Have you ever wondered if a business that pays taxes in one country might also need to pay the same taxes in another? This scenario leads to double taxation, discouraging businesses from engaging in international trade.
Double taxation increases business costs and reduces competitiveness. To address this, countries have established Double Taxation Agreements (DTAs) to eliminate or reduce the tax burden on international businesses. Besides lowering taxes, DTAs offer several other advantages.
Double taxation is a hot topic in the UAE due to the country’s global appeal and investment opportunities. In this article, we explain double taxation and how DTAs benefit businesses in the UAE and worldwide. Now Consultant, a leading tax consultancy firm in Dubai, helps you get the benefits of DTAs to save money from double taxation.
What is Double Taxation?
Double taxation happens when two or more jurisdictions tax the same income. In international taxation, this occurs when different countries tax a single income source. For example, a company based in the UAE makes sales in the USA and pays taxes there. If the company then brings the after-tax earnings back to the UAE and is taxed again, this would be an instance of double taxation on the same income.
Double Taxation Agreements (DTAs)
Double taxation is a frequent issue for international businesses. It happens when income is taxed in the country where it’s generated and then taxed again when it is repatriated to the home country. This can make the overall tax burden for international businesses extremely high, leading to increased costs. To address this issue, countries have signed numerous treaties and agreements, often based on OECD models, to prevent double taxation. These agreements help limit the taxes on international businesses, promoting trade between the participating countries.
In the UAE, the Ministry of Finance (MoF) actively expands its network of double taxation agreements (DTAs). These global partnerships enhance the UAE’s appeal in the business world. Currently, the UAE has 193 Dobule taxation treaties or bilateral investment treaties (BITs) aimed at reducing or exempting taxes on investments and profits. These agreements also ensure that profits can be transferred in freely exchangeable currency, making the UAE an attractive destination for global business.
Benefits of Double Taxation Agreements
Double Taxation Agreements (DTAs) offer the following key benefits as listed below:
- DTAs help align the UAE’s development goals with those of other countries, allowing the UAE to diversify its sources of national income.
- This eliminates the risk of double taxation, reducing the burden of additional taxes and preventing tax evasion.
- These agreements simplify cross-border trade and investment, making international business smoother.
- Double Taxation Agreements (DTAs) safeguard taxpayers from excessive taxation, applying to both direct and indirect taxes, which in turn encourages the free movement of trade and investment.
- DTAs also tackle international taxation challenges and evolve to accommodate shifts in the economic and financial environment, including the emergence of new financial instruments and complexities in transfer pricing.
- DTAs encourage the unrestricted movement of goods, services, and capital across the borders of the UAE.
Foreign Tax Credit In the UAE:
A UAE resident or non-resident with a permanent establishment in the UAE might earn income from foreign sources. To mitigate the effects of double taxation, UAE tax law provides exemptions for certain types of foreign income through participation exemptions and foreign permanent establishment exemptions in the form of foreign tax credits.
The foreign tax credit is designed to reduce or eliminate the risk of double taxation by allowing the taxable person to deduct taxes paid in a foreign country from their UAE tax on the same income.
This credit is available if:
- The tax in the foreign country is imposed and payable to the government there.
- The foreign country’s tax laws are enforceable and mandate payment.
- The foreign tax is calculated based on net income or profit, meaning total income minus deductions.
How Can We Help You?
Double taxation could affect your operations if your business engages in cross-border transactions or a local business serves foreign clients. At Now Consultant, our team of professional tax experts is here to guide you through the complexities of Double Taxation Agreements (DTAs) and help reduce your tax burden.
By utilizing these agreements, we can assist in minimizing your taxes, increasing your revenue, and keeping your business competitive on a global scale. We offer complete support for all your tax and audit needs, ensuring your business grows in the current challenging environment.
