Double Taxation Examples

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 29, 2023

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Double taxation is the term used to describe the situation in which two different taxing authorities tax the same income or asset.

This can happen when an individual is taxed on their income by both their country of residence and the country in which their company is based.

It can also happen when a company is taxed on its profits by both the country in which it is registered and the country in which it operates.

Why Does Double Taxation Occur?

There are a number of reasons why double taxation can happen.

One of the most common reasons is that there is no agreement between the two countries on how to tax cross-border income. This can lead to situations in which taxpayers are taxed twice on the same income.

Another common reason for double taxation is that the two countries have different tax systems, which can lead to companies being taxed on their profits in both countries.

How Can You Avoid Double Taxation?

There are a number of ways that taxpayers can try to avoid double taxation.

One of the most common methods is to claim a tax credit or deduction for the amount of tax that has been paid in the other country. This will reduce the amount of tax that is payable in the country in which the taxpayer resides.

A different method is to renounce the tax treaty between a company's country of residence and the country where it operates. This will cause the company no longer be subject to taxation from that country on its activities outside of that jurisdiction.

How C Corporations Avoid Double Taxation?

When a C corporation earns income from sources within and outside the United States, that income is generally subject to taxation by the federal government.

However, the Internal Revenue Code (IRC) allows a c corporation to claim a foreign tax credit for income taxes paid to a foreign government on income derived from foreign sources.

In order to qualify for the credit, the c corporation must establish a separate account for each country in which it does business. The c corporation must divide its income from foreign sources equally between these separate accounts.

When a c corporation earns income from more than one country, that c corporation must then decide how much of the income earned will be assigned to each separate account.

In order to avoid double taxation, the c corporation must take the same proportion of deductions as it does income.

Double Taxation Examples

In certain countries, such as Australia and New Zealand, there is no personal income tax but companies are taxed on their profits.

This can lead to double taxation of company profits, as they are taxed by both the country in which they are registered and the country in which they operate.

Another example of double taxation can occur when a company is based in one country but does business in another. In this case, the company would be taxed by both countries on its profits.

The impact of double taxation on the economy can be significant.

When companies are taxed twice on the same income, it can lead to a decrease in investment and a slowdown in economic growth.

The Bottom Line

Taxpayers need to be aware of the impact that double taxation can have on their finances. Not only can it reduce investment and economic growth, but it can also lead to an increase in tax rates as the government tries to raise revenue by taxing the same income twice.

As a result, companies should consider ways in which they could avoid double taxation. These could include closing subsidiaries, changing their corporate structure, or renouncing the tax treaty between the countries in which they reside and operate.

Double Taxation FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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