Many countries issue and collect tax to support their income revenue and to face some emerging issues as budget deficits. Normally, taxation is based on certain laws to be issued specifically for that purpose.
Taxation covers all nationals of the country and their business, even if they are residing abroad as per certain regulations and laws.
A tax treaty is a bilateral agreement made by two countries to resolve issues involving double taxation of passive and active income. Tax treaties generally determine the amount of tax that a country can apply to the taxpayer income, capital, estate and wealth. The tax treaty is called Double Tax Agreement.
When an individual or business invests in a foreign country, the issue of which country should tax the investor earnings arises. Both countries, may enter into a treaty to agree which country should tax the investment income so as to prevent the same income from double taxation. Normally, tax treaties follow, the OECD model or the UN model.
The OECD tax convention on income and on capital is more favourable to capital-exporting countries than capital-importing countries. It requires the source country to give up some or all of its tax on certain categories of income earned by residents of the other treaty country.
The two countries will benefit from such agreement if the flow of trade and investment between them is reasonably equal and the residence country taxes any income exempted by the source country.
The United Nations model convention gives favourable taxing rights to the foreign country of investment, typically developing countries receiving inward investment. It gives the source country increased taxing rights over the business income of non-residents compared to the OECD model convention.
One of the most important aspects of a tax treaty is the policy on withholding taxes, which determines how much tax is levied on income (interest and dividends) from securities owned by a non-resident. Generally, tax treaties are said to be reciprocal as they apply in both treaty countries. By this arrangement, the business between the two countries will prosper and business parties will look for more business engagements. Likewise, both the countries gain benefits.
Better, before starting any business in any country, to make sure that a double taxation treaty is in place.
This will be additional favourable positive point.