Intuit Academy Tax Practice Exam

Question: 1 / 400

What is the main purpose of a tax treaty?

To restrict citizens' investments abroad

To outline how income is taxed in two countries and prevent double taxation

The primary purpose of a tax treaty is to outline how income is taxed in two countries and to prevent double taxation. Tax treaties are agreements between two countries that provide a framework for determining which of the two has the right to tax specific types of income. This is essential to facilitate trade and investment between the nations by eliminating the risk that a taxpayer would have to pay tax on the same income in both countries, which could discourage cross-border transactions.

When individuals or corporations earn income that is taxable in both countries, the tax treaty helps clarify the allocation of taxing rights, often allowing the taxpayer to obtain a tax credit or an exemption to avoid being taxed twice. In essence, tax treaties promote international economic cooperation by creating a more predictable tax environment for individuals and businesses engaged in international activities.

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To ensure that citizens pay taxes in their home country only

To limit the amount of taxes paid by corporations

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