What is a treaty of double taxation?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In a way, this sort of a treaty would make more sense if it were called a treaty against double taxation.  This is much more like what the treaty actually does.  What such a treaty does is to make sure that someone does not get taxed twice on income earned in a foreign country.

Imagine that you are an American and you do some work in Japan.  Let's say that the Japanese government takes taxes out of the pay you get for your work while in Japan.  It would be unfair for you to then pay taxes in the US on that same income, right?

A treaty of double taxation prevents that.  It says that the worker will only get taxed in their own country, not in the country where they are working for just a short while.


krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

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Double taxation refers to imposition of taxation on the same income or profit more than once. This kind of incidence of double taxation becomes an important issue in case of individuals and businesses having income in countries other than home countries. In such situations the person or the business may be required to pay taxes as per laws of the home country as well as the country where the income is earned. This discourages people from working or doing business in foreign countries. This may hurt the economic interest of both the countries. Therefore countries enter into agreements or treaties to avoid or limit the incidence of double taxation. Such double treaties define conditions that determine the country in which the tax is to be charged on different types of incomes.

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ralphkor | (Level 1) eNoter

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