Direct Tax
Consulting
ESG Advisory
Indirect Tax
Growth Advisory
Internal Audit
BFSI Audit
Industry Audit
Valuation
RBI Services
SEBI Services
IRDA Registration
AML Advisory
IBC Services
Recovery of Shares
NBFC Compliance
IRDA Compliance
Finance & Accounts
Payroll Compliance Services
HR Outsourcing
LPO
Fractional CFO
General Legal
Corporate Law
Debt Recovery
Select Your Location
A treaty in general terms means an agreement concluded between two or more countries in a written form. It is governed by international law. This agreement can be in the form of a single instrument or two or more related instruments. Tax Treaties are one of the many categories of treaties and they deal with matters specifically related to taxation.
There are two main types of tax treaties i.e. Bilateral Tax Treaties and Multilateral Tax Treaties. A Bilateral Tax Treaty is a treaty concluded on a bilateral basis i.e. treaties between two parties. Whereas Multilateral Tax Treaty is concluded between more than two parties. Different treaties are entered into covering different taxes like taxes on income and taxes on capital. Capital and income tax treaties are referred to as “comprehensive tax treaties” as they include almost all types of income like business income, passive income[1], and employment income. There are treaties on inheritance and gifts which cover taxes on estates, inheritance, and gifts. Some treaties regulate cross-border transactions relating to social security levies and administrative assistance agreements. Every treaty is either based on the OECD Model or the UN Model.
At present, tax treaties plus domestic tax legislation create a legal framework for the tax system in a country. A tax treaty is binding on the taxpayers and tax authorities of the countries that are party to the treaty. From the moment, a treaty is signed it becomes enforceable in the countries that are party to the agreement. Generally, confusion arises as to the difference between tax treaties and domestic legislation of a country. The difference between the applications of the two is that such treaties do not create a tax liability for taxpayers and only determine the right of a country to levy tax and to what extent the right can be exercised. This makes such treaties relieving in nature by limiting the right to tax only to the parties to the treaty. On the other hand, domestic legislation levies the tax and provides the mechanism for its collection.
The OECD in ‘OECD Model Tax Convention on Income and Capital’ states the two main purposes for entering into tax treaties are: i) to avoid double taxation, and ii) to prevent tax evasion. These two main purposes have also been affirmed by the titles/preamble of various tax treaties. Apart from the two main purposes, other purposes of tax treaties include providing clarity and confirming the fiscal situation of the taxpayers by applying common solutions to identical cases. The purpose of tax treaties have been further discusses in detail below:
Tax treaties are not just agreements to prevent double taxation and prevent tax evasion, but they also minimize conflicts as countries mutually agree on the terms of the treaty. Tax treaty acts as a connecting factor in determining the taxing rights between source-based income and residence-based income. Tax Treaty also promotes international trade by removing the tax disputes arising due to differences in tax systems. It deals with various problems that arise due to the diversity in domestic tax systems and provides clarity on the taxing rights of a country. Thus, it can be said that tax treaties play a significant role in promoting cross-border transactions.
Also Read:A Discourse on Tax Planning StrategiesHow Does International Taxation Operate?The Principles of International Tax Planning
Did you or anybody in your family invest in Axis Bank Limited shares during the 1990s or early...
The Pharmaceutical industry is India's top gross domestic product (GDP) contributor. The market...
In the evolving international trade space, ensuring supply chain security and compliance with t...
Investment in shares of big public sector companies such as Coal India Limited (CIL) provides l...
The Securities and Exchange Board of India (SEBI) issued a circular on May 2, 2025, simplifying...
Are you human?: 1 + 9 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
With the liberalization of trade and foreign exchange policy beginning in the year 1991, India has begun to integra...
09 Jun, 2022
ITAT stands for Income Tax Appellate Tribunal. ITAT is a quasi-judicial body set up in January 1941 established by...
04 Jun, 2024