Double taxation occurs when a taxpayer is taxed twice for the same asset or income. This happens when taxing jurisdictions overlap and a transaction, asset, or income amount is subject to taxation in both jurisdictions. When an individual must deal with double taxation, he or she may lose a significant portion of income. In some cases, this may cause the double-taxed individual to experience a lowered standard of living. Corporations deal with double taxation too, as a corporation pays taxes on its earnings only to have its shareholders taxed once more. Double tax treaties comprise of agreements between two countries, which, by eliminating international double taxation, promote exchange of goods, persons, services and investment of capital. These are bilateral economic agreements where the countries concerned evaluate the sacrifices and advantages which the treaty brings for each contracting state, including tax forgone and compensating economic advantages.
Double Tax Avoidance Agreements & Taxation
Meaning of Treaty:
In layman’s language, a treaty is a formally concluded agreement between two or more independent nations. The Oxford Companion to Law defines a treaty as “an international agreement, normally in written form, passing under various titles (treaty, convention, protocol, covenant, charter, pact, statute, act, declaration, concordat, exchange of notes, agreed minute, memorandum of agreement) concluded between two or more states, on subject of international law intended to create rights and obligations between them and governed by international law. Examples of treaty include CTBT, Vienna Convention, and Tax Treaty such as DTAA etc.
The Double Tax Avoidance Agreement (DTAA)
The Double Tax Avoidance Agreement (DTAA) is essentially a bilateral agreement entered into between two countries. The basic objective is to promote and foster economic trade and investment between two Countries by avoiding double taxation.
Objective of double taxation treaties:
International double taxation has adverse effects on the trade and services and on movement of capital and people. Taxation of the same income by two or more countries would constitute a prohibitive burden on the tax-payer. The domestic laws of most countries, including India, mitigate this difficulty by affording unilateral relief in respect of such doubly taxed income (Section 91 of the Income Tax Act). But as this is not a satisfactory solution in view of the divergence in the rules for determining sources of income in various countries, the tax treaties try to remove tax obstacles that inhibit trade and services and movement of capital and persons between the countries concerned. It helps in improving the general investment climate.
The need and purpose of tax treaties has been summarized by the OECD in the ‘Model Tax Convention on Income and on Capital’ in the following words: It is desirable to clarify, standardize, and confirm the fiscal situation of taxpayers who are engaged, industrial, financial, or any other activities in other countries through the application by all countries of common solutions to identical cases of double taxation. The objectives of double taxation avoidance agreements can be enumerated in the following words: First, they help in avoiding and alleviating the adverse burden of international double taxation, by a) laying down rules for division of revenue between two countries; b) exempting certain incomes from tax in either country ;
c) reducing the applicable rates of tax on certain incomes taxable in either countries
Secondly, and equally importantly tax treaties help a taxpayer of one country to know with greater certainty the potential limits of his tax liabilities in the other country.
The double tax treaties (also called Double Taxation Avoidance Agreements or “DTAA”) are negotiated under public international law and governed by the principles laid down under the Vienna Convention...
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