Double Taxation

Definition

Double taxation is a taxation related principle, which refers to income taxes, which are paid two times on the same income source. The reason why double taxation is applied is because companies are taken as separate legal organizations than their shareholders. Companies have to make payments in the form of taxes on their annual incomes, like individuals. When the companies make payments as part of dividends to its shareholders, the dividend related payments attract income tax for the receiving shareholders, even when the incomes that were used for paying cash in the form of dividends had already been taxed at corporate level.

Individuals who are wealthy or well-off can enjoy a good life using the dividends received by them as part of the huge number of stocks held by them and by paying almost zero or no taxes on their earnings. However, there are many experts who feel that paying dividend is a voluntary action taken by a company and therefore, their income shouldn’t be double taxed unless and until they opt for making payments, in the form of dividends, to their shareholders.

Double Taxation on International Activity

In few cases, double taxation is charged as a result of an international activity. An individual who has business related dealings in one particular country and if he/she is a resident of another country, then in such a case, the individual may have to make tax payments on gains from business in his/her own country apart from the country in which the business is conducted or operates. Given the fact that this can attract a large portion of an individual’s business income, few countries offer tax related agreements that allows the individual to prevent taxation. Thus, while the taxpayer pays taxes in his own country, he/she enjoys tax exemption in the other nation.

However, in some cases, an individual or business has to pay tax in the country where gain arises. In such a case, the taxpayer enjoys a tax credit in his own country. This kind of a situation does not provide taxpayers an easy option to avoid tax payments as the tax deducting authorities in each of the countries communicate to find out and indentify taxpayers who could be using the laws to avoid tax payments.