when an individual or business invests in a foreign country the issue of which country should tax the investor s earnings may arise both countries the source country and the residence country may enter into a tax treaty to agree on which country should tax the investment income to prevent the same income from getting taxed twice 
the source country is the country that hosts the inward investment the source country is also sometimes referred to as the capital importing country the residence country is the investor s country of residence the residence country is also sometimes referred to as the capital exporting country to avoid double taxation tax treaties may follow one of two models the organization for economic co operation and development oecd model and the united nations un model convention 3 4 oecd tax treaty model vs un tax treaty modelthe organization for economic co operation and development oecd is a group of 37 countries with a drive to promote world trade and economic progress 5 6 the oecd tax convention on income and on capital is more favorable to capital exporting countries than capital importing countries it requires the source country to give up some or all of its tax on certain categories of income earned by residents of the other treaty country 7 the two involved countries will benefit from such an agreement if the flow of trade and investment between the two countries is reasonably equal and the residence country taxes any income exempted by the source country the second tax treaty model is formally referred to as the united nations model double taxation convention between developed and developing countries the un is an international organization that seeks to increase political and economic cooperation amongst its member countries a treaty that follows the un s model gives favorable taxing rights to the foreign country of investment typically this favorable taxing scheme benefits developing countries receiving inward investment it gives the source country increased taxing rights over the business income of non residents compared to the oecd model convention 3 the united nations model convention draws heavily from the oecd model convention 8 withholding taxes policyone of the most important aspects of a tax treaty is the treaty s policy on withholding taxes because it determines how much tax is levied on any income earned interest and dividends from securities owned by a non resident 9 for example if a tax treaty between country a and country b determines that their bilateral withholding tax on dividends is 10 then country a will tax dividend payments that are going to country b at a rate of 10 and vice versa the u s has tax treaties with multiple countries that help to reduce or eliminate the tax paid by residents of foreign countries these reduced rates and exemptions vary among countries and specific items of income under these same treaties residents or citizens of the u s are taxed at a reduced rate or are exempt from foreign taxes on certain items of income they receive from sources within foreign countries tax treaties are said to be reciprocal because they apply in both treaty countries income tax treaties typically include a clause referred to as a saving clause that is intended to prevent residents of the u s from taking advantage of certain parts of the tax treaty in order to avoid taxation of a domestic source of income for individuals that are residents of countries that do not have tax treaties with the u s any source of income that is earned within the u s is taxed in the same way and at the same rates shown in the instructions for the applicable u s tax return for individuals who are residents of the u s it is important to keep in mind that some individual states within the u s do not honor the provisions of tax treaties 10 