Double Taxation Relief

Double Taxation Relief

Double taxation relief plays a vital role in the international taxation system, ensuring that individuals and businesses are not burdened by paying taxes on the same income or gains twice.  By providing relief measures such as exemptions, credits, or deductions, countries promote economic cooperation, encourage cross-border mobility, and foster international trade and investment. Understanding the mechanism, types, and advantages of double taxation relief empowers individuals and businesses to optimise their financial resources while ensuring compliance with relevant tax laws.  

 

What is Double Taxation Relief? 

Double taxation relief refers to the mechanism implemented by countries to prevent the same income or gains from being taxed twice, both in the country of source and the country of residence. It is a critical aspect of international taxation that facilitates cross-border trade, investment, and economic cooperation. By providing relief, countries ensure that taxpayers are not discouraged from engaging in international transactions due to the potential burdens of double taxation. 

Understanding Double Taxation Relief 

To comprehend double taxation relief, it is essential to differentiate between two types of double taxation: economic double taxation and juridical double taxation. 

Economic double taxation occurs when the same income or gains are taxed in the country of source (where the income is generated) and the country of residence (where the taxpayer resides). This can happen due to differing tax laws, regulations, and jurisdictions. The resulting tax burden can significantly reduce the amount available for savings, investment, and consumption. 

Juridical double taxation, on the other hand, arises when two or more countries claim the right to tax the same income or gains based on their respective tax laws and regulations. This form of double taxation often occurs when individuals or businesses have a presence or engage in economic activities in multiple jurisdictions. Juridical double taxation can lead to complex tax obligations and compliance challenges. 

Double taxation relief seeks to alleviate the adverse effects of both economic and juridical double taxation by offering tax relief, deductions, exemptions, or credits. It ensures that taxpayers do not face undue financial burdens and promotes economic cooperation and global mobility. 

Types of Double Taxation Relief 

There are two primary types of double taxation relief: unilateral relief and relief under Double Taxation Avoidance Agreements, or DTAAs. 

  1.  Unilateral Relief: Unilateral relief refers to the relief measures adopted by a country on its own accord to mitigate the impact of double taxation. These measures may include tax credits, exemptions, or deductions granted by the country of residence to its taxpayers who have already paid tax in the country of source. Unilateral relief is typically based on the domestic tax laws of the country offering the relief. 
  2. Relief under DTAAs: DTAAs, also known as tax treaties, are bilateral agreements between two countries that aim to prevent double taxation. These agreements allocate taxing rights between the two countries and establish rules to ensure fairness and avoid conflicts. DTAAs generally provide relief through methods such as exemption, credit, or the elimination of double taxation. They often address various types of income, including dividends, interest, royalties, and capital gains, among others. The provisions of DTAAs take precedence over domestic tax laws in cases of conflict. 

How does Double Taxation Relief work? 

Double taxation relief operates by: 

  1. Allocating taxing rights: Tax treaties allocate the right to tax specific types of income between the countries involved. This ensures that each country has jurisdiction over the income generated within its borders, reducing the risk of double taxation. 
  2. Providing exemptions or credits: Relief measures, such as exemptions or tax credits, are implemented to avoid or minimise the double taxation burden. Exemptions exclude specific types of income from taxation in one country if taxed in the other, while tax credits allow taxpayers to offset tax paid in one country against the tax liability in another. 
  3. Harmonising tax treatment: Double taxation relief mechanisms aim to harmonise tax treatment by aligning the tax laws of different countries. This reduces inconsistencies, promotes fairness, and encourages economic activity across borders.

Example of Double Taxation Relief

To illustrate the practical benefits of double taxation relief further, let’s consider an example. 

XYZ Corporation, a Singapore-based company, establishes a subsidiary in the United States. The subsidiary generates profits subject to US corporate tax. Without double taxation relief, XYZ Corporation would be liable to pay US tax on its subsidiary’s profits and also face potential taxation in Singapore if the profits were distributed as dividends. 

However, the US-Singapore tax treaty provides relief to XYZ Corporation. According to the treaty, if XYZ Corporation’s subsidiary in the US pays corporate tax, the profits can be repatriated to Singapore without additional tax being imposed in Singapore. This provision ensures that the company is not subjected to double taxation and can efficiently utilise its global earnings. 

Frequently Asked Questions

To obtain relief from double taxation, individuals and businesses should consult their country’s tax authorities and consider the provisions of applicable tax treaties or domestic tax laws. Seeking professional advice from tax experts who specialise in international taxation can help identify the available relief measures and optimise tax planning strategies. 

Qualification for double taxation relief depends on various factors, such as residency, the nature of income, and the existence of tax treaties between countries. Generally, individuals who are residents of a country with tax treaties or provisions for double taxation relief can benefit from relief measures. Businesses that operate in multiple jurisdictions may also be eligible for relief based on tax treaties or domestic tax laws. 

The process of claiming relief from double taxation varies depending on the country and the specific relief measures involved. Generally, individuals and businesses must follow the procedures outlined by the respective tax authorities. This often includes providing documentation, such as tax residency certificates, proof of tax payments, and other relevant supporting documents. Seeking guidance from tax professionals or utilising online resources provided by tax authorities can help ensure accurate and efficient claiming of relief. 

DTAAs, also known as tax treaties, are bilateral agreements between two countries that aim to prevent double taxation. These agreements define the rules for taxing various types of income, allocate taxing rights between countries, and provide relief mechanisms to eliminate or mitigate double taxation. DTAAs often address issues such as residency, permanent establishment, dividends, interest, royalties, and capital gains, among others. 

  1. Avoiding double taxation: Relief measures ensure that income or gains are not taxed twice, reducing the tax burden and maximising the disposable income or profits. 
  2. Encouraging international trade and investment: By eliminating or minimising double taxation, relief measures promote cross-border economic activities, trade, and investment, fostering international cooperation and economic growth. 
  3. Facilitating global mobility: Double taxation relief allows individuals to work or invest in different countries without fear of being subjected to excessive taxation, encouraging global mobility and the exchange of talent. 
  4. Certainty and predictability: Tax treaties and relief provisions provide a framework for tax treatment, offering certainty and predictability to taxpayers engaged in international transactions. 

Related Terms

    Read the Latest Market Journal

    Back in Business: The Return of IPOs & Top Traded Counters in March 2024

    Published on Apr 17, 2024 404 

    Start trading on POEMS! Open a free account here! At a glance: Major indices continue...

    Weekly Updates 15/4/24 – 19/4/24

    Published on Apr 15, 2024 67 

    This weekly update is designed to help you stay informed and relate economic and company...

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 150 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 84 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 109 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 191 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 98 

    This weekly update is designed to help you stay informed and relate economic and company...

    How to soar higher with Positive Carry!

    Published on Mar 28, 2024 137 

    As US Fed interest rates are predicted to rise 6 times this year, it’s best...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com