Double taxation can be a complicated issue for individuals and businesses with international financial interests. Essentially, it occurs when the same income is taxed by two different countries. This guide explains what double taxation is, how it can be avoided, and the role of double taxation treaties and unilateral relief in providing tax relief to taxpayers.
What Is Double Taxation?
Double taxation happens when an individual or business is taxed on the same income in two countries. This can occur in a couple of ways:
- Dual Residency: When someone is a resident in two countries, both may claim the right to tax their worldwide income.
- Income Earned Abroad: If you earn income in a country that also taxes income based on its source, you could be taxed both by the country where the income is earned and by your country of residence.
For example, if you work in the UK but also have rental income from a property in another country, both the UK and the country where the property is located may impose taxes on that income.
In the case of UK residents who are not permanently settled (non-doms), before the non-domicile regime is abolished by 2025, they can choose to pay tax on foreign income only if it is brought into the UK. This is known as the remittance basis.
What Is Double Taxation Relief?
Double taxation relief ensures that you don’t pay tax twice on the same income. This relief can be provided through double taxation agreements (DTAs) or unilateral relief, both of which help to mitigate the impact of foreign taxation on a taxpayer’s overall tax liability.
Double Taxation Agreement (DTA)
A DTA is an agreement between two countries that establishes which country has the right to tax specific types of income. In most cases, the country where the income originates (the source country) has the first right to tax. However, the taxpayer’s country of residence may also have the right to tax the income, but it will usually provide relief for taxes already paid to the source country.
DTAs provide relief from various types of taxes, including income tax, capital gains tax, and inheritance tax. They help determine the tax residency of individuals, outline the tax obligations in each country, and prevent double taxation on cross-border income.
The UK has a wide network of DTAs with numerous countries, such as the United States, Germany, India, and Canada, among others. These agreements help reduce tax burdens for individuals working or earning income internationally.
Countries with Double Taxation Agreements with the UK
The UK has signed DTAs with many countries across the globe. Some of the countries covered by these agreements include:
- Australia
- Canada
- France
- Germany
- India
- United States
- South Africa
- Spain
- Japan
For a full list of countries, you can visit the UK government’s website.
What Is Unilateral Relief?
Unilateral relief applies when a country does not have a DTA with another country or when the DTA does not cover a particular type of income. Under unilateral relief, you can claim a foreign tax credit, which allows you to reduce your UK tax liability by the amount of tax you have already paid to another country on the same income.
This relief is available for UK tax residents who have paid tax in another country or foreign residents with a UK branch, agency, or permanent establishment. However, unilateral relief does not apply to offshore dividends or taxable gains linked to a foreign-exempt UK company permanent establishment.
Double Taxation Relief Example
Let’s consider an example of someone moving to the UK for work. They will generally need to pay UK income tax on their salary, even if their home country also taxes this income. However, if there is a double taxation agreement between the UK and their home country, they may be able to claim a credit for the UK taxes paid, reducing their overall tax burden.
For instance, if the individual spends fewer than 183 days in the UK and their employer is not based in the UK, they might be exempt from paying UK tax on that income. However, it’s essential to review the terms of the specific DTA to determine eligibility for relief.
Conclusion
Double taxation can be a significant burden, but with the right knowledge and tools, it can be mitigated. Double taxation agreements and unilateral relief offer mechanisms to ensure that taxpayers aren’t taxed twice on the same income. If you’re dealing with cross-border income or have tax obligations in multiple countries, it’s advisable to seek the guidance of tax professionals who can help navigate these complex international tax laws and ensure you’re taking full advantage of available reliefs.
