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Double taxation is defined as the levying of tax by two or more jurisdictions on the same declared income, asset, or financial transaction. Double taxation can occur when income is taxed both at the corporate level and at the individual level. Another time when we can see double taxation is when the same income is taxed in two different countries.
Mechanisms for relief of double taxation generally occurs in three forms:
1. Unilateral Measures under Domestic Legislation
2. Bilateral Agreements between Countries
3. International Tax Planning
Unilateral Relief by Country of Residence
Under Domestic Legislation, relief is generally in the form of Tax Credits or Exemptions. Relief by Foreign Tax Credit requires the foreign income to be included in the tax base but then allows a credit for the taxes paid in the Foreign Jurisdiction.
If the tax rate in the home Country (meaning the Country of residence) is higher than the tax rate paid to the foreign country an additional amount would be owed. On the other hand, if the tax rate in the foreign country were higher than the home country, a few countries would allow this amount to offset some of the domestic taxes and others would not. In either event, most of the double taxation would be eliminated under unilateral measures of the Country of Residence.
Unilateral relief is viewed as being consistent with public tax policy of Capital Export Neutrality; which is, from an investor’s perspective, where the choice between foreign or domestic investment is not influenced by tax considerations. In practice however, this method falls short as compared to relief from bilateral measures particularly when the tax rate in the foreign country is higher than the tax rate at home.
There is yet another form of unilateral tax relief that would exempt foreign income from the tax base altogether. Under this form of relief, the home country allows the foreign jurisdiction the right to tax the income. Generally, if this method is used it will affect the tax treatment of other items of income. The exemption is applicable to certain types of income that bear some resemblance to the tax that otherwise would be owed in the country of Residence. This method of relief is viewed as consistent with Capital Import Neutrality. In other words, foreign income would not be subjected to tax at a higher rate than at home to discourage foreign investment.
If you find yourself in a situation where double taxation may be a factor, it is important to seek the advice of a qualified professional. Kaufman Accounting provides tax compliance and consulting services to business and individuals with expertise in international taxation. Contact our offices today for a consultation!
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