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Double Taxation and International Tax Law

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International Tax Laws are laws applied during the taxing activities that occur between two or more countries. It is an interplay of the direct tax laws of two or more countries. Every country has the freedom to come up with its tax laws based on its constitution to tax its residents and non-residents working in their state. Since every state has a sovereign right to charge taxes, this means that they have to deal with emerging tax issues which not only concern their citizens but also non-residents who earn income in the respective states. This states through their tax laws, adjust tax rates, establish basis of taxation, determine deadlines for payment of tax, come up with measures for tax relief and penalties as well as for settling dispute relating to tax and appeal procedures (Piantavigna, 2017). These activities are conducted employing laws and regulations which form the main object of international tax law.


Double taxation is a tax principle. It refers to the taxing of the same income twice. Double taxation under the international tax law refers to the provision of the international tax law that provides for states to tax the businesses of non-residents twice. It can occur when income is taxed at both the corporate level and personal level. In international trade, it occurs when income is taxed in two different countries (Cockfield, 2018).  They are taxed in the country they earn income which is the state of residence also called source state and their state of origin. Internal taxes applied by the source state on income made by non-residents in the respective state reduces the tax base of the state of residence.

Double taxation occurs in two forms, juridical and economic double taxation. Juridical double taxation refers to the taxation of the same income in multiple jurisdictions but in the hands of the same taxpayer. Economic double taxation on the other hand refers to taxation by multiple jurisdictions of the same income in the hands of different taxpayers (Cockfield, 2018).


These are treaties or agreements that help prevent businesses and individuals from being taxed twice on the same income by two countries. It is part of a general strategy to address cross border tax problems for businesses and individuals operating in the international market. Double Taxation Agreements (DTAs) are made for enabling two countries to eliminate the occurrence of the phenomena (Panayi, 2016).

The purpose of double taxation agreement goes beyond eliminating double taxation for those who work overseas or in foreign countries, it also serves to promote investments in foreign lands, if not for double taxation agreements companies would encounter frustrations that would discourage venturing into new territories to establish themselves if they were forced to pay tax in their country and locally where they establish themselves in foreign lands (Panayi, 2016). Thus these agreements help reduce the tax burdens for these foreign companies. It also provides a framework that offers legal security to investors.

Double taxation also offers a legal framework for solving and disputes surrounding double taxation. It is also an effective tool in the fight against tax evasion and other tax-related crimes.

Through these agreements, a series of rules are established to determine how individuals or companies declare the income obtained based on its origin to avoid taxing the same person or company on the very same income or possession they had already been taxed on.

Double taxation agreements employ several methods to eliminate or avoid double taxation. According to the OECD Organisation for Economic Co-operation and Development tax convention model, there are two main principles employed in the elimination of double taxation (Pham & Ly, 2019). They include the principle of exemption and credit. Under the principle of exemption, states of residence do not impose a tax on income which according to the convention would be taxed in the source state. It is implemented in two ways; one, the full exemption method and two, the exemption with progress method. The full exemption method allows for income taxed in the source state not to be taken into account when determining the tax to be applied to the rest of the income. Exemption with progress, on the other hand, allows for income taxed in the sourcestate to be taken into account when determining the tax rate to be imposed on the rest of the income.

The second principle method used in the avoidance of tax is the credit method. Under this method, the state of residence makes a computation of its tax based on the total of the income of the taxpayer. This includes income from the source states and the state the establishment exists permanently (Pham & Ly, 2019). It then makes a deduction from its tax for tax paid in the other country.

These double taxation agreements serve as mutual concessions that governments make to create a base for reciprocal reductions of tariffs with their trading partners. It also serves to neutralize the world-price effects. It is necessary to establish double taxation agreements because trade restrictions arise when individual governments create policies unilaterally.

Double Taxation Convention as a Mechanism of International Tax Law.

International tax law is simply a system of treaties and bilateral agreements between countries that govern the way nations interact and agree on issues touching on tax between the respective nations. International tax laws fall under international laws and deliberate on how countries conduct business with each other and how to cooperate with firms and individuals working across borders or in foreign countries pay tax (Cockfield, 2018).

Double Taxation Conventions, therefore, fall under International tax laws because they involve two or more countries, they not only form part of the international tax laws but they are in themselves the international tax laws. Double taxation conventions reconcile tax laws made unilaterally by countries and creates favorable conditions or laws that allow trading countries and partners to come up with a framework to regulate tax imposition and prevent tax fraud as well as tax evasion to ensure revenue is not lost (Panayi, 2016).


As a mechanism for international tax law, double taxation conventions play a big part in international trade. It reduces the tax burden for players in the international market, this includes individuals and companies. With the growing numbers in the international workforce and the expanding economy that allows foreign companies to establish themselves in new territories, double taxation conventions allow ease of trade and solve disputes and conflicts that arise when unilateral laws have to come to a consensus to allow trade. It therefore directly enhances trade and economic growth of the world economy and that of individual states (Cockfield, 2018). It also allows the foreign workforce to get the most out of their pay and investments by reducing costs incurred through heavy or double taxation. This, therefore, encourages individuals and companies to invest in other places and the effect is the growth of the economy in both the source state and the local state of origin. Through double taxation, the world price of commodities is regulated ensuring commodities get to consumers at affordable prices that are not inflated due to the tax imposed on them. Therefore, through double taxation conventions, different countries can reconcile their tax laws and allow ease of doing business which forms the basis of international tax laws.


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