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Tax Treaty Structuring
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What Tax Treaties are and how they Work
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However much you may work on your tax mitigation procedures and your international
tax planning options, you may still find yourself unable to develop the optimal
tax plan without resorting to the provisions of one or more Tax Treaties.
Tax Treaties (double taxation agreements or DTAs) are international agreements or
conventions concluded with the object of eliminating double taxation by the contracting
states. International double taxation may be loosely defined as the imposition of
comparable taxes in two (or more) states on the same taxpayer in respect of the
same subject matter and for identical or overlapping periods. The most harmful effects
of double taxation are on the exchange of goods and services and on the movement
of capital and persons.
Tax Treaties are thus primarily contracts between countries regarding the countries’
respective rights to tax the income or capital attributable to corporations or individuals.
The object is to prevent the income or capital from attracting tax in both countries
if there were no Tax Treaty.
The drafting of the very provisions of the Tax Treaties in order to accommodate
two different domestic tax systems frequently carries with it unintended opportunities
for the mitigation of tax.
The OECD Model Convention has exercised a considerable influence on most Tax Treaties,
including treaties between countries that are not members of the OECD, and even
on the U.S. Treasury Model.
Though Tax Treaties do mostly resemble one another, they are seldom identical. Also,
Tax Treaties frequently contain differing provisions and differing rates of governing
withholding taxes. It is the existence of these provisions and rates in a wide network
of treaties that enables countries such as Switzerland and the Netherlands to be
used as tax planning conduits.
Bear in mind, however, that Tax Treaties are not normally concluded between high
tax jurisdictions and tax havens. In line with this approach, certain Tax Treaties
specifically exclude from their scope entities that benefit from specially favoured
Tax Treatment (e.g., the exclusion of Luxembourg holding companies from the provisions
of Tax Treaties concluded with Luxembourg).
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Next - The Problem Side of International Double Taxation
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