Taxes covered: Overview, definition and example
What is "taxes covered"?
"Taxes covered" refers to the specific types of taxes that are included within the scope of a contract, agreement, or legal provision. This term is often used in tax treaties, business contracts, and financial agreements to clarify which taxes are applicable, who is responsible for paying them, and how they should be handled. These taxes may include income tax, value-added tax (VAT), corporate tax, withholding tax, property tax, or other levies imposed by a government authority.
For example, a contract between an international company and a local supplier may specify that VAT and import duties are the "taxes covered", meaning the parties must determine responsibility for these taxes when invoicing and making payments.
Why is "taxes covered" important?
Clarifying "taxes covered" in an agreement is important because it helps prevent disputes over tax liabilities and ensures compliance with tax laws. Clearly defining which taxes apply and who is responsible for paying them helps businesses manage costs, avoid double taxation, and maintain transparent financial arrangements.
For businesses engaged in cross-border transactions, tax treaties often specify which taxes are covered to avoid double taxation on income earned in multiple jurisdictions. Understanding "taxes covered" is essential for tax planning, contract negotiations, and compliance with local and international tax regulations.
Understanding "taxes covered" through an example
Imagine a U.S.-based technology company enters into a contract with a European distributor. The agreement includes a "taxes covered" clause specifying that the European distributor is responsible for any VAT applied to sales within the EU, while the U.S. company is responsible for corporate taxes in its home country. This clause ensures that both parties clearly understand their tax obligations.
In another example, a construction firm signs a contract with a government agency for an infrastructure project. The contract states that all local property and payroll taxes are included in the "taxes covered" section, meaning the firm must account for these taxes in its pricing and financial planning.
An example of a "taxes covered" clause
Here’s how a "taxes covered" clause might appear in a contract:
“For the purposes of this Agreement, ‘Taxes Covered’ shall include but not be limited to income tax, corporate tax, withholding tax, value-added tax (VAT), sales tax, and any other levies imposed by applicable tax authorities. Each Party shall be responsible for its respective tax obligations unless otherwise agreed in writing.”
Conclusion
Defining "taxes covered" in a contract ensures clarity on tax obligations, reducing the risk of disputes and non-compliance. For businesses, this helps with cost management, tax planning, and legal certainty in both domestic and international transactions. Including a clear "taxes covered" clause in agreements allows parties to allocate tax responsibilities effectively and ensures compliance with relevant tax regulations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.