Double Taxation for Normal People

Have you ever felt like you are being taxed by different countries for the same thing?  Paying tax is even worse when you have to pay it twice! Double taxation occurs when the same income is taxed twice, for example, both in the country where you earn money and the country in which you live. Luckily, where a double taxation agreement (DTA) is entered into between countries, this can prevent the same income or assets from being taxed twice for the same individual (natural person) or company (legal entity).

Where does double taxation happen?

With the increased globalisation of trade, access to many job markets internationally, rather than purely in your home country, makes this discussion even more important. If you are employed or investing internationally, you may be earning your money in one country but living in another. This creates a breeding ground for situations where double taxation may apply.

Typical situations where this applies:

• Companies operating across borders;
• Individuals in expatriate contracts;
• Digital nomads earning income from international clients; and
• Investors earning dividends from foreign stocks.

Types of double taxation

Two dominant types of double taxation exist:

1. Juridical double taxation: This occurs when the same income or capital is taxed in the hands of the same person by more than one jurisdiction. For example, when a person residing in Country A earns income in Country B, both countries might tax that same income.
2. Economic double taxation: This happens when the same income is taxed in the hands of different taxpayers. The most common example is corporate profits, which are first taxed at the company level as corporate income tax and then taxed again when distributed to shareholders as dividends.

Unfortunately for the taxpayer, economic double taxation is usually seem as just tough luck, while tax authorities generally provide relief against juridical double taxation.

So how can juridical double taxation be avoided?

Many countries have a number of double taxation agreements in place which prevent this from occurring, by including the following:

1. Tax exemption method: This approach can include both full and partial exemptions. In a full exemption system, the residence state (home country) completely exempts all foreign-sourced income from taxation. In a partial exemption system, only certain categories of foreign income are exempted, while others remain taxable. For example, a country might exempt foreign-earned active business income but still tax passive income like interest or royalties. Some countries also implement partial exemptions by excluding only a percentage (such as 95%) of certain foreign income from the domestic tax base.
2. Tax credit method: This allows taxpayers to deduct the tax paid to foreign jurisdictions from their tax liability in their home country. When domestic tax on the same income exceeds foreign tax paid, the taxpayer pays the difference to their home country. When foreign tax paid equals or exceeds domestic tax due, no additional tax is owed to the home country, though excess foreign tax credits typically cannot be refunded. This method ensures income is effectively taxed at the higher of the two rates.

How to avoid paying in more than one country:

• Check if your home country has an existing Double Taxation Agreement with the country in which you earn your income.
• Keep an updated recorded of where you pay foreign taxes.
• Make sure that you properly understand your residency status, as different tax rules apply depending on whether you are a resident or non-resident in a country.
• If a company operation, operations must be structured in a way to prevent unnecessary tax liabilities.
• Consult a tax professional to ensure you are not paying more tax than you should be.

Double taxation agreements generally favour the taxpayer if used optimally. This means that more of your hard-earned money is kept by you. Thus, it becomes important to be well informed of international tax law especially if you are dealing with international income. Having a proper understanding can save you thousands, so it is always advisable to do your research or speak to an expert. Get in touch if you’d like to chat further.