Definition of Double Tax Agreements
A double taxation agreement (DTA) is a treaty between two countries which is intended to eliminate double taxation which would otherwise have been imposed on an individual who is a tax resident of more than one country at the same time. The primary goal of such an agreement is to prevent the taxpayer from paying taxes to the tax authorities of both countries. Usually, the amount of tax owed is to be based on the number of days for which the taxpayer worked in each country.
Importance of Double Tax Agreements
Every country’s tax authorities are tasked with imposing taxation on all income generated within the country’s territory. However, in instances where two countries are involved in international taxation, there could be a problem of double taxation imposed on taxpayers which may sometime arise. This is where the DTA comes in. A DTA prevents double taxation from being imposed upon taxpayers by taking specific tax laws of the two countries into account. DTAs apply to any person including individuals, companies, and other entities which are deemed to be residents of at least one of the countries involved. Since a DTA prevents incidences of double taxation which would cause income to be subject to tax in both countries involved, it allows one’s tax burden to be greatly reduced.
DTAs provide international tax exchange information for such tax authorities of each of the countries involved. Such information helps in reducing the administrative costs incurred by each country’s tax authorities. DTAs also have legal status. This is because the laws of most countries mention how international taxation upon income is to be imposed upon the taxpayer. Another reason why DTAs are important lies in the fact that they encourage foreign investment activities to be conducted. This is because the laws regarding foreign investment as they pertain to the DTA will be clearly specified. Therefore, investors will not have to worry about the specific details of any international tax laws.
The authorities which oversee DTAs ought to provide clear prescriptions on how certain profits should be calculated, offer guarantees of fair treatment to those affected by a DTA who work abroad, provide clear procedures on how to solve certain disputes which might arise, and facilitate the exchange of any tax-related information between the tax administrators of multiple countries.