Double taxation is the levying of tax by two or more jurisdictions on the same income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes).
Double liability may be mitigated in a number of ways, for example, a jurisdiction may: exempt foreign-source income from tax, exempt foreign-source income from tax if tax had been paid on it in another jurisdiction, or above some benchmark to exclude tax haven jurisdictions, or fully tax the foreign-source income but give a credit for taxes paid on the income in the foreign jurisdiction.
Jurisdictions may enter into tax treaties with other countries, which set out rules to avoid double taxation. These treaties often include arrangements for exchange of information to prevent tax evasion such as when a person claims tax exemption in one country on the basis of non-residence in that country, but then does not declare it as foreign income in the other country; or who claims local tax relief on a foreign tax deduction at source that had not actually happened.
The term "double taxation" can also refer to the taxation of some income or activity twice. For example, corporate profits may be taxed first when earned by the corporation (corporation tax) and again when the profits are distributed to shareholders as a dividend or other distribution (dividend tax).
There are two types of double taxation: jurisdictional double taxation, and economic double taxation. In the first one, when source rule overlaps, tax is imposed by two or more jurisdictions as per their domestic laws in respect of the same transaction, income arises or deemed to arise in their respective jurisdictions. In the latter one, when same transaction, item of income or capital is taxed in two or more states but in hands of different person, double taxation arises.income tax india
International double taxation agreements
It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another country. It could happen that a person will need to pay tax on that income locally and also in the country in which it was made. The stated goals for entering into a treaty often include reduction of double taxation, eliminating tax evasion, and encouraging cross-border trade efficiency. It is generally accepted that tax treaties improve certainty for taxpayers and tax authorities in their international dealings.
A DTA (double tax agreement) may require tax to be levied by the country of residence, and be exempt in the country in which it arises. In other cases, the resident may pay a withholding tax to the country where the income arose, and the taxpayer receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has already been paid. In the former case, the taxpayer would declare himself (in the foreign country) a non-resident. In either case, the DTA may provide that the two taxation authorities exchange information about such declarations. Because of this communication between the countries, they also have a better view on individuals and companies who are trying to avoid or evade tax.Darren Rykers (2009): "A Critical Analysis of how Double Tax Agreements can facilitate Fiscal Avoidance and Evasion"; The Taxpayer and the Lotus, 17 Nov. 2009.
South Africa maintains double taxation agreements (DTAs) with several countries, offering relief mechanisms such as tax credits and exemptions for foreign income.
Individuals ("natural persons") can only be resident for tax purposes in one country at a time. Corporate persons, owning foreign subsidiaries, can be based in one country and simultaneously based in another country: a subsidiary may make substantial income in one country but remit that income (as license fees, for example) to a holding company in another country that has a lower rate of corporation tax. Because of this, the control of unreasonable tax avoidance of corporations becomes more difficult and it requires more investigation when goods, rights and services are transferred.Gio Wiederhold (2013). Valuing Intellectual Capital, Multinationals and Taxhavens; Springer Verlag, 2013, Chap. 4.
Double taxation relief Countries may reduce or avoid double taxation either by providing an exemption from taxation (EM) of foreign-source income or providing a foreign tax credit (FTC) for tax paid on foreign-source income.
The EM method requires the home country to collect the tax on income from foreign sources and remit it to the country where it arose. Tax jurisdiction extends only to the national border. When countries rely on territorial principle as described above, they usually depend on the EM method to relieve double taxation. But the EM method is only common for certain income classes or sources, such as international shipping income.
The FTC method is used by countries that tax (individual or corporate) residents on income, irrespective of where it arises. The FTC method requires the home country to allow credit against domestic tax liability where the person or company pay foreign income tax.
Another solution used is 'relief provision'. They create more favorable terms for multinational companies to (remain) based in countries that use less effective measures than the EM or FTC method.Ernest R. Larkins(2001): Double Tax Relief for Foreign Income: A Comparative Study of Advanced Economies; HeinOnline, 2001. Vol:21:233
European Union
In the European Union, member states have concluded a multilateral agreement on information exchange. This means that they will each report (to their counterparts in each other jurisdiction) a list of those people who have claimed exemption from local taxation on grounds of not being a resident of the state where the income arises. These people should have declared that foreign income in their own country of residence, so any difference suggests tax evasion.
