DOUBLE TAX TREATIES

 Double taxation treaties are bilateral agreements between two

countries.

 The aim of these treaties is to eliminate or reduce the impact of double

taxation on individuals and businesses operating across borders.

 Double taxation occurs when a person or business is taxed on the same

income in more than one country.

 Double taxation treaties establish a framework for how different types

of income should be taxed.
 EXAMPLE

Source of
Country Income Taxation without Treaty Taxation with Treaty
Domestic
United States Taxed at US rates Taxed at US rates
Income
Taxed at US rates and may also be Taxed at US rates, with a foreign tax
Indian-source
  subject to Indian tax, leading to credit available for taxes paid in
Income
double taxation. India.
Domestic
India Taxed at Indian rates Taxed at Indian rates
Income
Taxed at Indian rates and may also Taxed at Indian rates, with a foreign
US-source
  be subject to US tax, leading to tax credit available for taxes paid in
Income
double taxation. the US.
 Prevention of double taxation

ROLES OF Promotion of cross-border trade

DOUBLE and investment
TAX
TREATIES Promotion of fairness and
equality
Prevention of tax evasion
 Prevention of Double Taxation

Promotes cross-border investment and

ADVANTAGES trade by reducing tax burden on taxpayers

Reduction of Tax Compliance Costs

 Potential loss of tax revenue

DIS- Complexity and administrative

ADVANTAGES burden

Potential for disputes

CONCLUSION
Double tax treaties play a crucial role in facilitating
international trade and investment by providing relief from
double taxation for taxpayers who have income in multiple
countries. These treaties help to avoid conflicts and promote
cooperation between countries in the area of taxation.
Tax Havens
Tax Havens offer tax benefits without requiring businesses to operate outside of

their borders or to people who live there.

Therefore, places with clearly defined geographic jurisdictions that purposefully

enact laws to facilitate transactions involving people outside of the said jurisdiction

are known as Tax Havens.

Tax Havens are used by both individuals and institutions. Although they both use it

to reduce their tax obligations and the methods are similar, their motivations for

doing so differ just a little, and they carry it out using offshore trusts and companies.
Advantages of Tax
Havens
• The ability of the business to save money and pay fewer taxes is the main advantage of
Tax Havens.

• Saving taxes is a rational and legal process. The investment is secure because there are
no restrictions on the tax implications in the nation, which is known as a Tax Haven.

• The economy also gains significantly from Tax Havens because they promote new
investment, which is good for the whole nation.

• They initiate the growth of both, an individual and the nation.

 Disadvantages of Tax Havens
 Tax Havens might also promote some illegal activity.
 Tax Havens may benefit large corporations, but they are almost always
very advantageous for the local population.
 The parties may be exposed to betrayal because the Tax Havens process
lacks transparency.
 Business deals made in Tax Havens are frequently made up and may
mislead the other party.
How Governments Earn Money From Tax
Havens

 Tax havens are not completely tax-free. They charge a lower tax rate. Low tax
jurisdictions generally charge high customs or import duties to cover the losses in tax
revenues.
 Tax havens may charge a fee for new registration of companies and renewal charges
to be paid every year. Additional fees may also be charged such as license fees. Such
fees and charges would add up to a recurring fixed income for the tax havens.
 The top tax havens currently are the British Virgin Islands, The Netherlands,
Switzerland, Hong Kong, Singapore, Ireland, Mauritius and the United Arab
Emirates (UAE).
TRANSFER PRICING

• Transfer price, also known as transfer cost, is the price at which related

prices transact with each other, such as during the trade of supplies or labor
between departments.

• Transfer prices may be used in transactions between a company and its

subsidiaries, or between divisions of the same company in different countries.
 ILLUSTRATIONS
For example, assume entity A and entity B are two unique segments of Company ABC. Entity A builds and sells

wheels, and entity B assembles and sells bicycles. Entity A may also sell wheels to entity B through an intracompany

transaction. If entity A offers entity B a rate lower than market value, entity B will have a lower cost of goods

sold (COGS) and higher earnings than it otherwise would have. However, doing so would also hurt entity A's

sales revenue.

If, on the other hand, entity A offers entity B a rate higher than market value, then entity A would have higher sales

revenue than it would have if it sold to an external customer. Entity B would have higher COGS and lower profits. In

either situation, one entity benefits while the other is hurt by a transfer price that varies from market value.
Why is transfer pricing used ?

• Transfer prices are used when individual entities of a larger multi-entity firm are
treated and measured as separately run entities.

• While it is common for multi-entity corporations to be consolidated on a financial

reporting basis, they may report each entity separately for tax purposes.

• When these entities report their own profits a transfer price may be necessary for
accounting purposes to determine the costs of the transactions. 
ADVANTAGES

• Transfer prices will usually be equal to or lower than market prices which
will result in cost savings for the entity buying the product or service.

• It increases transparency in intra-entity transactions.

• Finally, the desired product is readily available so supply chain issues can be
mitigated.
DIS-ADVANTAGES
• Since transfer prices are usually equal to, or lower than, market prices, the entity
selling the product is liable to get less revenue.

• Market prices are based on supply-demand relationships, whereas transfer prices

may be subject to other organizational forces.

• Additionally, intra-entity animosity might arise, especially if the transfer price is

appreciably higher or lower than the market price as one of the parties will feel
cheated.
KEY TAKEAWAYS
• Transfer prices that differ from market value will be advantageous for one entity, while
lowering the profits of the other entity.

• Multinational companies can manipulate transfer prices in order to shift profits to low tax
regions.

• To remedy this, regulations enforce an arm's length transaction rule that requires pricing
to be based on similar transactions done between unrelated parties.