What is Double Taxation?

Double taxation occurs when a taxpayer is taxed twice for the same asset or income. This happens when taxing jurisdictions overlap and a transaction, asset, or income amount is subject to taxation in both jurisdictions. When an individual faces this situation, he or she may lose a significant portion of income, and in some cases, this may cause the person to experience a lowered standard of living. Corporations deal with double taxation too, as a corporation pays taxes on its earnings only to have its shareholders taxed once more.

Opponents of double taxation assert that it is damaging to the economy, as it imposes unfortunate consequences for those who choose to save and invest. They often argue that eliminating double taxes, in all its forms, will spur the economy on, leading to an increase in jobs, improved salaries, and much better living standards.

Some people argue that double taxation of corporations isn’t really a problem at all. They hold that a corporation is a legally separate entity from its shareholders, citing the fact that shareholders are afforded certain levels of protection from liability in terms of damages caused by a corporation. Since a corporation is an entirely separate taxpayer from its shareholders, the argue, the same taxpayer is not taxed twice on the same asset or earnings.

Sometimes double taxation occurs as the result of international activities. An individual may have business dealings in one country while residing in another, for example. In such a situation, the individual may be required to pay taxes on her business gains in her country of residence as well as in the country in which the business operates. As this can require taxpayers to give up a significant portion of their incomes, some countries have tax agreements to prevent it. These agreements allow taxpayers to pay taxes in their country of residence, enjoying exemption from taxation in the other country.

In other cases of international double taxation, a business or individual is taxed in the country in which a gain arises. The taxpayer then enjoys a tax credit in his country of residence, eliminating the issue. This situation does not offer taxpayers an easy way to avoid paying taxes, however, and the taxing authorities in each country communicate to discover and investigate taxpayers who try to use these laws to avoid paying.