20 Apr, 2023
Covered Tax Agreement Meaning
Posted by: Hector Danilo Pompa Dominique In: Uncategorized
A covered tax agreement refers to an agreement between two countries that governs the taxation of cross-border income. These agreements are also known as tax treaties or double tax treaties. The purpose of a covered tax agreement is to eliminate double taxation, prevent tax evasion, and promote cross-border trade and investment.
The covered tax agreement is designed to prevent double taxation by determining the taxation rights of each country where the income originated. The agreement also includes provisions that limit taxes on the income that arises from one country but is taxed in another country.
For example, a business that operates in the United States and Canada may be subject to double taxation on its profits. However, if the two countries have a covered tax agreement, the business can benefit from reduced tax rates or exemptions on income derived from one or both countries. This allows businesses to avoid paying higher taxes and encourages cross-border investment and trade.
A covered tax agreement also includes provisions that address issues related to tax evasion. The agreement includes measures to prevent taxpayers from shifting profits to low-tax jurisdictions to avoid taxes in a high-tax jurisdiction. This is done by requiring taxpayers to disclose all relevant information about their business activities and by establishing information-sharing systems between the two countries.
Finally, the covered tax agreement seeks to promote cross-border trade and investment by reducing the tax burden on businesses. This is done by providing tax incentives for businesses that invest in the other country. For example, a company that invests in a foreign country may be eligible for tax credits or reduced tax rates.
Overall, the covered tax agreement is an important tool for facilitating cross-border trade and investment. It helps to eliminate double taxation, prevent tax evasion, and promote economic growth. Businesses that engage in cross-border transactions should be aware of these agreements and understand how they can benefit from them.
