instrument for complex transactions and ensuring safety for both parties, although the proceedings take longer.