Glossary term
Double Taxation Agreement (DTA)
Subject: Legal, Tax and Reporting, Tax Compliance and Governance
Also known as: Tax treaty, Double Taxation Avoidance Agreement (DTAA)
A double taxation agreement is a treaty between two countries that decides which of them may tax certain income, and by how much, so the same income is not taxed twice.
Explanation
When a person or company lives in one country and earns income in another, both may claim the right to tax it. The treaty divides these rights by type of income: business profits, dividends, interest, royalties, salaries and gains. Typically the source country may tax at a reduced rate, and the residence country gives relief by exemption or by a credit for tax paid. Most treaties follow the OECD or UN model, and they also include rules on permanent establishments, tie-breakers for dual residents, and exchange of information between tax authorities. To claim benefits, a taxpayer usually shows proof of residence. Treaties can be abused to obtain benefits through shell structures, which is why many now contain anti-abuse tests. Treaty relief is claimed return by return, so a missing residence certificate can cost the full domestic rate.
Example
A university in one country earns royalties from a licensee in another, whose domestic law would withhold 20% tax. Under the treaty the rate on royalties is 10%. The university gives the licensee a residency certificate, the licensee withholds 10%, and the university claims a credit for it against its home tax bill.
Not to be confused with
- Tax information exchange agreement
- An exchange agreement only shares tax information. A double taxation agreement also allocates taxing rights and relieves double tax.