Double taxation

Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). Double liability is mitigated in a number of ways, for example:

Another approach is for the jurisdictions affected to enter into a tax treaty which sets out rules to avoid double taxation.

The term "double taxation" can also refer to the double taxation of some income or activity. For example, in some jurisdictions, corporate profits are taxed twice, once when earned by the corporation and again when the profits are distributed to shareholders as a dividend or other distribution. The term is not usually used to refer to the taxation of the same income by different levels of government, such as by federal, state and local authorities.

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. While individuals, or natural persons can have only one residence at a time; corporate persons, owning foreign subsidiaries, can be simultaneously resident in multiple countries. Control of unreasonable tax avoidance of corporations becomes more difficult and requires investigation of transfer pricing set for transfer of goods, intellectual property rights, and services, among its subsidiaries.

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