DOUBLE TAXATION AGREEMENTS
The requirement that an entity or individual pay
two separate taxes on the same property for the
same purpose and during the same time period.
Under Subchapter C of the INTERNAL REVENUE
CODE, the federal government imposes double tax-
ation on corporations by taxing both the profits
received by the corporation and the earnings dis-
tributed to shareholders of the corporation
through stock dividends.
Double taxation occurs when the same
transaction or income source is subject to two or
more taxing authorities. This can occur within a
single country, when independent governmental
units have the power to tax a single transaction
or source of income, or may result when differ-
ent sovereign states impose separate taxes, in
which case it is called international double taxa-
tion. The source of the double taxation problem
is that the taxing jurisdictions do not follow a
common principle of taxation. One taxing juris-
diction might tax income at its source, while
others will tax income based on the residence or
nationality of the recipient. Indeed, a jurisdic-
tion might use all three of these basic
approaches in imposing taxes.
The consequence of double taxation is to tax
certain activities at a higher rate than similar
activity that is located solely within a taxing
jurisdiction. This leads to unnecessary reloca-
tion of economic activity in order to lower the
incidence of taxation, or other, more objection-
able forms of tax avoidance. Businesses espe-
cially have had the most trouble with double
taxation, but individuals also might find it
uneconomic to work abroad if all of their
income is subject to taxation by two authorities,
regardless of the origin of the income.
The problems that double taxation presents
have long been recognized, and with the grow-
ing INTEGRATION of domestic economies into a
world economy, countries have undertaken sev-
eral measures to reduce the problem of double
taxation. An individual country can offer tax
credits for foreign taxes paid, or outright exemp-
tions from taxation of foreign-source income.
Treaties have also been negotiated between
states to address the double taxation problem.
One of the most important of these agreements
was the International Tax Convention, which the
United States and the United Kingdom con-
cluded in 1946. It has served as a model for sev-
eral other tax conventions. Under the tax
convention between the United States and the
United Kingdom, for example, exemptions from
taxes, credits for taxes paid, and reduction or
equalization of overall tax rates are all utilized to
reduce double taxation.Within the United States,
many states have worked to prevent the incidence
of taxation from reaching uneconomic levels on
