Double taxation
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Double taxation is a situation in which two or more taxes must be paid for the same asset or financial transaction.
Double taxation occurs in several ways. At the international level, it occurs between two countries due to overlap between their tax laws. It also may happen at the corporate dividend level.
Double Taxation terminology
The euphamism, "double taxation" is a loaded term. The term, at its root, is accurate in that the same cash stream or asset, but is inaccurate in its implication that it is a limited taxation phenomenon. When considering the life of an asset or stream there are many transactions between distinct entities where taxation comes into place.The usage of the word "double" implies excess and redundance. It is often used in a limited fashion to highlight the taxed transaction as being an excess when the same asset or cash stream has been taxed many times prior and, in many cases, will be further taxes when changing between distinct entities.
Corporation Dividend Tax
Typically, a corporation pays income taxes on its profits, and may decide to issue a portion of those proceeds as dividends to its shareholders. The money is taxed at the corporate level as its income. When it is paid to shareholders (a distinctly different entity) as dividends, it is taxed as income for that individual. This is referred to as the dividend tax. (On the other hand, a partnership is not itself taxed, but partners pay personal income tax on their share of net earnings at the end of the year, whether or not those earnings are distributed).Opponents to the dividend tax refer to it as a "double taxation" while those who want to maintain the income tax for individuals who receive dividends avoid using that terminology due to its connotation.
In Australia the income tax on dividends is avoided by the use of a dividend imputation system.
USA
In 2003, President Bush lobbied to repeal the dividend tax calling it "double taxation". A compromise with Congress resulted in the Jobs and Growth Tax Relief Reconciliation Act of 2003, which taxes most Americans at the 15% level, and low-income Americans at the 5% level.(International) Double Taxation Agreements
It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make bilateral Double taxation agreements with each other. Conventionally, this requires that tax be paid in the country of residence and be exempt in the country in which it arises. To do this, the taxpayer must declare himself (in the foreign country) to be non-resident there. So the second aspect of the agreement is that the two taxation authorities exchange information about such declarations, and so may investigate any anomalies that might indicate tax evasion.
European Union savings taxation
In the European Union, member states have concluded a multilateral agreement1 on information exchange. This means that they will each report (to their counterparts in each other jurisdiction) a list of those savers who have claimed exemption from local taxation on grounds of not being a resident of the state where the income arises. These savers should have declared that foreign income in their own country of residence, so any difference suggests tax evasion.(For a transition period, some2 states have a separate arrangement. They may offer each non-resident account holder the choice of taxation arrangements: either (a) disclosure of information as above, or (b) deduction of local tax on savings interest at source as is the case for residents).
Notes
Note 1: [Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments].Note 2: See (17) and (18) of above, for a "temporary" period, Austria, Belgium and Luxembourg may apply a withholding tax to non-resident accounts rather than exchange information.
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