APPLICATION OF A DOUBLE-TAX TREATY

A central problem with international transactions is that multiple jurisdictions may claim the right to tax the same income.  This creates a huge disincentive for companies that want to invest in other countries, as they will save nearly 30% (or more) on the income they earn by simply not providing services and creating a tax liability in the other country.  National governments have recognized this problem that has the potential to restrict trade and as a result, have created a network of bilateral agreements with other countries to address these issues.  These agreements, known as double-tax treaties (“DTT”) will often supersede domestic tax laws. [5]

In the context of international tax, a DTT represents an important source of information regarding the taxability of international transactions.  If a company is resident of one contracting state and is conducting business in the other contracting state, the tenets of the DTT will often redefine domestic tax laws and provide concessions on the ability of one or both states to tax the same income.  Furthermore, a DTT may also provide mechanisms for reducing taxation if the income remains taxable in both countries.  For example, let us take an example of a US subsidiary that wishes to repatriate a dividend back to its Parent Company domiciled in the UK.  Under US tax laws, the dividend would immediately be subject to a WHT of 30% at source.  However, by virtue of the DTT between the US and UK, the US subsidiary can send the dividend to the Parent at a reduced rate of 15%.  The parent can claim this reduction by filing a duly-completed W-8BEN with its financial institution.

About the author: Christian Wunderley, LL.M. is an international tax consultant and Managing Partner of the U.S tax firm, CD Tax Associates.  He has a number of years of experience working in both financial services and international tax, including firms such as PricewaterhouseCoopers, BDO, and Citigroup.  His specializations include withholding tax, particularly for non-U.S. businesses and investors that want to invest in the United States.

[5]  The US is among the only countries that equate a treaty obligation with another country as equivalent to domestic law, rather than superior.  Although it has not been used often, Congress has the ability to pass a law in direct contradiction to the treaty obligations and customary international law.