In a recent article, I wrote about the relationship between double taxation treaties and the ability to attract FDI. The reasons countries sign tax treaties vary – eliminating double taxation gives taxpayers, and therefore investors, peace of mind when looking at different jurisdictions in which to invest. Tax treaties also give a particular country a stamp, which also leads to an increase in FDI.
The process of signing a tax treaty is extremely lengthy. After a country has decided which contracting party it wants, a series of negotiations begins between the two countries before the treaty is finally ratified. This process can take years and if you multiply this period by the number of contracts a country wants to sign, the result is an extremely lengthy process, the fruits of which will only reap in decades.
Unilateral tax relief exempts taxpayers from double taxation even without a double taxation agreement. Countries have introduced such provisions into their national tax law to give taxpayers the same tax relief as a double taxation treaty without reciprocity in the case of a ratified double taxation treaty.
While a jurisdiction may not be very interested in providing relief to taxpayers for taxpayers resident in or from another country that does not provide the same mutual relief, it offers a number of benefits. Firstly, given that the elimination of double taxation will give taxpayers peace of mind, the introduction of unilateral tax breaks will attract more investment into the country as investors will not deal with double taxation issues whether or not a treaty is in place.
Furthermore, the introduction of unilateral relief provisions into a country’s domestic legislation does not require the years and sometimes decades to negotiate a number of treaties with different countries, but provides that benefit instantly without the need for the approval or ratification of other countries in the parliament of the other countries.
As mentioned above, and also in my April article entitled “The Relationship Between Double Taxation Treaties and Foreign Direct Investment”, double taxation treaties not only provide double taxation exemption, but offer a number of other benefits. These include, but are not limited to, combating tax avoidance and tax evasion, provisions on the exchange of information, eliminating discrimination and providing dispute settlement mechanisms. The introduction of unilateral relief provisions should not be seen as an alternative to negotiating and ratifying tax treaties with a number of other jurisdictions, but as an accompanying solution by enabling taxpayers to immediately eliminate double taxation regardless of double taxation in the country from which the income comes or the taxpayer is domiciled.
The author is co-founder of Seed, a research-oriented, internationally oriented consulting company based in Malta, Europe.
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