With tariffs rarely out of the news, it’s easy to forget that direct taxes – both corporate and personal – can have a bigger impact on international business. In this article, Andrew Fitton, Corporate Tax Partner at UNW, explains how Tax Treaties can prevent businesses from being taxed twice and support smoother international trade.
Taxed Twice
Almost every country has its own system of income tax and corporation tax. When you or your business operates, invests, or sells goods overseas, that country may seek to apply its own income tax or corporation tax system – on top of UK tax – to take a share of your profits.
In theory, the UK tax system recognises that income and gains shouldn’t be taxed twice. In practice, however, domestic reliefs to prevent double taxation are fragmented, complex, and often fall short of dealing with overseas tax regimes from more than one hundred different countries. As a result, British taxpayers engaging in cross-border business face a real risk of being taxed twice.
International Agreement
Double taxation has long been recognised as a barrier to international trade and cooperation. To overcome this, countries began entering into Tax Treaties with one another almost 250 years ago.
A Tax Treaty sets out a mutual agreement between two countries on how each will modify its domestic tax rules to relieve – partly or wholly – taxpayers from paying tax twice on the same income or gain.
Today, the UK leads the world in the number of Tax Treaties it has in place, reflecting our status as a global trading nation.
Tax Treaties to the Rescue
When planning international activities or investments, every taxpayer should ask themselves two key questions:
- What income tax or corporation tax will be payable overseas, and how is it payable?
- What equivalent tax will arise in the UK, and how is it payable?
This analysis often reveals that the overall tax burden could be higher than expected – prompting taxpayers to look for relief under a Tax Treaty.
For example, in the absence of a Tax Treaty, the US applies a 30% withholding tax on all qualifying payments made from the US. However, under the UK-US Tax Treaty, this can be reduced – in some cases to a much lower rate, or even to nil – provided the conditions for relief are met.
Practicalities
While Tax Treaties set out the broad principles for mitigating double taxation, each country administers treaty benefits differently. This adds a layer of complexity, as every jurisdiction has its own procedures, rules, and specialists for applying them.
Failure to follow the correct process can mean long delays in obtaining relief – or, worse still, no relief at all. In some cases, taxpayers face significant costs trying to recover overpaid or withheld tax from another jurisdiction.
It’s also worth remembering that Tax Treaties are international legal agreements, written in the formal language of diplomacy – with terms such as Contracting State, Competent Authority, Entitlement to Benefits, and Non-Discrimination. These agreements have been subject to decades of negotiation, interpretation, and case law, both in the UK and internationally. Unsurprisingly, taxpayers unfamiliar with them can find the detail confusing.
In fact, a few years ago, the European Court of Justice found that the Kingdom of Denmark had misapplied a number of its own Tax Treaties – an error that ultimately cost Danish taxpayers around 12 billion Danish Kroner.
How UNW Can Help
North East businesses are increasingly exporting their knowledge, skills, products, and services – and attracting international investment keen to benefit from our region’s people, assets, and culture.
In doing so, questions about double taxation and the application of Tax Treaties often arise, regarding:
- Mitigating foreign withholding tax on interest, dividends or royalties
- Determining tax residency and resolving dual residency conflicts
- Avoiding double taxation on business profits
- Clarifying taxation of employment income
- Determining taxing rights for capital gains
- Securing relief for foreign tax credits
- Understanding the taxation of directors, artists, and sportspersons working internationally
- Applying the Mutual Agreement Procedure
UNW’s tax specialists have extensive experience reviewing international business arrangements, interpreting the relevant Tax Treaties, and ensuring North East businesses – and their people – can pursue their international ambitions with confidence.
If you are already trading overseas, attracting international investment, or considering doing so, we can help. Contact Andrew Fitton, Corporate and International Tax Partner, or your usual UNW tax contact for expert advice and support.
