With the growing numbers of international tax issues, each ranging in complexity, it is necessary to understand key agreements in place between nations in order to manage a client’s tax issues in both the UK and abroad.
Double Tax Treaties are a key treaty that can exist between two countries. The aim of the treaty is to agree on the nation that will receive the right to tax an entity, being either an individual or a company. It is usually agreed between the country of residence and the country in which the entity operates within. Any tax treaty agreed will hold precedence over the domestic tax law of a country. In order to gain exemption in a country, it will be necessary for an entity, usually through a self-assessment or equivalent form, to make a claim to exempt themselves from Tax.
These agreements will be beneficial to both individuals and companies that carry out trade within two or more countries. This is because they ensure that the same income is not subject to double taxation.
One way that double taxation may be avoided is through one nation alone obtaining the tax rights. This will mean that all worldwide income will be taxed just within the nation with the tax rights. However, the nation in which the individual will be liable to tax within will often depend on where they are considered treaty resident. This will usually depend on the number of days that an individual will spend in each country that they operate within.
Another way that double taxation may be offset is through tax relief being available in the event of taxation within both countries. This means that an entity may set off tax paid in one nation against the tax liability in another. For instance, if an entity is a UK tax resident, then a credit is available for overseas tax paid on income which was acquired overseas.
However, the method of double taxation relief will often depend on the nature of the income produced, as well as specific wording within present double tax treaties.
While the UK does have double tax treaties with many nations, it remains the case that it doesn’t with numerous nations, such as Brazil. In the event of this, you may still be able to claim unilateral tax relief on any foreign tax paid. For example, if income produced in the UK is taxed at 40%, and income in another country is taxed at 30%, the entity may be eligible for relief. This would mean the tax liability in the UK would only amount to 10%.
Details on the nations in which the UK has double tax treaties with are detailed here, with the UK having double tax treaties with most European nations:
In the event of situations, for both individuals and companies, where income is derived from both the UK and elsewhere, Signature Tax can aid in interpreting the agreements produced in Double Tax Treaties and how it will impact your own tax liability. Signature Tax can also aid in making claims to HMRC for unilateral tax relief on any tax paid either in the UK or overseas.