- Double taxation
Taxation An aspect of fiscal policy
Double taxation is the systematic imposition of two or more taxes 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). It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country. The double liability is often mitigated by tax treaties between countries.
The term 'double taxation' is additionally used, pariticulary in the USA, to refer to the fact that Corporation profits are taxed and the shareholders of the corporation are (usually) subject to further personal taxation when they receive dividends or distributions of those profits.
- 1 International double taxation agreements
- 2 European Union savings taxation
- 3 India
- 4 United States
- 5 'Double taxation' of Corporate dividends
- 6 See also
- 7 Notes
- 8 External links
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. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make bilateral double taxation agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises. In the remaining cases, the country where the gain arises deducts taxation at source ("withholding tax") and the taxpayer receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has already been paid. To do this, the taxpayer must declare himself (in the foreign country) to be non-resident there. So the second aspect of the agreement is that the two taxation authorities exchange information about such declarations, and so may investigate any anomalies that might indicate tax evasion.
European Union savings taxation
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 savers who have claimed exemption from local taxation on grounds of not being a resident of the state where the income arises. These savers 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. 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).
Cyprus double tax treaties
Cyprus has concluded 34 double tax treaties which apply to 40 countries. The main purpose of these treaties is the avoidance of double taxation on income earned in any of these countries. Under these agreements, a credit is usually allowed against the tax levied by the country in which the taxpayer resides for taxes levied in the other treaty country and as a result the tax payer pays no more than the higher of the two rates. Further, some treaties provide for tax sparing credits whereby the tax credit allowed is not only with respect to tax actually paid in the other treaty country but also from tax which would have been otherwise payable had it not been for incentive measures in that other country which result in exemption or reduction of tax.
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 (whilst still paying the UK tax).
India has comprehensive Double Taxation Avoidance Agreements (DTAA ) with 79 countries. 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 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kind of taxpayers.
A large number of foreign institutional investors who trade on the Indian stock markets operate from Mauritius. According to the tax treaty between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether.
The Indian and Cypriot tax treaty is the only other such Indian treaty to provide for the same beneficial treatment of capital gains.
It must be noted that India has and is making attempts to revise both the Mauritius and Cyprus tax treaties to eliminate this favourable treatment of capital gains tax. The Indian government periodically check for its DTAA with many countries and come up with amendments.
U.S. citizens and resident aliens abroad
The U.S. requires its citizens to file tax returns reporting their earnings wherever they reside. However, there are some measures designed to reduce the international double taxation that results from this requirement.
First, an individual who is a bona fide resident of a foreign country or is physically outside the United States for an extended time is entitled to an exclusion (exemption) of part or all of their earned income (i.e. personal service income, as distinguished from income from capital or investments.) That exemption is $91,400 for 2009, pro-rated. (See IRS form 2555.)
Second, the United States allows a foreign tax credit by which income taxes paid to foreign countries can be offset against U.S. income tax liability attributable to foreign income. This can be a complex issue that often requires the services of a tax advisor. The foreign tax credit is not allowed for taxes paid on earned income that is excluded under the rules described in the preceding paragraph (i.e. no double dipping).
Double taxation within the United States
Double taxation can also happen within a single country. This typically happens when subnational jurisdictions have taxation powers, and jurisdictions have competing claims. In the United States a person may legally have only a single domicile. However, when a person dies different states may each claim that the person was domiciled in that state. Intangible personal property may then be taxed by each state making a claim. In the absence of specific laws prohibiting multiple taxation, and as long as the total of taxes does not exceed 100% of the value of the tangible personal property, the courts will allow such multiple taxation.
'Double taxation' of Corporate dividends
Some comentators[who?] assert that shareholders are often also subject to double taxation, as the Corporation they own is taxed on its profit as a legal entity and they are taxed again at the individual level when they receive distributions. The opposite of this is called pass-through taxation, where a business entity is not taxed as a legal entity; instead, its profits are taxed at the individual level after they have paid distributions. Business entities which benefit from pass-through taxation include S-Corporations, LLCs, and partnerships, and this is a significant advantage over other business forms which are subject to double taxation.
- ^ Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments
- ^ See (17) and (18) of above, for a "temporary" period, Austria, Belgium and Luxembourg may apply a withholding tax to non-resident accounts rather than exchange information.
- ^ Osys Global Corporate Consultants Official Website
- ^ a b c IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad
- IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad
- US Tax Planning: Foreign Earned Income Exclusion
- Countries having Double Taxation Avoidance Agreement (DTAA) with Government of the Republic of India
- Detailed information including Divided %, Interest % and Royalty % with DTAA countries
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