Double Taxation Agreements

The requirement that an entity or individual pay two separate taxes on the same property for the same purpose and during the same time period. Under Subchapter C of the INTERNAL REVENUE CODE, the federal government imposes double taxation on corporations by taxing both the profits received by the corporation and the earnings distributed to shareholders of the corporation through stock dividends.

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 the taxing jurisdictions do not follow a common principle of taxation. One taxing jurisdiction might tax income at its source, while others will tax income based on the residence or nationality of the recipient. Indeed, a jurisdiction might 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 that is 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 also might 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 that double taxation presents 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, which the United States and the United Kingdom concluded 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 that derives from multistate sources.