Double taxation occurs when the same transaction or income source is subject to two or more taxing authorities. This can occur within a single country, when independent governmental units have the power to tax a single transaction or source of income, or may result when different sovereign states impose separate taxes, in which case it is called international double taxation. The source of the double taxation problem is that taxing jurisdictions do not follow a common principle of taxation. One taxing jurisdiction may tax income at its source, while others will tax income based on the residence or nationality of the recipient. Indeed, a jurisdiction may use all three of these basic approaches in imposing taxes.
The consequence of double taxation is to tax certain activities at a higher rate than similar activity located solely within a taxing jurisdiction. This leads to unnecessary relocation of economic activity in order to lower the incidence of taxation, or other, more objectionable forms of tax avoidance. Businesses especially have had the most trouble with double taxation, but individuals may also find it uneconomic to work abroad if all of their income is subject to taxation by two authorities, regardless of the origin of the income.
The problems presented by double taxation have long been recognized, and with the growing integration of domestic economies into a world economy, countries have undertaken several measures to reduce the problem of double taxation. An individual country can offer tax credits for foreign taxes paid or outright exemptions from taxation of foreign-source income.
Treaties have also been negotiated between states to address the double taxation problem. One of the most important of these agreements was the International Tax Convention concluded by the United States and the United Kingdom in 1946. It has served as a model for several other tax conventions. Under the tax convention between the United States and the United Kingdom, for example, exemptions from taxes, credits for taxes paid, and reduction or equalization of overall tax rates are all utilized to reduce double taxation. Within the United States, many states have worked to prevent the incidence of taxation from reaching uneconomic levels on income derived from multistate sources.
