Introduction

In today’s world economy, one can have many sources of income and worldwide. Difficulties can arise when two or more states, depending on their respective local laws, apply the same income tax. This situation is known as double taxation, in which two or more countries tax the same income, assets, or other financial transactions.

Double taxation occurs because of overlapping tax laws; that is when two or more countries assume jurisdiction over the same assets, income, or transaction. For example, if one state claims a tax on the basis of a “source of income” and another state claims a tax on the same funds on the basis of “residence”. The two states can also both claim taxes on the basis of “residence” by having different legal criteria to qualify a fiscal residence (e.g. length of stay vs. center of vital interests).

To encourage investment and help taxpayers avoid this unfair practice, states are strongly advised to become a party to the Double Taxation Agreement (“DTA”), which allows states to agree on rates and tax jurisdictions for specific types of income.

Double Taxation Agreement: Objec-tives and Content

Double Taxation Agreements pursue a “win-win strategy” of encouraging foreign investment and making the foreign market available for locals. States agree on an acceptable basis to share tax revenues and investors benefi t from increased legal and fi scal certainty.

Many of the existing DTAs follow models provided by the UN and the OECD. States fi rst determine the scope of the Convention and the tax covered. The next step involves determining an appropriate method for eliminating double taxation.