Q5. Explain double taxation avoidance agreement in detail

Ans:- Double Taxation Avoidance Agreements

Double Taxation Avoidance Agreements

Double taxation relief

Double taxation means taxation of same income of a person in more than one country. This results due to countries following different rules for income taxation. There are two main rules of income taxation (a) source of income rule and (b) residence rule.

As per source of income rule, the income may be subject to tax in the country where the source of such income exists (i.e. where the business establishment is situated or where the asset/property is located) whether the income earner is a resident in that country or not.

On the other hand, the income earner may be taxed on the basis of his residential status in that country. For example if a person is resident of a country, he may have to pay tax on any income earned outside that country as well.

Further some countries may follow a mixture of the above two rules.

Thus problem of double taxation arises if a person is taxed in respect of any income on the basis of source of income rule in one country and on the basis of residence in another country or on the basis of mixture of above two rules.

Relief against such hardship can be provided mainly in two ways 
(a) Bilateral relief (b) Unilateral relief.

Bilateral Relief

The governments of two countries can enter into agreement to provide relief against double taxation, worked out on the basis of mutual agreement between the two