(For a transition period, some states have a separate arrangement.See (17) and (18) of 2003/48/EC above, for a "temporary" period, Austria, Belgium and Luxembourg may apply a withholding tax to non-resident accounts rather than exchange information. They may offer each non-resident account holder the choice of taxation arrangements: either (a) disclosure of information as above, or (b) deduction of local tax on savings interest at source as is the case for residents).
A 2013 study by Business Europe says that double taxation remains a problem for European MNEs and an obstacle for cross border trade and investments. In particular, the problematic areas are limitation in interest deductibility, foreign tax credits, permanent establishment issues and diverging qualifications or interpretations. Germany and Italy have been identified as the Member States in which most double taxation cases have occurred.
Cyprus Cyprus has entered into a broad network of bilateral agreements for the avoidance of double taxation. These agreements allocate taxing rights between Cyprus and the relevant treaty country and may provide relief where the same income would otherwise be taxed in both countries.
Czech Republic – Korea DTA In January 2018, a DTA was signed between Czech Republic and South Korea. The treaty eliminates double taxation between these two countries. In this case, a Korean resident (person or company) that receives dividends from a Czech company needs to balance the Czech dividend withholding tax but also the Czech tax on profits, profits of the company that pays the dividends. The treaty covers taxation of dividends and interest. Under this treaty, dividends that are paid to the other party will be taxed at the maximum of 5% of the total amount of dividend for legal entities as well as for individuals. This treaty reduces from 10% to 5% the limit for taxing paid interest. Copyrights to literature, works of art etc. still remain free from taxation. For patents or trademarks a maximum 10% tax rate is implied.
German taxation avoidance If a foreign citizen is in Germany for less than a relevant 183-day period (approximately six months) and is tax resident (i.e., and paying taxes on his or her salary and benefits) elsewhere, then it may be possible to claim tax relief under a particular Double Tax Treaty. The relevant 183 day period is either 183 days in a calendar year or in any period of 12 months, depending upon the particular treaty involved.
So, for example, the Double Tax Treaty with the UK looks at a period of 183 days in the German tax year (which is the same as the calendar year); thus, a citizen of the UK could work in Germany from 1 September through the following 31 May (9 months) and then claim to be exempt from German tax. As the double taxation avoidance agreements will give the protection of income from some countries.
The Netherlands Different factors such as political and social stability, an educated population, a sophisticated public health and legal system, but most of all the corporate taxation makes the Netherlands a very attractive country of doing business in. The Netherlands levies corporate income tax at a 25 per cent rate. Residents taxpayers are taxed on their worldwide income. Non-residents taxpayers are taxed on their income derived from Dutch sources. There are two sorts of double taxation relief in The Netherlands. Economic double taxation relief is available with regard to proceeds from substantial equity investments under the participation. Juridical double taxation relief is available for resident taxpayers having foreign source income items. In both situations there is a combined system in place which makes difference in active and passive income.Maarten F. de Wilde & Geert T. W. Janssen(2011): The Netherlands: Key practical issues to eliminate double taxation of business income. Erasmus School of Law, 2011.
Hungary Hungary is unique as it is the only non-developing country (the other, developing country being Eritrea, at a flat 2%) that considers all of its citizens tax residents, and provides no personal allowance (such as the US foreign earned income exclusion) – income is taxed from the first penny earned.
While double taxation agreements do provide for relief from double taxation, Hungary only has some 73 of them in place. This means that Hungarian citizens receiving income from the 120-odd countries and territories that Hungary has no treaty with will be taxed by Hungary, regardless of any tax already paid elsewhere.
India India has comprehensive double taxation avoidance agreement with 88 countries, out of which 85 have entered into force. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 (bilateral relief) is for taxpayers who have paid the tax to a country with which India has signed double taxation avoidance agreements, while Section 91 (unilateral relief) provides benefit to tax payers who have paid tax to a country with which India has not signed an agreement. Thus, India gives relief to both kinds of taxpayers. The rates differ from country to country.
Example of double taxation avoidance agreement benefit: Suppose interest on NRI bank deposits attracts 30 per cent tax deduction at source in India. Since India has signed double taxation avoidance agreements with several countries, tax may be deducted at only 10 to 15 per cent instead of 30%.
In case of any conflict between the provisions of the Income Tax Act or double taxation avoidance agreement, the provisions of the latter prevail.