Double taxation agreement. Different countries have different tax rate levels and tax regulations. In case you are a resident in one country but generate and receive your income from a different jurisdiction you might be subject to double taxation: abroad and at home.
For example, a person resident of Country A receives his $100 income from Country B. If Country’s A tax rate is 20% and Country’s B is 30% the person will suffer a significant loss in his income as he will be taxes twice. He will lose $50 ($100*20% + $100*30%) and receive an after-tax income of only $50, a half of his original income. Such arrangements discourage international trade for obvious reasons.
Double Tax Agreement (DTA) is a contact between two countries on the basis of which double taxation on the same income is avoided. Thus If a Double Tax Agreement is in force then you will need to pay tax on any gain only once. DTA sets which country has the taxing rights over an individual.
Furthermore, it also sets rules depending on the type of income or gain. Offshore jurisdictions with low or zero tax rates posses such agreements with many countries that explains its popularity in the business world. It allows companies to pay low or zero tax rates in tax heavens of legal residence such as BVI, Seychelles or Mauritius, rather than often much higher rate in the country where the actual operation is carried out.
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