The negative effects of Double taxation
(By STEWART MBEGU & Amid A. Mgwasa)
How to cite this work
Mbegu. S. & Mgwasa. A. A. (2022). The negative effects of Double taxation. Idiana consultancy publication
This article tries to analyze the definition of double taxation, the negative effects of double taxation. Double taxation is a tax principle referring to income taxes paid twice on the same source of income. It can occur when income is taxed at both the corporate level and personal level. Double taxation also occurs in international trade or investment when the same income is taxed in two different countries.
1.0 What is double taxation
According to Kagan (2022) argued that Double taxation is a tax principle referring to income taxes paid twice on the same source of income. It can occur when income is taxed at both the corporate level and personal level. Double taxation also occurs in international trade or investment when the same income is taxed in two different countries.
2.0 What are the negative effects of Double taxation?
It discourages foreign direct investments (FDI)
Virtually all governments are keen to attract foreign direct investment (FDI). It can generate new jobs, bring in new technologies and, more generally, promote growth and employment. The resulting net increase in domestic income is shared with government through taxation of wages and profits of foreign-owned companies, and possibly other taxes on business (e.g. Property tax). FDI may also positively affect domestic income through spillover effects such as the introduction of new technologies and the enhancement of human capital (skills) (Adam, 2013). Given these potential benefits, policy makers continually re-examine their tax rules to ensure they are attractive to inbound investment. Tax policies may also support direct investment abroad, as outbound investment may provide efficient access to foreign markets and production scale economies, leading to increased net domestic income (Lotha, 2015).
It increases the tax burden to taxpayers
Investors are generally willing to accept a higher host country tax burden if the country offers attractive business-enabling and market condition, a stable framework, and above all, host country location-specific profit opportunities. Indeed, in principle, the tax burden on location-specific profit could be increased up to the point where economic profit is exhausted without discouraging investment. Thus, where an economy offers an abundance of location-specific profit opportunities, policy makers may understandably resist pressures to adopt a relatively low tax burden, to avoid tax revenue losses (Sinha, 2017).
Double taxation violates the equitable (fairness) principle.
It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make bilateral double taxation agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises (Julian, 2021).
3.0 Conclusion
In a nutshell these problems of double taxation are mainly reduced or controlled by double taxation treaties (agreements) which serve to smooth the business across-boarders. Double taxation agreements require which country has taxing rights over an individual, and, if they both have such rights, which one takes significance. The agreements may agree down different rules for different types of income. They may also agree to exempt some income or gains from tax or allow a set-off of tax paid in one country against tax due in the other.
Reference
• Julian. K (2021), Problems with integrating corporate and personal income taxes in an open economy, Journal of Public Economics 48, 39-66.
• https://www.tra.go.tz/index.php/corporation-tax/108-what-is-a-double taxation
• Lotha (2015), double taxation: The Poor (Cities) Pay More, 23 Urban Affairs Rev. 37, 50 (1987)
• Sinha P.(2014) , Double taxation: Constraints and Objectives in an Open Economy’ (2013) 11 eJTR 284.
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