Ways and means of avoiding double taxation system

If you wish to know about double taxation agreements, you are certainly at the right place. Double taxation is nothing but levying taxes by two or more jurisdictions on the same income of an individual. Jurisdictions can enter into tax treaties with different countries to set rules for escaping double taxation. 

Such treaties are known to provide arrangements for exchanging information to prevent tax evasion. Before making the best out of it, you should know about such treaties and rules properly. 

How is relief provided against double taxation?

There are some provisions for providing relief against double taxation agreements under income tax. It is important to explore different aspects of such provision before reaping its benefits. 

  • Unilateral relief

According to this provision, an individual taxpayer is supposed to be relieved from being taxed two times by the government, irrespective of whether there is a DTAA or not. Some specific conditions need to be met to ensure eligibility to get this unilateral relief. 

The first condition is that the individual must be a citizen of that country. On the other hand, the income has to be earned outside that country during the previous year. Moreover, that individual must pay taxes on that income in a foreign country.

  • Bilateral relief

This provision is to protect the taxpayers through DTAA. This kind of relief is generally offered in two means. The first one is considered the exemption method, and the second method is the tax credit method. The exemption method is to provide full protection from getting taxed twice. If it is already taxed in the foreign country, it will not be taxed on home soil. Moreover, regarding the tax credit method, an individual can claim some tax credit for taxes paid outside his/her home country.