Double Taxation Avoidance Agreements: How They Work
September 3, 2015
A tax agreement is the agreement between two (sometimes more, but typically two) authorities concerning matters in relation to tax. There are two types of agreements which were formed in the course of history. TIEAs and DTAs are the mentioned agreements. First-one is focused on exchange of information (EOI), and the second one has its focus on evasion of double taxation. The information about first type of agreements you may find on the Internet or in the special literature. The next information will concern mostly the second type of agreements – DTAs. Meanwhile, nowadays the DTAs cover an EOI part making with it a TIEA needless. Firstly, we need to get rid of confusing terminology. The main concept we will use here is “DTA”, nevertheless on the Internet or in special literature, you may find such next concepts as “DTAA” and “DTC”. Be sure, they all bring up to the same type of agreement which is called Double Taxation Avoidance Agreement.
Be aware that not all taxes are identical. There are numerous taxes, including corporate tax, income tax, wealth tax, inheritance tax, trades tax, property tax, environmental tax, alcohol tax, unemployment tax, import tax, carbon tax, payroll tax, and these is a small part of the existed taxes. At the same time such vices as alcohol can be often taxed three times and cover import tax, trades tax, in addition to specific tax for that vice. That could be interpreted as a form of double (treble) taxation, which is not in choice for DTAs. Though DTAs can include other forms of tax, we would better concentrate on revenue and corporate taxes in this post, as they are annoying ones.
You face the double taxation when your revenue is charged the same or much-related type of tax twice. Moreover, you can easily avoid this foul problem with a DTA. The main idea is in the fact that the two authorities agree to only tax revenue up to the all-out of either of the two’s tax rates. Therefore, in case when revenue is subject to 20% tax on Authority A and 30% in Authority B, the revenue must only be subject to 30%, but never 50%.
Using the above example, let us picture an off the shelf company which trades in both Authority A (20% tax) and Authority B (30% tax). Supposing there is a DTA between the two authorities and the firm bear out the liability criteria, by way of paying 20% trade tax in Authority A the firm can control that 20% as a tax credit and just pay 10% trade tax in Authority B. Therefore, this process is named tax relief.
Tax liability is the concept used concerning the residence, which suits as the prime place of residence for regular persons, and which for companies and firms (legal or juridical persons) is resolute by evaluating things like prime place of business, residence of managers and or stockholders, mind and organization tests, and authority of incorporation.
Nevertheless, the DTAs cover a wide ground, because its scope of tax liability was extended. By getting a greater space for clarification of tax residency, the more offshore companies and persons have a chance to use the agreement to evade double taxation. DTAs are a great solution of your tax problems. Without proper DTAs, the less and fewer foreign investment will be provided, similarly, international trade will face problems. When you are well informed, while engaging in incorporation of the company in multiple authorities with DTAs, you will sure get a possibility for your tax burden reduction by evading double taxation.
At the same time, if you possess a small business and the taxable overseas company registration, you may not be fit for a DTA. The tolerant definitions of tax residence, which are used in DTAs, can interpret even incorporation appropriate to qualify as residence as the second authority. Intra-EU DTAs are often promising by this way, but your benefit may vary.
Before thinking of whether you are qualified or not, remember that tax agreements may be complex and are simply made more complex by authorities with complex tax codes. Therefore, you should better ask a qualified professional, as the information in the post is simplified.