4
-
C
HINA
B
RIEFING
|
October 2014
An Introduction to Double
Taxation Avoidance
- By Chris Devonshire-Ellis, Zhou Qian and Matthew Zito
When a commercial transaction is undertaken between individuals or enterprises with residency in two different national tax jurisdictions
(i.e. a “cross-border transaction”), differences in their respective taxation systems can give rise to redundant (or “double”) taxation of the
same income.
The stultifying effect this can have on attracting foreign direct investment (FDI), especially for developing countries, has led to thewidespread
adoption of Double Taxation Avoidance Agreements (DTAs or DTAAs) between global trading partners, including states and non-state tax
jurisdictions such as Hong Kong.
DTAs are bilateral agreements by nature, and while their signatory countries are not necessarily 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. As a result, some 75 percent of the content of a given DTA is identical with that of any other, though the applicability and
specific provisions of individual treaties can vary substantially.
These agreements have been shown to be an effective means of promoting bilateral FDI (by typically between 27 and 31 percent over
the long-run) between signatory countries and boosting ROI for investors, thus presenting a win-win for governments and businesses
alike. In addition to their function of preventing double taxation, DTAs also work to combat tax evasion through information sharing and
to promote cross-border trade efficiency.
Typically, DTAs prevent double taxation through two methods: either through providing tax credits (i.e., allowing the tax paid in one of
the two countries to be offset against tax payable in the other) and/or by providing exemptions or reduced tax rates for specific income
types such as interest, royalties and dividends.
From an investor’s perspective, confusion regarding international taxation can arise when company operations are subject to two different
and potentially conflicting tax systems. For example, Hong Kong and Singapore employ 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, under which 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 boost the tax efficiency of international investments.
China DTA Factsheet
Total tax revenue (2012)
Corporate Income Tax Law effective
Corporate income tax rate
Number of double tax agreements
Dividends tax rate (paid to a non-resident company)
DTA preferential rate
RMB 10 trillion +
1 January 2008
25%
101
10%
5 - 8%
