Double taxation is the levying of tax by two or more countries placed on the same income, assets or financial transactions. The primary purpose of double tax agreements is to safeguard taxpayers, whether they are individuals or a corporate identity, against being taxed twice on the same income.
The Features of a Double Taxation Agreement
Two countries can enter into a double tax agreement in order to diminish the opportunity of one income being taxed in both countries. Individuals or corporate entities that are established in one jurisdiction and earn their income from another are likely to be liable for tax in both countries. It is therefore imperative to beware of the double tax agreements to avoid paying tax twice.
Through a double tax agreement or tax treaty, countries are able to allocate taxing rights on the income earned by residents earning from a different country – in contrast to paying tax in both jurisdictions. In a bid to ease the tax procedure for residents in its country, governments establish tax agreements with other jurisdictions. The negotiations between two countries establish the basic regulations with regards to where the tax will be paid and what the rate will be.
There are a number of benefits of double tax agreements, including a reduced tax rate for individuals earning from different jurisdictions. There is also a reduction on tax withheld from interest and dividends for residents of one country to another. It is advised to seek the assistance of a professional consultancy firm when researching double tax agreements to make sure that you are aware of the countries that have entered a treaty of this nature.
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