What we usually call double tax treaties refers to bilateral tax treaties signed between countries in order to avoid and eliminate double taxation on the same taxpayer or on the basis of the same income, based on the principle of plain reciprocity.
NO.1. Avoid the use and scope of effect of double tax treaties
Double tax treaties generally refer to two aspects, on the one hand, which groups of persons the agreement applies to, and on the other hand, which taxes are limited to.
1. Who is it for?
Double tax treaties are usually limited to residents of one of the Contracting States or residents of both Contracting States, so they are not applicable to everyone.
So what is a resident?
Resident refers to a natural person, legal person and other body that is taxable for tax purposes under the laws of the country where he or she is located, regardless of his or her nationality, on the basis of his or her period of residence, place of residence, place of head office or place of administration, etc.
In order and in order to determine which party a taxpayer should belong to, it is usually based on the country of permanent domicile.
2. Taxes
In general, in terms of taxes, they are limited to the types of taxes that are subject to income and generally do not involve taxes that are subject to taxation such as transactions or property.
(1) The scope of the agreement is clarified with the taxation of income.
(2) The two sides shall separately list the types of taxes in force to which the agreement applies.
(3) Taxes that are expressly applicable to the addition or substitution of existing taxes after the conclusion of the agreement.
In addition, there are two issues that need to be agreed:
◆ Does it include income tax levied by local governments?
It is generally believed that local income tax is a taxation of income and should be included in the scope of taxes under the agreement.
◆ Does tax non-discrimination include taxes other than income taxation?
Generally as a special provision, the taxes to which tax treatment is applied without discrimination, including income tax and other taxes.
NO.2. Tax jurisdiction to avoid double tax treaties
1. Corporate income tax
According to international tax practice, two basic principles are generally followed: one is that taxation can only be levied if there is a permanent establishment, and the other is that only profits attributable to permanent establishments can be taxed.
The so-called permanent establishment refers to the fixed place where an enterprise conducts all or part of its business, mainly including management sites, branches, factories, workshops, offices, places for the development of natural resources, construction sites, installation projects, etc., as well as agents who have the right to sign contracts on behalf of the enterprise without independent status, and commission agents who act on behalf of an enterprise in whole or nearly in full.
There are also those that are taxed on the basis of attractiveness, that is, the business activities carried out by the head office of the enterprise without going through the permanent establishment. If the business is the same or of the same type as the permanent establishment, the profits earned are taxed as if they were the profits of the permanent establishment.
2. Personal income tax
What the two sides need to focus on is what can be allowed to make exceptions to the income from labor services on the premise of adhering to the principle of taxation at source. Generally speaking, if the beneficiary is taxed by the country of his residence, the main ones are as follows:
◆ Remuneration received from employers in the country of residence for short-term stayers (90 days in China).
◆ Income of flight attendants of ships and aircraft engaged in international transportation.
◆ Income from government employees who are sent to work abroad.
◆ Remuneration for teaching or researchers of one of the States Parties who give lectures in the other country for a period not exceeding two years or several years.
In general, there is no tax on the income earned by international students and interns for study and living, as well as the income of actors and athletes who engage in cultural exchanges in accordance with intergovernmental agreements.
3. Withholding tax is levied on investment income (dividends, interest, royalties).
The main reason is to negotiate the adoption of a limited tax rate and the two sides to share the income. In the treaty, it is generally expressly stated that taxation can be levied by both parties, but the country of origin of the income has priority to tax, and the rate of limitation on withholding tax is determined accordingly.
The OECD model proposes that the tax rate on dividends shall not exceed 15%, and the tax rate on dividends shall not exceed 5% and the tax rate on interest shall not exceed 10% for subsidiaries of parent subsidiaries (directly holding not less than 25%). Many tax experts in developing countries believe that such a restrictive tax rate would result in a significant loss of income in the country of origin, whereas the United Nations model leaves the issue of tax rates to be resolved in negotiations between the two sides.
The taxation of investment income directly relates to bilateral interests and is often at the heart of negotiations. Although the developed countries have declared that they have no intention of transferring the tax revenues of developing countries to the developed countries through the signing of tax treaties, the most important thing for the developing countries is that the measures to reduce tax rates can effectively and effectively encourage investment and the introduction of technology, so as not to cause equity spillovers and the reduced income from encouraging investment to flow into the coffers of capital-exporting countries.
NO.3. Avoid double taxation
1. Tax exemption method
That is, no tax is levied on income derived from the other country, which is often considered to be the best approach. It can provide the necessary conditions for enterprises in capital-sending countries to operate in developing countries, so that they can compete on an equal footing with local enterprises.
2. Credits
That is, the amount of tax paid in the country of origin can be deducted from the tax payable in the aggregate calculation of the country. With the result that the low tax rates in developing countries do not benefit investors, they are not very attractive to enterprises in capital-exporting countries, cannot effectively play the role of encouraging international investment, and are not conducive to the expansion of business by investment enterprises.
However, it was also argued that the use of credits could have the effect of burden equity, so that enterprises in developed countries would not have different burdens depending on where they operated.
There are also those who advocate that the shortcomings of the tax credit method should be appropriately compensated for by the method of treating the tax amount as if it had been taxed. That is, the tax reduction and exemption granted by the country of origin shall be deducted as if the tax amount has been levied when calculating the tax in the country of residence, so as to facilitate the encouragement of international investment.
However, some developed countries do not agree to the use of deemed tax credits, and some only agree to provide deemed tax credits for withholding tax reductions and exemptions, and do not agree to apply them to corporate income tax.
NO.4. Taxation without discrimination
Avoiding tax discrimination is an important principle in international tax relations, and it is also one of the issues that need to be focused on in the negotiation of tax treaties. A non-discriminatory treatment clause is usually included in a tax treaty to ensure that a taxpayer in one Contracting State does not have a different or heavier tax liability in another State than a taxpayer in another State in the same circumstances. There are 4 main aspects:
◆ No difference in nationality: taxpayers are not treated differently in taxation because of their different nationalities.
◆ No difference between permanent establishments: There is no difference in tax payment between permanent establishments and domestic enterprises.
◆ No difference in payment: There is no difference due to different payment objects.
◆ No difference in capital: the burden is not different or heavier than that of domestic enterprises because its capital is owned or controlled by enterprises or individuals in the other country.
However, such non-discriminatory tax treatment cannot affect the implementation of domestic fiscal and economic policies. That is, it should not include tax reduction and exemption treatment for domestic residents and enterprises based on reasons such as citizenship status or family burdens and domestic policies, as well as other special tax reduction and exemption benefits.