Tax Treaties

 

Tax Treaty is known as an Avoidance of Double Taxation Agreement. It could be described as an agreement between two or more countries (otherwise known as the Contracting States or parties) with the aim of making sure that a resident of one or both of the contracting countries. A tax treaty is a bilateral (two-party) agreement made by two countries to resolve issues involving double taxation of passive and active income of each of their respective citizens.

HOW TAX TREATY WORKS

A tax treaty is an agreement between countries that is intended to resolve issues of double taxation and tax evasion. Tax treaties usually outline not only the taxes that are to be paid but also whether or not a person is considered a resident and thus eligible to the benefits of the country under their tax system.

When an individual or business invests in a foreign country, the issue of which country should tax the investor’s earnings may arise. Both countries–the source country and the residence country–may enter into a tax treaty to agree on which country should tax the investment income to prevent the same income from getting taxed twice.

PURPOSES OF TAX TREATY

 The Aim of a tax treaty, clearly stated, is to facilitate cross-border trade and investment by eliminating the tax impediments to these cross-border flows.

TAX TREATIES RATE

Tax treaties usually specify the same maximum rate of tax that may be imposed on some types of income. As an example, a treaty may provide that interest earned by a nonresident eligible for benefits under the treaty is taxed at no more than five percent (5%).

DOUBLE TAX TREATIES

 Double Taxation Avoidance Agreement or DTAA is a tax treaty signed between any two/multiple countries so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country.

BENEFIT OF DOUBLE TAX TREATIES

  •         Lower Withholding Tax
  •         Tax credits
  •         Exemption from taxes

PURPOSES OF DOUBLE TAX TREATIES

1.Double taxation treaties are agreements between 2 states which are designed to

  1. Protect against the risk of double taxation where the same income is taxable in 2 states.
  2. Provide certainty of treatment for cross-border trade and investment.

TAX RELIEF

Tax relief is any government policy initiative that is designed to reduce the amount of taxes paid by individuals or businesses.

UNDERSTANDING TAX RELIEF

An individual or business entity typically gets tax relief through deductions, credits, or exclusions, and occasionally by the forgiveness of a tax lien.

HOW DOES TAX RELIEF WORKS

Tax relief means that you either pay less tax to take account of the money you’ve spent on specific things, like business expenses if you’re self-employed get tax back or get it repaid in another way, like into a personal pension.

UNILATERAL TAX RELIEF

Unilateral relief is relief from double taxation for property in states. It can only apply where there is no Double Taxation Treaty in place between countries. The country which charges tax on the foreign property will grant the credit. A corrective measure is taken by a country to minimize the effect of double taxation in a situation where similar relief is unavailable through a tax treaty.

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