What is Double Taxation? Understanding the Global Taxation Landscape

Businesses can find themselves operating in multiple jurisdictions, each with its own unique taxation system. This can lead to a scenario known as double taxation, where a company is required to pay taxes on the same income in more than one country. 

To shed light on this complex issue, we'll explore the concept of it, its implications for businesses and individuals and how Double Taxation Agreements (DTAs) are applied.

The Dilemma of Global Taxation

While efforts have been made to harmonise taxation rules on a global scale, every country maintains its distinct taxation framework. This means that when a company conducts business or has legal entities in multiple jurisdictions, it may become subject to paying taxes on the same income in both locations.

What does double taxation look like?

Consider the scenario of a company which is incorporated in Country 1 and owns a rental property in Country 2. Country 1 levies taxes on all rental income of companies incorporated within its borders, irrespective of property location. Simultaneously, Country 2 imposes taxes on the company’s rental income based on the property's location. This results in double taxation for the company.

Individual Double Taxation

Similarly, individuals can face double taxation. For instance, if you hold a US passport but work in Hong Kong, you may be obligated to pay income tax in both the United States and Hong Kong.

How Double Taxation Agreements (DTA) Offer Relief

DTAs between one or more countries outline how taxes on income will be allocated in cases where both jurisdictions could legally tax the same income. The primary aims of DTAs are to provide taxpayers with certainty regarding their tax obligations, minimise their tax burden, and stimulate investment between the participating countries.

Examples of how a DTA is applied

• Tax Credit Relief: In the credit system, a taxpayer's foreign tax is offset against their domestic tax on the same income. Essentially, the tax paid in the source jurisdiction is subtracted from the tax due on the same income in the jurisdiction of residence.

• Tax Exemption: Foreign income is excluded from domestic taxation. This exemption may apply to either the entirety or a portion of the foreign income.

• Reduced Tax Rate: This form of relief entails taxing income at a lower rate, commonly applied to interest, dividends, and royalties.

• Relief through Deduction: In this scenario, domestic tax is levied on foreign income after deducting the foreign tax already paid.

DTAs are used to offer clear guidance and fairness

It also operates as a framework to resolve potential conflicts and ensure that taxpayers are not unfairly subjected to double taxation. DTAs offer clear guidelines on which country has the right to tax specific types of income, providing a measure of predictability and fairness in cross-border taxation scenarios.

How can a DTA framework be applied? 

• Strengthens the credibility of a country's tax system.

• Provides guidelines on how taxes are applied in each jurisdiction.

• Gives taxpayers a clear understanding of their potential tax obligations in the country.

• Clearly defines how revenue is shared between two countries.

• Enables taxpayers to seek relief for taxes paid in other countries.

• Acts as a safeguard against tax evasion by establishing a framework for exchanging information between revenue authorities.

Hong Kong’s Double Taxation Agreements

• Australia

• Ireland

• New Zealand

• Bangladesh

• Italy

• Pakistan

• Belarus

• Japan

• Portugal

• Belgium

• Jersey

• Qatar

• Brunei

• Korea

• Romania

• Cambodia

• Kuwait

• Russia

• Canada

• Latvia

• Saudi Arabia

• Czech

• Liechtenstein

• Serbia

• Estonia

• Luxembourg

• South Africa

• Finland

• Macao SAP

• Spain

• France

• Mainland China

• Switzerland

• Georgia

• Malaysia

• Thailand

• Guernsey

• Malta

• United Arab Emirates

• Hungary

• Mauritius

• United Kingdom

• India

• Mexico

• Vietnam

• Indonesia

• Netherlands

Comprehensive DTAs: Belgium, Mainland China, Thailand, Vietnam and Luxembourg.

Airline and shipping income: Sri Lanka and Singapore.

Airline income: Bangladesh, Belgium, Canada, Croatia, Denmark, Estonia, Ethiopia, Fiji, Finland, Germany, Iceland, Israel, Jordan, Kenya, Korea, Kuwait, Laos, Macau SAR, Mainland of China, Maldives, Mauritius, Mexico, Netherlands, New Zealand, Norway, Russian Federation, Seychelles, Sweden, Switzerland and the United Kingdom.

Shipping income: Denmark, Germany, Netherlands, Norway, United Kingdom and USA.

Tax information exchange agreements: Hong Kong has concluded the agreements with Denmark, Faroes, Greenland, Iceland, Norway, Sweden and USA.

FAQ

How does double taxation impact SMEs?

Double taxation can potentially reduce their profitability and competitiveness. Companies must carefully plan their operations to minimise the impact of double taxation and take advantage of available tax relief mechanisms.

Are there strategies to mitigate the effects of double taxation?

Yes, businesses and individuals can employ various strategies to mitigate the effects of double taxation. These may include careful tax planning, structuring transactions to take advantage of available exemptions or deductions, and making use of relevant tax treaties or agreements.

What role do tax advisors play in addressing double taxation?

Tax advisors play a crucial role in helping businesses and individuals navigate the complexities of international taxation. They provide expert guidance on structuring transactions, understanding relevant tax laws, and applying available tax relief mechanisms.

Can double taxation also affect an individual?

Yes, individuals with international ties, such as expatriates or individuals with assets in multiple countries, face taxation challenges. It is essential to seek expert advice to ensure compliance with relevant tax laws and optimise tax liabilities.

How can businesses estimate their tax liability in cases of double taxation?

We recommend asking the assistance of a tax advisor to get a clear picture of your business’s financial position and liabilities. 

Conclusion

Through Double Taxation Agreements, countries aim to strike a balance between ensuring their fair share of tax revenue and fostering international economic cooperation. By seeking our expert advice and tax planning, you can optimise your or your business’ tax liabilities.