What Are Double Taxation, Double Tax Agreement And Double Tax Relief? (Part 3 of 3)
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Part 3 of 3 on Double Tax Relief …
1. In the present era of cross-border transactions across the globe, the effect of taxation is one of the important considerations for any trade and investment decision in other countries.
2. One of the most significant results of globalisation is the visible impact of one country’s domestic tax policies on the economy of another country.
3. This has led to the need for continuously assessing the tax regimes of various countries and bringing about necessary reforms.
4. Where a taxpayer is resident in one country but has a source of income situated in another country it gives rise to possible double taxation.
5. This arises from the two basic rules that enables the country of residence as well as the country where the source of income exists to impose tax namely, (i) the source rule and (ii) the residence rule.
6. The source rule holds that income is to be taxed in the country in which it originates irrespective of whether the income accrues to a resident or a non-resident whereas the residence rule stipulates that the power to tax should rest with the country in which the taxpayer resides.
7. If both rules apply simultaneously to a business entity and it were to suffer tax at both ends, the cost of operating on an international scale would become prohibitive and would deter the process of globalisation.
8. It is from this point of view that Double Taxation Avoidance Agreements (DTAA) become very significant.
9. DTAAs lay down the rules for taxation of the income by the source country and the residence country.
10. Such rules are laid for various categories of income, for eg, interest, dividend, royalties, capital gains, business income etc.
11. Each such category is dealt with by separate article in the DTAA.
Hope this article helps those business owners who are operating their businesses across the globe to understand their tax positions better.
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