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Double Taxation Agreements

Governments negotiate double taxation agreements (DTAs) so that profits, income, and gains which may be attributed to either one of the parties of the agreement are treated fairly and are not taxed in both regimes. In many cases, DTAs go further and offer beneficial tax rates to those who are tax resident in one or other of the signing parties’ countries.

DTAs are negotiated separately from trade agreements and, in some cases, countries which are party to both trade agreement and double taxation agreement offer conflicting tax positions. It is therefore important to understand which agreement provides the best arrangements and to make claims appropriately.

DTAs since 1998 are often routinely based on a format provided the Organisation for Economic Co-operation and Development (OECD). However, the format may be freely modified and routinely is so that each DTA is unique. At the present time, DTAs are only ever bilateral.

Corporations that are trading internationally, or that are planning to do so, will routinely appoint accountants in each country in which they trade.  Yet the large majority of accountancy firms “look inwards” to tax due in their own country. Few have the expertise to apply the international agreements or to suggest how appropriate structuring may reduce the corporation’s overall tax bill. 

Each corporation will then believe it is “up to date” with its tax affairs in each country and as far as paying tax is concerned this may be a correct view – but are they paying too much tax?

Mitigation of Tax Due While Trading Internationally

In setting up a new corporate structure or in setting up facilities to help individuals manage their international exposure to taxation, it is necessary to consider which DTAs are enforced and their specific terms.  A company trading between two countries, will be taxed in both countries if a DTA does not exist between these countries.  Sometimes, a DTA may exist between these two countries, but companies are still taxed in both countries due to partial coverage.  At other times, the rates of tax agreed may be relatively unfavourable.

To take advantage of a DTA, an individual or corporation must be physically present or have a permanent establishment in one or the other treaty partners’ countries. Where a client has taxable affairs in Country A and Country B, but where these countries do not yet have an appropriate DTA, then it can often be useful to establish a taxable presence (NewCo) in Country C, where each of Country A and Country C, and Country B and Country C have good DTAs in place.  The corporation will then first trade with NewCo in Country C, which will then trade onwards to Country B.

Because NewCo must have “substance” – real people doing real work, some new corporate costs will be involved.  However, these may be much less than the overall tax that is saved.

Multiple Countries

For corporations trading in many countries, finding the right Country C, which has the best DTAs in place with each country is the solution; one NewCo can save tax in all countries in which trade is carried on.  Such arrangements can often provide lower overall rates of tax than simply dealing directly with Country A and Country B.

But finding the “right country” is specialist work.

We hold an up-to-date database of all DTAs currently in force in the world. We can easily find Country C and can then incorporate NewCo, and resource key persons to run it.

Costs of our research, establishment and staffing of New Co, establishing appropriate documentation are all “first year” costs.  First year tax savings are normally sufficient to pay for these.  Running costs thereafter are then normally a fraction of ongoing taxation saved.

Governments negotiate these agreements to foster trade between the signatories; we help you make the most of them.

Advanced Decisions

Most DTAs allow for the negotiation of advanced decisions for individual cases and for intergovernmental discussions to clarify areas of mutual interest. Taking advantage of these facilities requires expertise in the tax structures of both parties to the agreement and may take significant time to negotiate. Small and medium sized companies rarely have the in house expertise to allow them to do this, neither can they spare the managerial time that would be necessary. Tax Associates International can provide both the expertise and the organisational input. Where the potential tax saving is significant the costs of such an exercise can be readily recouped against future tax savings.

We have considerable expertise in the use of double taxation agreements and would be happy to discuss how affairs may be structured to take advantage of them.

Related Links

Transfer Pricing Agreements
Trade Agreements