Tax treaties exist between many countries on a bilateral basis to prevent
double taxationDouble taxation is the imposition of two or more taxes on the same income , asset , or financial transaction . It refers to two distinct situations:...
(
taxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law.Taxes are also imposed by many subnational entities...
es levied twice on the same
incomeIncome is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
,
profitAccounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.A key difficulty in measuring profit is in defining costs...
,
capital gainA capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...
,
inheritanceInheritance is the practice of passing on property, titles, debts, and obligations upon the death of an individual. It has long played an important role in human societies...
or other item). In some countries they are also known as
double taxation agreements,
double tax treaties, or
tax information exchange agreements (TIEA). In fact these are Double Taxation Avoidance Treaties i.e. treaties to avoid tax is levied twice.
Most developed countries have a large number of tax treaties, while developing countries are less well represented in the worldwide tax treaty network.
Tax treaties exist between many countries on a bilateral basis to prevent
double taxationDouble taxation is the imposition of two or more taxes on the same income , asset , or financial transaction . It refers to two distinct situations:...
(
taxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law.Taxes are also imposed by many subnational entities...
es levied twice on the same
incomeIncome is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
,
profitAccounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.A key difficulty in measuring profit is in defining costs...
,
capital gainA capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...
,
inheritanceInheritance is the practice of passing on property, titles, debts, and obligations upon the death of an individual. It has long played an important role in human societies...
or other item). In some countries they are also known as
double taxation agreements,
double tax treaties, or
tax information exchange agreements (TIEA). In fact these are Double Taxation Avoidance Treaties i.e. treaties to avoid tax is levied twice.
Most developed countries have a large number of tax treaties, while developing countries are less well represented in the worldwide tax treaty network. The
United KingdomThe United Kingdom of Great Britain and Northern Ireland is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of Ireland, and many small islands...
has treaties with more than 110 countries and territories. The
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
has treaties with 56 countries (as of February 2007). Tax treaties tend not to exist, or to be of limited application, when either party regards the other as a
tax havenA tax haven is a country or territory where certain taxes are levied at a low rate or not at all.Individuals and/or Corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments...
. There are a number of model tax treaties published by various national and international bodies, such as the
United NationsThe United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and the achieving of world peace...
and the OECD.
Concept
International double taxation, narrowly defined, occurs when two different states impose a comparable tax on the same potential taxpayer on the same taxable item. The concept has been defined more broadly, but with less precision, as the result of overlapping tax claims of two or more states. For example, someone who is resident for tax purposes in France and who makes an interest-bearing deposit with a bank in the UK is potentially exposed to income tax on the interest in the UK and in France.
The concept of international
double taxationDouble taxation is the imposition of two or more taxes on the same income , asset , or financial transaction . It refers to two distinct situations:...
that bilateral tax treaties seek to remove is broader than the narrow definition. It includes some types of economic double taxation—that is, taxation of something already taxed under another country's laws whether or not it is formally subject to multiple levels of taxation. For example, many tax treaties operate to provide tax relief to a corporate group when a state has imposed a corporate income tax on profits earned by a subsidiary corporation and another state otherwise would impose a corporate income tax on its parent corporation when those profits are distributed as a dividend.
In general, tax treaties attempt to eliminate most forms of international double taxation, narrowly defined, and various other forms of international double taxation when a failure to do so would have a demonstrably harmful impact on international trade and investment.
A major goal of bilateral tax treaties is to remove impediments to international trade and investment by abating the risk of double taxation that can occur when both contracting states impose tax on the same income. This goal is advanced in five distinct ways.
- First, a bilateral tax treaty generally increases the extent to which exporters residing in one contracting state can engage in trading activity in the other contracting state without attracting tax liability in that latter. The second state can usually only impose tax on the business profits of a person who is resident in the other state if they operate in the second state through a permanent establishment
The concept of permanent establishment is one of the most important issues in international double tax treaty law. Virtually all modern tax treaties use PE as the main instrument to establish taxing jurisdiction over a foreigner's unincorporated business activities.The UN model tax treaty is very...
there.
External links