In an increasingly globalized world, many individuals and corporations work and do business abroad. As a result, jurisdictions need to define how income earned in foreign countries is taxed. Otherwise, income could be taxed in more than one country, resulting in double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. . To avoid this, countries negotiate double taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. agreements (DTAs).
Tax treaties usually provide mechanisms to eliminate double taxation of business and wage income earned by individuals who live or have their main income in one country but (temporarily) work in another country. Additionally, they often include the mutual reduction or elimination of withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. taxes on interest, dividends, and royalties earned by foreign individuals and corporations. Hence, countries making a treaty agree to forgo some tax revenue on cross-border transactions.
Tax treaties can provide certainty and stability for taxpayers and encourage foreign investment and trade. A broad network of tax treaties contributes to the competitiveness of an economy.
The largest tax treaty network among European OECD countries belongs to the United Kingdom, which has treaties with 130 countries. The UK is followed by France (122 countries) and Italy (100 countries).
The countries with the smallest network of tax treaties are Iceland (45 countries), Lithuania (54 countries), and Greece (57 countries). On average, the European countries covered hold 82 double tax agreements.
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