Double taxation

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Double taxation is the 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 two distinct situations:

• taxation of dividend income without relief or credit for taxes paid by the company paying the dividend on the income from which the dividend is paid. This arises in the so-called "classical" system of corporate taxation, used in the United States.
• 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.

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.^{[citation needed]}

European Union savings taxation

In the European Union, member states have concluded a multilateral agreement on information exchange.^[1] 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.^[2] 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).

Double Taxation Avoidance Agreement Signed By India

India has comprehensive Double Taxation Avoidance Agreement(DTAA ) with 79 countries. What it means is that there are agreed rate of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country.Under Income Tax Act 1961 of India ,there are two provisions -section 90 and section 91 - which provides specific relief to tax payers to save them from DTAA. Section 90 is for tax payer 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 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 is 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.

German Taxation Avoidance

If a foreign citizen is in Germany for less than a relevant 183 day period (approximately six months) and are tax resident (ie., and paying taxes on your salary/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. The Double Tax Treaty with the UK, for example, looks at a period of 183 days in the German tax year (which is the same as the calendar year).

So, for example, you could work in Germany from 1 September through to the following 30 May, a total of 10 months, whilst being tax resident in Germany and could claim to be exempt from German tax under a Double Tax Treaty. This is assuming that during this period you were tax resident in another country and paying taxes on your salary and benefits there.

In some cases, it would be beneficial, from a tax standpoint, to claim exemption under a Double Tax Treaty, i.e., if your other country of tax residence levies much lower taxes. In other cases, whilst the tax liability may be broadly similar (e.g., as with the UK and Germany), claiming exemption under a Double Tax Treaty offers administrative convenience and savings in professional fees (payroll bureau, tax return filing etc). In Germany, if the criteria of a relevant Double Tax Treaty are satisfied then there is no requirement to submit a formal claim for relief; rather, exemption may simply be assumed. The other criteria are that you are paid by a non-German company and that the costs of your employment are borne by a non-German company. You should not, generally, have a problem satisfying these criteria.

If you are receiving a salary for working in Germany and that salary is subject to German tax, i.e., relief under a Double Tax Treaty is not available or desirable, you (as a company) or your employer is obliged to deduct a German withholding tax and pay this over to the German Revenue authorities on a regular basis. You will need to seek professional advice in Germany as to the calculation, regularity and transmission of these payments and contact details can be provided if required.

U.S. Citizens and Resident Aliens Abroad

The US 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. ^[3]

First, an individual who is a bona fide resident of a foreign country or is physically outside the US 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 currently set at $85,700 (2007).^[3]

Second, the US allows a foreign tax credit by which income taxes paid to foreign countries can be offset against US 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).^[3]

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 do not exceed the 100% of the value of the intangible personal property, the courts will allow such multiple taxation.

See also

• Tax equalization
• Tax treaty

Notes

1. ^ Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments
2. ^ 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.
3. ^ ^{a b c} IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad

External links

• IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad
• US Tax Planning: Foreign Earned Income Exclusion