What Is Double Taxation?

Double taxation is when taxes are levied twice on the ⛦same source of income. It can occur when income is taxed at the corporate and personal level. Double taxation can also happen in international trade or investment when the same income is taxed in two countries.

How Double Taxation Works

Double taxation often occurs because 澳洲幸运5官方开奖结果体彩网:corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just like individuals. Double taxation is often an unintended consequence of 澳洲幸运5官方开奖结果体彩网:tax legislation. It is generally seen as a negative elementꦍ of a tax system, and tax authorities﷽ attempt to avoid it.

When corporations pay out dividends to shareholders, those dividend payments incur income-tax liabilities for the shareholders who receive them, even though the earnings that provided the cash to pay the dividends were already taxed at the corporate level.

Most tax systems attempt varying 澳洲幸运5官方开奖结果体彩网:tax rates and 澳洲幸运5官方开奖结果体彩网:tax credits, to have an integrated system where income earned by a corporation and paid out as dividends and income earned directly by an individual is taxed at the same rate. In the U.S. dividends meeting certain criteria can be classified as "qualified" and subject to advantaged tax treatment: a tax rate of 0%, 15%, or 20%, depending on the individual's tax bracket. The federal corporate income tax rate in 2024 is 21%. For states, the corporate income tax rate ranges from 1% to 12% and are deductible expenses.

Debate Over Double Taxation

Some argue that taxing shareholders on their dividends is unfair because these funds were already taxed at the corporate level. Proponents of double taxation point out that without taxes on dividends, wealthy individuals could enjoy a good living off the dividends they receive from owning large amounts of 澳洲幸运5官方开奖结果体彩网:common stock, yet pay zero taxes on 澳洲幸运5官方开奖结果体彩网:personal income.

Stock ownership could become a tax shelter, in other words. Supporters of dividend taxation also point out that dividend payments are voluntary actions by companies and, as such, companies are not required to have their income "double taxed" unless they choose to pay dividends to shareholders.

International Double Taxation

Income may be tax෴ed in the country where it is earned and levied again when repatriated 🎉to the home country. It may make international business too expensive to pursue.

To avoid these issues, countries have signed treaties to avoid double taxation, often based on models provided by the Organization💙 for Economic Cooperation and Deve🍃lopment (IECD). In these treaties, signatory nations agree to limit their taxation of international business to augment trade between the two countries and avoid double taxation.

The Bottom Line

Double taxation occurs when taxes are levied twice on a single source of income. Often, this happens when dividends are taxed. Like individuals, corporations pay taxes on annual earnings. If these corporations later pay out dividends to shareholders, those shareholders may have to pay income tax on them. Double🌠 taxation happens when individuals or companies are taxed by two countries♔ or states.