Solution to Problem of Double Taxation: Intra-Country & International

Prof. Findlay Shirras considered double taxation as an obstacle in the way of the economic use of world resources. According to him, ‘double taxation is a barrier which tends to keep capital within national frontier and to prevent it from flowing freely over such frontiers.

The problem of double taxation arises because of the different criteria adopted by different nations in matters of taxation. A country always wants to tax income and other resources irrespective of what they’re. That is why the problem of double taxation is an international issue.

Avoidance of Intra-Country Double Taxation

Avoidance of Intra-country Double taxation of centralization of finances; all taxes may be imposed by the central government, and the tax proceeds allocated between union and states.

The following solutions can be adopted for the avoidance of Intra-country double taxation:

Evolution of Uniform Tax Criteria:

The Central government and the state governments may evolve through mutual negotiations; a uniform set of criteria and model legislation should be prepared by all governments. This can go a long way in removing the possibility of double taxation and infusing greater understanding and cooperation among various nations.

Centralization of Finance:

In Switzerland, the Supreme Court has been authorized to determine the criteria for the imposition of taxes to avoid the possibility of double taxation. In the arrangement, governments. If any state suffers a loss due to such an arrangement. The Central Government should make efforts to compensate it.

Reciprocal Tax Agreements:

If collective agreements aiming at different states cannot be evolved, then double taxation can be avoided through reciprocal tax agreements. A number of American states and Canadian states have entered into reciprocal arrangements in respect of income tax and other duties.

Exclusive Assignments of Tax Jurisdiction:

Another technique to avoid double taxation is by specifying the exclusive tax jurisdiction of the union and state governments. In this way, both of the authorities levy taxes without interfering with their tax jurisdictions and the possibility of double taxation.

Avoidance of International Double Taxation

It is not very difficult to avoid double taxation by the same authority or by different authorities in the federal countries, but if the taxing authorities are two or two governments, then avoidance of double taxation is not that easy.

The following solutions can be adopted for the avoidance of international double taxation:

Stipulation of the Basis of Taxation:

There are generally two bases of taxation, one is the source of income, and the other is the residence. If a person works in one country and earns his income there, the government of that country is entitled to tax him.

At the same time, if the person is a citizen of another country, then the government of the other country is also entitled to impose a tax on his income. Here comes the problem of double taxation.

The avoidance of double taxation in such cases requires the stipulation of the basis of taxation either according to residence or according to, the place of origin of income, or according to the location of property.

Provision of Bilateral Reliefs:

Under this method, the two countries decide to impose tax both on their respective subjects and foreigners earning their incomes within their respective frontiers. To avoid double taxation, they enter into an agreement for the provision of relief to their subjects taxed in the other country.

Under this situation, the actual tax liability of an economic unit may be lower than that envisaged under full avoidance of double taxation. The net tax liability on an economic unit would thus turn out to be smaller than in the case of full avoidance of double taxation.

SAARC countries comprising India, Pakistan, Sri Lanka, Nepal, Bangladesh, Bhutan, and Maldives, at 3 summits held at Dhaka in November 2005, signed a limited multilateral agreement on avoidance of double taxation with respect to customs duties.

Unilateral Tax Relief:

When no bilateral arrangements exist for the avoidance of double taxation, a country may decide to provide unilateral tax relief to its own citizens.

Read Also: Double Taxation Avoidance Agreement (DTAA)

India has entered into comprehensive agreements for the avoidance of double taxation of income with several countries in an effort to have similar agreements with many others. An important objective in negotiating tax treaties with developed countries is to stimulate the inflow of capital and technology to accelerate economic development by removing tax barriers.

Read More in: Theory of Public Finance

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4. Role of Government under Cooperation and Competition
5. Role of Government in Economic Development and Planning
6. Concept of Public Goods, Private Goods, and Merit Goods
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62. Solution to Problem of Double Taxation: Intra-Country & International
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68. Need for Public Debt or Public Borrowing
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