What is a Double Tax Treaty? Double Tax Treaty Review

Overview

A bilateral tax treaty refers to a tax treaty signed by two sovereign states to coordinate the tax distribution relationship between each other. Bilateral tax treaties are the main form of international tax treaties today. Due to the differences in political, economic and cultural backgrounds of various countries, especially the great differences in tax systems, it is very difficult for multiple countries to negotiate and reach a consensus on tax matters in order to safeguard their respective financial interests, while it is relatively easier for two countries to negotiate. At present, the vast majority of tax treaties signed internationally are bilateral treaties. All tax treaties signed by my country are bilateral tax treaties.

According to relevant records, the world's first bilateral tax agreement was the specific tax agreement reached between the United Kingdom and Sweden on inheritance tax in 1872.

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Nowadays, bilateral tax agreements are expanding further. Since the birth of the Taiwan Cooperation Organization Model Tax Convention and the United Nations Model Tax Convention in the 20th century, bilateral tax agreements have played an important role in the process of international coordination and cooperation in taxation. Countries are very active in concluding tax agreements. In the process of economic globalization, in order to solve the new international tax problems brought about by economic globalization, countries will pay more attention to the use of this existing bilateral tax coordination and cooperation model. This is not only reflected in the increasing number of countries signing tax agreements and the further expansion of the agreements, but also in the increasingly rich content of the agreements. In the future, the content of tax agreements will have the following additions:

1. Add new taxes applicable to the agreement (such as safeguard duties);

2. Applying tax treaties to new forms of business activities (e.g. commercial activities);

3. Extensively develop new measures to prevent international tax evasion (such as thin capitalization and the use of tax treaties);

4. Add new provisions on tax administrative assistance (tax collection, transmission of tax documents) and tax dispute resolution (such as international tax arbitration).

In addition, bilateral tax agreements concluded on specific issues, such as agreements on exchange of tax information and agreements on mutual administrative assistance in tax matters, will develop further.

Main contents of China's bilateral taxation agreements

The two international tax treaty models of the OECD and the United Nations are the practical summaries of how countries around the world deal with their mutual tax relations. Their emergence marks that the adjustment of international tax relations has entered a mature stage. The two models mainly include the following basic contents:

1. Division of taxing rights and scope of application of the agreement

In terms of guiding ideology, both models recognize the principle of giving priority to the jurisdiction of the source of income, that is, the principle of taxation at source, and the taxpayer's country of residence adopts the method of tax exemption or credit to avoid international double taxation. However, there are also important differences between the two models: the United Nations model emphasizes the principle of taxation at the source of income, reflecting the interests of developed and developing countries respectively; the OECD model requires more restrictions on the principle of source of income. The two models are basically consistent in the scope of application of the agreement, mainly including the scope of application of taxpayers and the scope of application of tax types.

(II) Agreement on permanent establishment

Both templates have agreed on the meaning of a permanent establishment. A permanent establishment refers to a fixed place where an enterprise conducts all or part of its business activities, including three key points: first, there is a place of business, that is, the enterprise's investment, such as buildings, sites or machinery and equipment. Second, this place must be fixed, that is, a certain location is established and has a certain degree of permanence. Third, the enterprise conducts business activities through this place, usually by the company's personnel relying on the enterprise (personnel) in the country where the fixed place is located. The purpose of clarifying the meaning of a permanent establishment is to determine the taxation rights of one contracting state on the profits of the enterprises of the other contracting state. The breadth of the scope of a permanent establishment is directly related to the amount of tax distribution between the country of residence and the country of income source. The OECD template tends to define a narrower scope of permanent establishments to facilitate taxation in developed countries; the United Nations model tends to define a wider scope of permanent establishments to facilitate developing countries.

(III) Limitation of withholding tax rate

The usual practice of levying withholding tax on investment income such as dividends, interest, and royalties is to limit the tax rate of the country of origin of the income so that both contracting states can collect taxes and exclude the tax monopoly of either party. There is a clear difference between the two templates in the range of the tax rate limit. The OECD template requires a very low tax rate limit, so that the withholding tax levied by the country of origin of the income is relatively small, and more tax can be collected after the country of residence grants a credit. The United Nations template does not follow this provision, and the withholding tax limit rate must be determined by negotiation between the contracting states.

(IV) Non-discriminatory tax treatment

Both the OECD Model and the UN Model advocate the principle of equality and mutual benefit. A contracting party shall ensure that the nationals of the other party enjoy the same tax treatment as its own nationals. The specific contents are:

International non-discrimination. That is, different tax treatments cannot be given to taxpayers in the same or similar situations just because of their different nationalities.

No distinction between permanent establishments. That is, the tax burden of a permanent establishment in a foreign country should not be heavier than that of similar enterprises in the country. No distinction between payment deductions. That is, when calculating corporate profits, if the interest, royalties or other payments paid by the enterprise are recognized as deductible expenses, they cannot be treated differently because the payment recipient is a resident of the country or a resident of the foreign country.

