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- 2 Marks
Question
Countries have enjoyed tax treaties while others have criticised the whole idea of tax treaty arrangements. Treaties may be bilateral or multilateral. Many countries weigh the benefits of treaties before they enter into them in order not to lose out.
Required:
Assess the rationale for tax treaties. (2 marks)
Answer
The rationale for countries entering into tax treaties includes the following:
- Avoidance of Double Taxation:
- One of the primary purposes of tax treaties is to prevent double taxation. Without a treaty, income earned by individuals or businesses in one country may be subject to tax in both the country of residence and the source country. Tax treaties establish which country has the taxing rights and provide relief from double taxation, either through exemptions or tax credits.
- Promotion of International Trade and Investment:
- Tax treaties facilitate cross-border trade and investment by providing certainty and reducing the tax barriers faced by investors. The treaties set clear guidelines on the allocation of taxing rights between countries and may reduce withholding taxes on dividends, interest, and royalties. This creates a more favorable environment for international business and economic cooperation.
In summary, tax treaties are designed to avoid double taxation and promote international trade and investment by providing clear tax rules and reducing tax barriers for cross-border activities.
- Tags: Double Taxation, International trade, Tax treaties
- Level: Level 3
- Topic: International taxation
- Series: MAR 2023
- Uploader: Theophilus