Zipper Clause in DTAA

Zipper Clause in DTAA – A zipper clause is a provision included in Double Taxation Avoidance Agreements (DTAAs) to prevent the same income from being taxed twice in two countries. It ensures that when a taxpayer is liable to pay tax in both the country of residence and the source country, mechanisms like tax credit, exemption, or deduction are applied to eliminate double taxation. The clause “zips” together the taxing rights of the two countries, resolving any conflicts arising from overlapping provisions in tax treaties. Typically, the zipper clause: Specifies how foreign taxes paid are credited against domestic tax liability. Clarifies which country has primary taxing rights. Resolves disputes where income could be classified differently under domestic laws of two countries.

Example: An NRI earns rental income in India and pays tax in India. Under the zipper clause in the India–USA DTAA, the tax paid in India can be credited against their US tax liability, preventing double taxation on the same rental income.