Double Taxation
Double taxation is a tax principle referring to income taxes paid twice on the same source of income. It can occur when income is taxed at both the corporate level and personal level. Double taxation also occurs in international trade or investment when the same income is taxed in two different countries.
Double taxation issues arise when a taxpayer resides in one country but earns income or capital gains in another country. Since most countries have distinct tax laws and systems, the taxpayer can suffer double taxation when two countries levy taxes on the same income.
For example, a person who works and resides in the United States (U.S.), and is taxed on income earned in the U.S., may also be taxed by another country on the same income. This could lead to the same income being taxed twice, by two different countries. The U.S. has a special tax deduction for income earned abroad, which is designed to help alleviate some of the double taxation issues that taxpayers may face.
In another example, a foreign business may be subject to both the local country’s corporate taxes and the taxes of the business’ country of origin. The income of the business could be taxed in both countries, resulting in double taxation.
The potential of double taxation can reduce a country’s ability to attract foreign investment, as the foreign investor would likely need to pay taxes twice on the same income. It can also make international trade more expensive. To combat the possibility of double taxation, many countries have signed double taxation treaties with other countries. For example, the U.S. has double taxation treaties with a host of other countries, which prevent double taxation of certain kinds of income, as well as offering tax credits to avoid double taxation of income earned by certain entities.
The objective of double taxation treaties is to allow business entities operating in two different countries to benefit from reduced taxation and administrative costs. Generally, the treaties provide the framework for countries to negotiate exemptions, reductions or credits in tax payments, reducing the potential for double taxation.
International investment and trade are beneficial for economies and the global marketplace in general. Double taxation can impede such activities, creating inequities for residents and businesses operating in multiple countries. By creating agreements that mitigate double taxation issues, countries are better able to foster beneficial relations as well as create a fairer business environment on the international scale.
