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Posted by Tiffany Gaskin

Why You Need To Know About Tax Treaties

Why You Need To Know About Tax Treaties

The world is more connected than ever, and taxation is one of many ways to unite countries. However, tax lawyers are finding some discrepancies with the impact on economic development. Several tax treaties prevent individuals or corporations from paying taxes twice. While it benefits investment, the government gets higher refunds through a harsh tax system. 

The treaties agreed by the US are over 60, and citizens benefit from tax through certain income, tax deductions, and other benefits. The world tax system focuses on reducing bilateral taxation to boost international trade and investment, mutual tax laws, and sharing tax information. 

Those residing in the country and those living in other countries are entitled to these treaty benefits and safeguards, such as nondiscrimination provisions. Those living outside the US can enjoy additional tax benefits from the residing country's tax treaties.

 

What is a Tax Treaty?

A tax treaty is a legally agreed term between two or more countries. The agreement must be in line with the tax system of both parties. According to Article 2 of the Vienna Convention on the Law of Treaties, an international tax treaty must agree with international law. According to the same law, the name given as agreement or convention is unimportant but should be according to each country’s tax laws. A treaty is a step to eliminate double taxation on citizens’ taxable income and avoid colliding tax laws of both countries. 

There are bilateral and multilateral tax agreements. The bilateral is between two countries and abiding by the rights and obligations of contracting countries. Bilateral treaties are over 3000. Most treaties are signed under these tax convention models: the United Nations and OECD Model Conventions.

The multilateral tax treaties are between two or more countries but are agreed under a single instrument. However, there are few of these treaties in history. But a recent development has been done by the OECD and its Base Erosion and Profit Shifting (“BEPS”) to revamp multilateral instruments according to the international tax system. 

Treaties are a two-way thing, so they must be reciprocated. Treaties are concluded with signatory from involving countries according to Article 26 of the Vienna Convention. The agreement is referred to as the pacta-sunt-servanda principle in Latin, meaning “agreements must be kept.


Common Tax Treaty Benefits

Personal service income. The US abides by this tax for its citizens in other countries for some number of days but under certain conditions. Income from personal performance in a treaty country may not be included as income tax. 

Professors and teachers. If you are a teacher or on research in a treaty county, the income is exempted from tax as a US citizen. 

Students, trainees, and apprentices. Business, research, study, professional, and technical training funding from the US are exempted from tax in treaty countries. Under specific laws, income received by US trainees, apprentices, and students is excluded from tax in treaty countries.

Pensions and annuities. US pensions and annuities may be excluded from tax in certain treaty countries under specific rules. For example, the US tax system exempts most government pensions and annuities from treaty countries. 

Investment income. Under specific rules, the income is taxed at a minimum. US residents are excluded from investment income tax such as dividends and interest in a treaty country. Some treaties exclude capital gain under specific criteria. 

Saving clauses. The US does not reduce tax liability for its citizens and residents. However, the saving clauses are exempted for US citizens and residents under particular treaties. The US tax system for its residents is not affected by any tax system of treaty countries.  


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Tiffany Gaskin
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