A tax treaty (also called a tax convention or tax agreement) is a legally binding contract established between countries aimed at alleviating double taxation of income earned internationally and preventing fiscal evasion.
Key Elements of Tax Treaties:
- Rules assigning taxing rights over dividend, interest and royalty income streams between signatories
- Guidance on sourcing rules and definitions to standardize compliance worldwide
- Establishment of procedures facilitating information sharing between tax authorities
Example:
A multinational updated its transfer pricing documentation in accordance with requirements set forth under applicable tax treaties.
Takeaways:
By promoting certainty and cooperation, tax treaties foster cross-border investment and economic activity which ultimately benefits participating nations. However, ensuring equitable treaties requires ongoing amendment and renegotiation in response to ever-changing global business models.