Sept. 18 – Simply put, double taxation agreements (DTAs) aim to prevent the same income from being taxed by two or more states, while also eliminating tax evasion and encouraging cross-border trade efficiency.
DTAs are mostly of a bilateral nature and, while DTA-signing countries are not all members of the Organization for Economic Cooperation and Development (OECD), DTAs are generally based on model conventions developed by the OECD or (less commonly) the United Nations.
While about 75 percent of the actual words of any given DTA are identical with the words of any other DTA, the applicability and specific provisions of each treaty can vary substantially.
From an investor’s perspective, confusion about international taxation can arise when investors are subject to two different and potentially conflicting tax systems. For example, Hong Kong and Singapore adopt a “territorial source” principle of taxation, which means that only profits sourced locally are taxable.
Meanwhile, other countries like China and the United States are on the worldwide tax system, and resident enterprises are required to pay tax on income sourced both in and outside of the country. DTAs not only provide certainty to investors regarding their potential tax liabilities, but also a tool to create tax efficient international investments.
DTAs prevent double taxation by allowing the tax paid in one of the two countries to be offset against tax payable in the other country, and/or by providing exemptions or reduced tax rates for specific income types such as interest, royalties, and dividends.
