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A Suitable Agreement Is Needed To Avoid Double Taxation

The term double taxation refers to the practice of taxation of the same earning at two different levels. For example, tax imposition at the corporate level and then again at the shareholder dividend level. You can understand it by one more example as- taxation of foreign investments in the country and then it is imposed upon repartition. Simply, it denotes to the imposition of two or more taxes on the same income, asset, or financial transaction. Many countries have agreed to prevent all forms of double taxation.

Double taxation refers to two different situations:       

  1. Taxation of dividend income without relief for taxes paid by the firm paying the dividend on the earning. In the United Stated, this system is called “classical” system.
  2. Taxation by two or more countries of the same income, asset or transaction such as income paid by a company of one country to a resident of a different country. There are some tax treaties between countries to mitigate the occurrence of double liability.
There is a common misconception about the double taxation that reads as the income earned by a company is taxed before it is distributed, and any money paid to the individual is taxed again. Generally, it occurs because companies are considered as separate legal entities from their shareholders. When corporations pay out profits and dividends to the shareholders, those dividend payments incur income tax liabilities for the shareholders that receive them, although the earnings provided to them had already been taxed at the corporate level. In case, the corporation declares dividend then income is subject to double taxation. It is taxable income to the corporation.

Double taxation can occur within a single country. In the United States a person may legally possess only a single domicile, and when he/she dies in other state then intangible personal property is taxed by each state by each state. As long as the total of taxes does not exceed the 100 percent of the value of the tangible personal wealth or property, the courts will allow such multiple taxations to the property holders.