Bilateral Tax Agreement - Explained
What is a Bilateral Tax Agreement?
Written by Jason Gordon
Updated at September 20th, 2021
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
-
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
- Courses
Table of Contents
What is a Bilateral Tax Agreement?How Does a Bilateral Tax Agreement Work?BilateralTax Agreements and ResidencyThe United States Is DifferentAcademics Research on Bilateral Tax AgreementWhat is a Bilateral Tax Agreement?
A bilateral tax agreement is an agreement between two tax jurisdictions such as municipalities, states, or countries to address the problem of double taxation. When two tax jurisdictions agree to reduce conflicts arising from duplication of taxes especially when it affects citizens or organizations that reduce in more than one country, a bilateral tax agreement is reached. Otherwise called a tax treaty, this agreement fosters relations between two jurisdictions and fosters foreign trade and investment.
Back to:ACCOUNTING & TAXATION
How Does a Bilateral Tax Agreement Work?
A bilateral tax agreement is a key way to eliminate the double taxes that individuals and corporations who reside in more than one jurisdiction or country face. Double taxation has disadvantages, the major one being it causes tax evasion. It also discourages foreign trade and investment between the two countries. The Organization for Economic Cooperation and Development (OECD) has certain guidelines for bilateral agreements. When a tax treaty exists between two jurisdictions, it enhances cooperation in tax collection between the two jurisdictions.
BilateralTax Agreements and Residency
Individuals who are domiciled in the two countries are said to have residency in both. Given the tax rules of the countries, such individuals might be subjected to double taxation. In a bilateral tax agreement, tax jurisdictions seek to eliminate the problem of double taxation that individuals and corporations are exposed to. Hence, under this agreement, only one country is regarded as a domicile for tax purposes. There are certain conditions that must be met before a country is considered domicile, the most important one is the number of days an individual spends in such a country. For instance, individuals who spend more than 183 days in European countries are considered to be domiciled there and are thereby subject to tax laws of the country.
The United States Is Different
The tax condition in the United States is quite different from other nations. Holders of green card and US citizens are mandated to pay federal income tax in the United States regardless of whether they are domiciled in another European country. Despite this existing tax rule, the US government provided a means to eliminate double taxation by allowing citizens who live outside America to enjoy the Foreign Earned Income Exclusion (FEIE). As of 2018, Americans who are domicile abroad can deduct up to $104,100 from their tax return, this is a form of tax relief.
Academics Research on Bilateral Tax Agreement
- Purchasing power, interest rate parities and the modified Fisher effect in presence of tax agreements, BenZion, U., & Weinblatt, J. (1984). Purchasing power, interest rate parities and the modified Fisher effect in presence of tax agreements.Journal of International Money and Finance,3(1), 67-73. This paper shows that in a world with different rates of inflation and taxation, in the presence of an international tax agreement, the simultaneous coexistence of the purchasing power parity mechanism, the interest rate parity mechanism, and the revised Fisher effect is impossible. The analysis reveals a possible inherent instability of interest rates and exchange rates generated by inflation. This instability is greater the larger the tax rate differentials among countries.
- Information technology and bilateral FDI: Theory and evidence, Jeon, B. N., Tang, L., & Zhu, L. (2005). Information technology and bilateral FDI: Theory and evidence.Journal of Economic integration,20(4), 613-630. This paper investigates the impact of communication cost on the FDI activities of multinational corporations (MNCs). First, we provide a theoretical foundation for a gravity-type FDI model, which shows that physical distance and communication technology are important determinants of FDI activities. Second, we apply the ITaugmented gravity model to bilateral FDI data for a total of 47 OECD and non- OECD countries from 1980 to 1997 and find that distance is negatively related to inward FDI stocks while the growth of IT, measured by teledensity and celldensity, has encouraged FDI significantly. The impact is found to be more prominent on FDI from G7 countries to OECD countries, than to non-OECD countries, and more prominent in the 1990s than in the 1980s. Moreover, IT plays a more effective role by reducing communication cost when distance is beyond a threshold range.
- A Comparative Analysis of the United States-People's Republic of China Tax Treaty: United States Tax Treaty Policy Concerning Developing Countries, Kelly, D. A. (1986). A Comparative Analysis of the United States-People's Republic of China Tax Treaty: United States Tax Treaty Policy Concerning Developing Countries.Syracuse J. Int'l L & Com.,13, 83. Comparison of Foreign-related Tax Convention between Mainland and Taiwan (Part One), Rui, L. (2010). Comparison of Foreign-related Tax Convention between Mainland and Taiwan (Part One).Journal of Anhui Vocational College of Police Officers, (1), 11. International taxation convention is a basic form of harmonizing the international taxation relations.With the increasing exchange of economic and trade between mainland China and Taiwan,the lack of a bilateral tax agreement,the issue on the avoidance of double taxation is becoming obvious in the practice of cross-straits economic.As a positive exploration to solve this problem.It is expected to begin with the reason of international double taxation,apply methods of analysis,induction,and comparison to discuss two main international taxation convention models,which are the OECD model and the UN model,and then,makes a comparison of foreign tax agreements between mainland China and Taiwan.
- The Soviet Union's Other Tax Agreements, Newcity, M. (1985). The Soviet Union's Other Tax Agreements.NYUJ Int'l L. & Pol.,18, 833.