In today’s digital economy, individuals often find themselves earning income in one country while residing in another, leading to potential issues of double taxation. Double taxation can occur when two countries impose taxes on the same income based on residency and source rules. To address this issue, double taxation avoidance agreements (DTAAs) were created to eliminate instances of double taxation. However, multinational corporations (MNCs) have been utilizing jurisdictions with favorable tax treaties to minimize taxes on profits and capital gains, gaining a competitive advantage in the global marketplace.
For example, if a company in India provides services to a company in UAE, the income would be taxed in both countries without a DTAA in place. However, with a DTAA between India and UAE, the concept of taxing business profits in a foreign jurisdiction only applies if a permanent establishment is created in that jurisdiction, reducing the scope of taxation for companies without a presence in the foreign country. This alleviates the issue of double taxation and provides a more favorable tax environment for companies engaging in cross-border transactions.
In cross-border transactions with UAE sourced income, withholding tax rates vary depending on the country involved. For transactions with Singapore and India, the rates range from five to 12.5 percent, while the UAE-Mauritius DTAA exempts taxation on state-sourced dividends and interest from Mauritius. Although DTAAs generally provide a beneficial tax regime, domestic laws stipulate that the provisions of DTAAs apply only if they are more beneficial. This can lead to situations where the domestic tax regime, such as the UAE’s zero percent withholding tax rate, may be more favorable than the provisions of DTAAs.
While routing transactions through tax havens and engaging in treaty shopping has been common practice for MNCs, governments and organizations like the OECD are taking measures to prevent abuse of tax treaties. Proposed amendments, such as those in the India-Mauritius DTAA, aim to introduce stringent anti-abuse provisions to ensure that the principle purpose of a transaction is not solely for obtaining a tax benefit. This reflects the ongoing efforts to create a more transparent tax environment and prevent treaty shopping and abuse of tax treaties.
In conclusion, DTAAs have become a strategic tool for MNCs to gain a competitive advantage in the global marketplace by eliminating double taxation and creating tax-efficient structures. With borders blurring and markets expanding globally, the strategic utilization of DTAAs has become essential for businesses looking to navigate complex tax environments. As government authorities and international organizations continue to update and amend tax treaties, companies must stay informed and compliant to ensure a transparent and efficient tax landscape.