No distinction between capital. That is, if the capital of an enterprise of one Contracting State is wholly or partly, directly or indirectly, owned or controlled by a resident of the other Contracting State, the tax burden or related conditions of the enterprise shall not be different or heavier than those of a similar enterprise of the other Contracting State.

(V) Avoiding international tax evasion and tax avoidance

Avoiding international tax evasion and tax avoidance is one of the main contents of international tax agreements. The two models mainly adopt the following measures in this regard:

1. Information Exchange

It is divided into routine information exchange and special information exchange. Routine information exchange is the regular exchange of information on the income and economic transactions of multinational taxpayers by the contracting parties. Through this information exchange, the contracting parties can understand the changes in the income and economic transactions of multinational taxpayers in order to correctly determine the taxable income. Special information exchange is when one of the contracting parties proposes the content that needs to be investigated and verified, and the other party helps to verify it.

2. Transfer pricing

In order to prevent and limit international legal tax avoidance, the contracting parties must work closely together and determine in the agreement a transfer pricing method agreed upon by all parties to prevent taxpayers from transferring profits and evading taxes by means of prices.

Implementation of Double Taxation Agreements

Bilateral tax agreements are an important legal basis for my country's foreign-related tax collection and management, as the implementation of tax agreements mainly involves the identification of residents of the two contracting parties and the application for preferential treatment under the tax agreements.

1. Determination of foreign resident status

According to the provisions of my country's foreign tax law, foreign residents can apply for preferential treatment under tax treaties when they obtain income (mainly dividends, interest and royalties) from China. Therefore, my country's tax authorities must first determine whether the taxpayer is a resident of the other contracting party. In the practice of foreign tax law, it can be handled according to the following principles:

1. Determination of the resident status of foreign legal persons.

To determine whether other economic organizations related to companies and enterprises are legal residents of the other country, the tax authorities can temporarily make a judgment based on the head office or actual management organization of the enterprise reported when handling tax registration and the legal person qualification certificate (copy) issued by the relevant authorities of the country where the enterprise is located when handling industrial and commercial registration. If effective proof cannot be provided, the preferential treatment of the tax treaty shall not be enjoyed.

2. Determination of the resident status of foreign natural persons.

As for whether foreigners who work or provide services in China are residents of the other contracting party, my country's tax authorities may handle it according to different situations: First, the taxpayer shall report his residence or residence in the other country, the employment or business he is engaged in, and the tax obligations he bears, and submit his identity certificate, passport and the certification materials issued by the company (enterprise) that sent him to China. The tax authorities may temporarily recognize it, and then conduct selective and focused verification according to the specific circumstances. Second, for individual situations that are unclear, or from a third country or a third country, the tax authorities cannot determine, and the taxpayer requests to enjoy the tax treaty treatment, it must be required to provide certification materials issued by the tax authorities of the country where he is located that he has the tax obligation of a resident. If no evidence can be provided, the preferential treatment of the tax treaty shall not be enjoyed. Third, when an individual is a resident of both Contracting States and both Contracting States impose tax on his or her domestic and foreign income, the individual should provide the tax authorities with details of his or her occupation, residence or domicile and his or her tax liability in the other State, so that the tax authorities of the two Contracting States may resolve the matter through consultation in accordance with the provisions of the other State.

(II) Application for preferential treatment under tax treaties by foreign residents

If residents of other contracting states obtain investment income such as dividends, interest and royalties from China and need to apply for preferential treatment under the tax treaty, they should fill out the application form for tax treaty treatment when submitting the resident certificate issued by their own tax authorities. Only after confirmation by our tax authorities can they enjoy the preferential treatment under the tax treaty. Otherwise, the tax authorities have the right to collect taxes at the tax rate prescribed by our tax law first, and allow them to review and refund the overpaid taxes after re-issuing the certificate and filling out the application form. The application form for foreign residents to enjoy tax treaty treatment can be obtained from the tax authorities. The beneficial owner of the investment income should fill it out in Chinese and English in two copies, and send it to the payer together with the resident identity card, and then the payer shall submit it to the tax authorities. After review, the tax authorities will return one copy to the payer for execution.

3. Proof of Chinese Resident Identity

When a Chinese resident (including an individual, company or group) obtains investment income from the other contracting party and wants to apply for tax treaty treatment in that country, the Chinese tax authorities (county, city and above tax authorities) should provide the taxpayer with a Chinese resident identity certificate. The Chinese tax authorities have formulated a unified format, and the tax authorities in the place where the resident is located can sign and issue the certificate. The certificate is in duplicate, one copy is given to the Chinese resident to handle the procedures for enjoying tax treaty treatment in the other contracting party, and the other copy is kept on file by the local tax authorities for future reference.