What are double taxation agreements?
Double taxation agreements are bilateral agreements between two countries with the objective of preventing the same income from being taxed by both countries, thus avoiding double taxation. Double taxation can occur when a taxpayer has economic activities in two different jurisdictions and both jurisdictions claim the right to tax the income generated.
These agreements seek to eliminate or reduce double taxation through a series of provisions that assign the right to tax certain types of income to one country or another. Double tax treaties address issues related to tax residency, income taxes, wealth taxes and other tax issues.
Some of the objectives and benefits of double tax treaties include:
1. Avoid Double Taxation
Double taxation can occur in two ways: legal double taxation, where two countries claim the right to tax the same income according to their own internal laws, and economic double taxation, which occurs when the same Income is effectively taxed twice. Double taxation agreements seek to avoid these situations.
2. Protect and facilitate International Investment and Trade
These agreements encourage foreign investment and international trade by providing clear rules on how income generated in different jurisdictions will be taxed. This is especially important in a globalized world where companies and people transact across their national borders.
3. Define Tax Residency
They establish criteria to determine the tax residence of a person or entity, which is crucial to determine in which country they should pay taxes.
4. Establish Withholding Rates at Source
They specify the maximum withholding rates at source that a country can apply to certain types of income, such as dividends, interest. This is crucial to ensure that the country of origin of the income does not apply excessively high rates, which could discourage foreign investment.
5. Exchange of Information
Many of these agreements include provisions that allow the exchange of information between the signatory countries. This helps prevent tax evasion and ensures effective enforcement of tax laws.
Double taxation agreements in Andorra with other countries:
In line with the effort that the government has been reinforcing in recent years to give an image of transparency and good conduct, there are currently 11 agreements in force to avoid double taxation, in addition to another 7 already signed pending entry into force. Progressively, the objective of the Government of Andorra is to promote new agreements with more countries:
Country Date entry into force
- Spain 26-02-2016
- France 01-07-2015
- Luxemburg 07-03-2016
- Liechtenstein 21-11-2016
- Portugal 23-04-2017
- United Arab Emirates 01-08-2017
- Malta 27-09-2017
- Cyprus 11-01-2019
- San Marino 31-12-2021
- Hungary 08-12-2022
- Monaco 22-07-2023
- Croatia Pending
- Czech Republic Pending
- Iceland Pending
- Netherlands Pending
- Corea del Sur Pending
- Belgium Pending
- Lithuania Pending
- nbsp;Austria in negotiations
- nbsp;Italy in negotiations
What are agreements for the automatic exchange of tax information?
In addition to the above, the Principality of Andorra is a country adhered to the CRS regulations (Agreements for the automatic exchange of tax information) under Law 19/2016. These agreements for the automatic exchange of tax information are agreements between countries or jurisdictions that establish the obligation to exchange financial information about taxpayers between them. These agreements have the main objective of combating tax evasion and international tax avoidance, allowing tax authorities to access relevant information on the financial accounts of taxpayers abroad. In this case there does not necessarily have to be an agreement to avoid double taxation.
The automatic exchange of tax information is generally based on international standards, such as the Common Reporting Standard (CRS) developed by the Organization for Economic Co-operation and Development (OECD). The CRS establishes procedures and standards for the collection, sharing and protection of taxpayer financial information among participating jurisdictions.
Under these automatic agreements, financial institutions, such as banks and other non-bank financial entities, are required to collect information about the financial accounts of foreign clients and report it to the tax authorities of their home country. In turn, these authorities automatically share this information with the tax authorities of other countries with which there are agreements in force.
These efforts seek to increase tax transparency internationally and reduce the possibility that taxpayers may evade paying taxes by hiding assets abroad. The implementation of these automatic tax information exchange agreements has been supported by the international community as a measure to strengthen the integrity of the global tax system.
The operation of automatic tax information exchange agreements involves several steps and processes. Below is a general outline of how these agreements work:
- International Standards: Countries that wish to participate in the automatic exchange of tax information usually adopt agreed upon international standards. The Common Reporting Standard (CRS) developed by the OECD is a commonly used example. This standard establishes the requirements and procedures for the collection and sharing of financial information.
- Identification of Reportable Accounts: Financial institutions, such as banks and other financial entities, must identify financial accounts that are considered “reportable” according to the criteria established by regulations.
- Information Collection: Financial institutions collect information about reportable accounts, which may include account balances, investment income, and other relevant financial details.
- Reporting to the Local Tax Authority: Financial institutions report the information collected to the local tax authority of the country in which they operate.
- Automatic Exchange of Information: The local tax authority automatically exchanges the collected information with the tax authorities of other participating countries as established in the agreement. This may involve sending standardized reports on a regular basis.
- Reception and Processing of Information by the Foreign Tax Authority: The tax authority of the receiving country processes the information received and uses it for tax purposes, such as verifying taxpayers’ tax returns.
- Application of Tax Legislation: Based on the information received, tax authorities can take measures to ensure compliance with tax obligations, such as collecting outstanding taxes or investigating possible cases of tax evasion.
Tax information agreemens in Andorra with other countries:
Andorra currently has a tax information agreement with the following 73 jurisdictions.
In summary, double tax treaties seek to provide certainty and clarity to taxpayers engaged in international activities, while promoting an environment conducive to cross-border investment and trade. These agreements are important to prevent double taxation, which could discourage economic activity and investment internationally.
And the automatic exchange of tax information facilitates the detection of non-compliant tax returns and promotes transparency in tax matters. Importantly, implementation and specific details may vary depending on bilateral agreements between participating countries and adopted standards.