Tax Treaties in International Business

International Business has evolved in terms of sophistication and taken on a much larger scale. This is a kind of business that needs one to be thoroughly aware of cultural, social and economic developments in the world around them. Operating on an international level is very different to operating on a domestic level. The entire game changes with a new set of rules that need to be followed.  The different aspects of International Business have to be followed and developed in order for the business to be a success.

One of the pillars supporting International Business is taxation. The laws regarding tax keeps changing from one country to another. For example, laws in the United States would be different from the one that are followed in India. The various acts are defined by the law of a country that is abided by while conducting the business across boundaries. Tax treaties are one dimension of taxation you need to be aware about.

A tax treaty is an agreement between the two countries that are entering into a business transaction. The treaties can cover aspects like income tax, inheritance taxes, value added taxes and anything else that is agreed between the parties involved. Tax treaties that are drawn are all different depending from country to country, though there are few points that do overlap, some of which are mentioned below.

  • The treaty defines the terms on which the taxes are to be covered along with identifying who is a resident and eligible for benefits.
  • The amount of tax that is withheld from interest, dividends and royalties paid by a resident of one country to one of the other country is reduced.
  • The agreement will determine the conditions in which the income of individuals resident in one country will be taxed in the other country, including salary, self-employment, pension and other income.
  • It is also provides terms for exemption of certain types of organizations or individuals
  • The frameworks for enforcement and dispute resolution are also provided.

Besides defining the terms and condition of the agreement, the tax treaty also serves the purpose of reducing taxes of one treaty country for residents of the other treaty country in order to reduce double taxation of the same income. The aim of drawing a tax treaty is to reduce double taxation while another aim is to eliminate tax evasion and to encourage cross- border trade efficiently.

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