Denisa Palkova
Tax Consultant, Kreston Slovakia
Denisa Palkova is a Tax Consultant at Kreston Slovakia, equipped with a Master’s degree in Auditing and Accounting and a Bachelor’s degree in Accounting from Ekonomická univerzita v Bratislave. With over five years of experience in the accounting field, Denisa has progressed through roles at respected firms such as V4 Group Slovensko, Crowe, and Johnson Controls. Based in Bratislava since November 2021, she provides expert advice on tax planning and compliance.
The importance of double taxation treaties
April 19, 2024
Double taxation treaties are an important tool in international taxation. As defined in the OECD Model Tax Convention on Income and Capital, international double taxation can be described as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods. Without a solution, this creates problems for trading goods and services, the movement of capital and the movement of individuals between countries. These issues are widely recognized as obstacles that would impede the development of economic relations between countries.
What challenges does double taxation cause?
Double taxation of income and capital would add a significant challenge for taxpayers navigating the complexities of global commerce. The benefits of entering new markets and trading or investing across borders would be highly impacted by the burden of being taxed twice on the same profits or gains in different countries. Not only would this affect businesses and individuals, it would also disrupt the smooth flow of cross-border trade and investment in general. Within this complex fiscal landscape, a solution emerges – Double Taxation Treaties (DTTs).
What are double taxation treaties?
DTTs, also known as Double Tax Treaties or Tax Treaties, are bilateral or multilateral agreements between two or more countries designed to alleviate the issue of double taxation. Allocation of taxing rights of signatory nations is the main objective of these treaties, aiming to prevent individuals or businesses being taxed twice on the same income in different jurisdictions. Essentially, they lay out clear rules about how taxes should be imposed and which country has the primary right to tax specific types of income (e.g. the country of the source of the income or the country of residence of the taxpayer), such as dividends, interest, royalties and capital gains. DTTs ensure fairness and clarity in tax matters for businesses and individuals operating across borders and by doing so foster global trade and growth.
DTTs also create conditions for cooperation between countries in the tax field to limit tax evasion on an international scale and determine the principles of equal treatment for taxpayers of one contracting state in another contracting state (i.e. non-discrimination). They include provisions for the exchange of information between tax authorities, helping combat tax evasion and ensuring transparency in financial matters. This exchange of information amplifies the enforcement capabilities of nations, preventing individuals or entities from exploiting loopholes to evade taxes, for example by shifting profits to low-tax jurisdictions.
Are Double Taxation Treaties the only solution?
Despite the many benefits of DTTs, challenges in tax matters persist. DTTs may produce varying interpretations leading to the exploitation of loopholes and opportunities for abuse. Moreover, the rapid evolution of global business models often outpaces the capability of existing legislative frameworks, therefore DTTs need regular updates and revisions to ensure their relevance and effectiveness.
Conclusion
The significance of double taxation treaties in providing global economic stability and smooth international trade to drive global growth cannot be overstated. DTTs, along with being a tool for the prevention of double taxation, serve also as a bridge for the encouragement of international trade and cooperation between nations as well as an essential instrument in combating tax evasion. In the ever-changing economic world, DTTs remain a pivotal tool in maintaining tax harmonisation, nonetheless, regular evaluations of the treaties are imperative to ensure their continued relevance.
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