Double Taxation Treaty (DTT)
Muhammad Sohail, CA
Accounting & Finance Expert | Business Growth Advisor | Outsourced Accounting Solutions
Double Taxation Treaties are agreements between two or more countries to avoid international double taxation. International businesses often face double taxation issues. Income may be taxed in the country where it is earned and then taxed again when it is repatriated to the home country of the business. In some cases, the overall tax rate is so high that international business is too expensive to operate.
To avoid these problems, many countries have signed double taxation treaties, often based on models provided by the Organization for Economic Co-operation and Development (OECD). In these treaties, signatory states undertake to limit their taxation of international trade in an effort to expand trade between the two countries and avoid double taxation.
Pakistan has entered into several agreements on tax matters with other countries. Natural persons with permanent residence and with full and unlimited tax liability in any of the contracting countries may be entitled to exemption/reduction of income taxation according to the provisions of the relevant treaties, without which the income would otherwise be subject to double taxation. Each contract is different, and therefore it is necessary to check with the relevant contract where the tax liability of the relevant person actually lies and what taxes the contract stipulates.
Tax benefits under the DTA for payments can take place in two ways. On the one hand, there may be an exemption from paying tax or a reduction of the tax rate on the relevant payments. On the other hand, there may be a credit for deducted withholding payments.
A typical DTA will contain 'articles' (i.e. chapters or sections) covering different areas. When a DTA emerges, both countries start with a model convention, which is a template containing standard DTA articles and clauses. Each country comes to the negotiating table with its own list of conditions or "musts". The contract that is finally signed is therefore the culmination of rounds of negotiation, compromise and compromise. This is why each treaty is unique and a specific treaty must be referred to whenever an issue arises involving both countries. The OECD (Organisation for Economic Co-operation and Development) Model Convention is one of the main three; the other two are model conventions of the United Nations and the United States.
?The structure of the DTA model is as follows:
Chapter I: Scope
Article 1 - Persons covered
Article 2 - Covered Taxes
Chapter II: Definitions
Article 3 – General definitions
Article 4 – Resident
Article 5 – Permanent establishment
Chapter III: Taxation of Income
Article 6 – Income from real estate
Article 7 – Business Profits
Article 8 – Shipping, inland waterways and air transport
Article 9 - Affiliated Companies
Article 10 - Dividends
Article 11 – Interest
Article 12 - Copyright fees
Article 13 – Capital gains
Article 14 – Technical Fees (Note: This is a regulation in Malaysian contracts)
Article 15 – Income from employment
Article 16 – Remuneration of Directors
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Article 17 – Artists and athletes
Article 18 – Pensions
Article 19 – Civil service
Article 20 – Students
Article 21 – Other income
Chapter IV: Taxation of capital
Article 22 – Capital
Chapter V: Methods of Avoiding Double Taxation
Article 23A – Exemption method
Article 23B – Credit method
Chapter VI: Special Provisions
Article 24 – Non-discrimination
Article 25 – Procedure for mutual agreement
Article 26 – Exchange of information
Article 27 – Assistance in the collection of taxes
Article 28 – Members of diplomatic missions and consular offices
Article 29 – Territorial expansion
Chapter VII: Final Provisions
Article 30 – Entry into force
Article 31 – Termination
Pakistan tax treaties with other countries
Pakistan has concluded tax treaties with more than 66 countries. The aim of these conventions is to avoid double taxation of income or profits arising in one territory and paid to residents of another territory. The provisions of tax treaties take precedence over the tax laws in force in Pakistan with respect to the taxation of non-resident income derived from Pakistan. Most treaties are based on the Model Tax Convention of the Organization for Economic Co-operation and Development (OECD).
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