Double taxation occurs when two different international tax authorities impose a similar taxation on the same taxpayer. Furthermore, taxation is applied on the same taxable property and during the same time span. In order to reduce this international double taxation, international authorities draft bilateral or multilateral agreements, called “tax treaties”. Other primary goals of these treaties are to relax the consequences of the double tax payment and to avoid fiscal evasion.
The tax treaties involve the following approaches. In the first case, the right of taxation is granted by the authority of the residence of the taxpayer. In the second case, the right of taxation is given to the authority of the source state. In this latter case, the authority of the residence of the taxpayer has the obligation to included one of the following methods in his treaties. The first one is a tax exemption with progression method. The authority of the residence of the taxpayer first calculates the tax on the overall income; this is both the taxable and exempt income, to establish the average tax rate on income. Afterwards, this average tax rate is applied on the taxable income only. The second method is the foreign tax credit method. Here, the overall income is taxed, but the taxpayer has the right to apply for a tax credit in order to finance the tax paid abroad.
Beside these approaches, the treaties also include some articles to arrange the exchange of information between the tax administrations of both residence and source states. These gleanings handle about the implementation of the aspects of the treaties and the internal legislation concerning the taxable incomes of the treaties.
Furthermore, the treaties enclose several provisions concerning the principle of non-discrimination based on nationality, the regulation of mutual consultation and the restrictions of the functioning of the treaties.
Nevertheless, the tax treaties can become an object of abuse. The treaties might be abused by residents of third States as an approach to profit from tax benefits. This phenomenon is called “Treaty Shopping”. However, this problem is solved in recent treaties by additional “Limitations of benefits articles”. These clauses contain some tests to conclude whether the tax regulations of the treaty can be assigned to the involved taxpayer.
The most important advantage of these tax agreements is that they create economic incentives abroad, like for example investment incentives, job incentives, new business development, etc.
In addition, all countries with which Belgium has developed a tax treaty are summed up in the next link, with the intention of giving an idea of the frequency of these tax treaties.