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Every country has a sovereign right to determine its domestic tax policy. A country also has the exclusive right to tax anyone and anything within its fiscal borders. However, in this age of globalization, the transactions involve two separate jurisdictions. Such cross-border transactions raise questions such as: who should be taxed, what should be taxed and in which jurisdiction should it be taxed. These questions are key considerations in the field of international taxation. Further, a country cannot impose its tax laws on another country as both are sovereign. There is but no single international tax law that governs the taxation of cross-border/ international transactions. The overlapping of laws of different jurisdictions may give rise to international double taxation which is an unintended result of a disparity in tax legislation.
International Double Taxation arises when domestic rules are applied to cross-border transactions. One of the major objectives of international tax principles is to make sure that income is not taxed twice. Double Taxation impedes international trade and investment therefore, a significant aim of international law principle is to prevent and eliminate double taxation. Prevention and elimination of double taxation are mainly done in two ways either by i) granting double taxation relief or ii) allocating taxing rights via tax treaties. Granting double taxation relief can be done either unilaterally by the domestic/resident country or bilaterally via tax treaties. The unilateral measure means incorporating provisions on preventing double taxation in domestic tax laws. The bilateral tax treaties entered into between countries for double tax avoidance are known as Double Taxation Avoidance Agreements (DTAAs).
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Every country has a sovereign right to design its tax system. At an international level, it gives rise to a variety of systems with no two tax systems being alike. The disparity gives rise to conflicts. It is the disparity that encouraged many states to adopt a common approach to imposing tax liability. The common approach includes the following:
Countries using the residence or citizenship rule generally adopt the worldwide basis for taxation and levy tax on the global income of their residents regardless of the origin of income. Whereas countries using the territorial tax system, levy tax only on domestically sourced income regardless of the residential status of the recipient. In practical implementation, a mixture of both systems is adopted. Under the worldwide tax system, only the residents of the state will be taxed and non-residents will not be taxed even if the income arises in that country. However, some countries also tax non-residents on their income arising within the country. Now countries that follow the worldwide taxation system have also begun to include aspects of a territorial system in their domestic tax system. Similarly, countries following territorial tax systems may tax foreign income if it is remitted into the country or consider certain foreign income to be sourced domestically thereby not restricting the taxing rights only to domestically sourced income. Despite following a common approach, it is inevitable to avoid the incidence of double taxation and conflicts arising out of such differences. Incidence of double taxation can be of the following types:
International businesses frequently face the issue of double taxation where their income is taxed in the country where it is treated as an income for tax purposes both in a foreign country as well as in the domestic country. International double taxation discourages international trade as it makes international business or international transactions expensive to pursue. Every country at present date wants to open its economy for foreign business and trade. So to avoid instances of international double taxation, countries enter into tax treaties known as DTAAs. These treaties are often based on models provided by the OECD. In these treaties, the signatory countries agree to limit the taxation of international business either by exempting tax or by providing relief. This measure helps facilitate trade between the countries to avoid double taxation.
Also Read:How Does International Taxation Operate?The Principles of International Tax PlanningTax Treaties and their role in International Taxation
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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