Double taxation is when the same income or asset is taxed in two or more countries. This is a crucial issue for businesses and the economy as it increases the cost of tax planning, reduces investment, and reduces competitiveness.
Causes of double taxation
One of the critical issues of double taxation is the differences in national tax systems. Each state has its tax rules and rates, which may result in taxing the income or assets in several countries. International transactions are another reason. When the company does business in several countries, it may encounter a problem when its income or assets are taxed in several jurisdictions.
Impact of double taxation on business and the economy
Double taxation can increase tax planning costs. Companies must spend more time and resources developing strategies to avoid double taxation, and this may reduce the profitability and competitiveness of companies. The decline in investment is a consequence of double taxation, too.
When companies face double taxation, they can make a decision after which they stop investing in a country. This may lead to lower economic growth and development of the particular company. Declining competitiveness is another consequence of double taxation. When companies are forced to spend a lot of time and resources on tax planning, they may need help to compete with firms that avoid such issues.
Measures to prevent double taxation
One of the main measures to prevent double taxation is the conclusion of international agreements. Such agreements may include provisions on which state is entitled to a surcharge, which revenues are included in the taxable base, and what tax rates apply.
In addition, international companies can use tax deduction mechanisms to reduce their tax liabilities. For example, if a company pays taxes in one country, it may receive a tax deduction in another. This approach helps companies avoid double taxation.
Importance of international organizations
International organizations such as OECD, WTO, and IMF are essential in addressing the issue of double taxation. They develop standards and recommendations that help States prevent double taxation and improve their tax systems. So, the OECD has developed the Model Tax Convention, the template for international tax agreements.
This Convention contains provisions on what income is taxable and what tax rates apply. The World Trade Organization also plays a vital role in solving the problem of double taxation. It develops rules and recommendations that help States prevent double taxation and improve their tax systems.
Double taxation is a severe problem for international companies and can hinder stable economic development. Experts use different methods, such as international agreements and tax deduction mechanisms, to prevent double taxation and ensure steady economic growth.