How Do Double Taxation Treaties Benefit Countries?

Countries compete for your business as a taxpayer, and double taxation treaties allow different nations to be more competitive. For example, if a European country would like to attract business from an American corporation, it will need to find a way to make the option sensible for the American company. A double-taxation treaty can do this.

What is a Double-Taxation Treaty?

When a treaty exists, an individual or business does not have to pay taxes to both places equally. Essentially, the organization pays taxes to the place where it does business. If the taxes paid are not sufficient to cover the tax the organization would pay in its host country, the organization only needs to pay the difference between the two tax rates. 

Who has a Double-Taxation Treaty?

Many financial centers, including Switzerland, Luxembourg and other European or South American nations have a double-taxation treaty with the United States, or with each other. Whenever the treaty is in place, both countries agree to certain reporting and information sharing. In this way, a country like the US can track which individuals are earning income overseas to make sure the IRS collects taxes. The host country abroad benefits by being more competitive than a nation without a double-taxation treaty.

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