The Hidden Cost of Global Trade

Double Taxation Solutions in 5 Steps

The Hidden Cost of Global Trade. Global commerce makes it easy to earn income in more than one country. However, this situation brings with it the problem of “double taxation.” Double taxation is the taxation of the same income in two different countries. This situation is a financial burden for investors and businesses. In this article, double taxation is examined. Legal mechanisms used to solve the problem are explained. Agreements to which Turkey is a party are addressed. The steps that must be taken to protect the rights of taxpayers are clarified.

1. What is Double Taxation and Why Does It Occur?

Double taxation is the situation where a person or an institution is being taxed in more than one country on the same income or gain. This situation is generally arising from the different taxation rules of countries.

• Residency-Based Taxation: Many countries have the right to tax the persons who are living within their borders (who are residents) on all the incomes they have earned globally.
• Source-Based Taxation: A country has the right to tax the income earned within its borders, regardless of where the person who has earned that income is a resident.

The clash of these two different taxation rules is creating the problem of double taxation.

2. Agreements for the Prevention of Double Taxation (DTAs)

For the solution of double taxation problems, countries are making bilateral agreements between themselves. These agreements are being called “Agreements for the Prevention of Double Taxation” (DTAs).

• The Purpose of the Agreements:
  • To determine in which country an income will be taxed,
  • To prevent tax evasion,
  • Purposes such as protecting the rights of taxpayers are being found.
• The Provisions of the Agreements: These agreements are determining the taxation authority for various income types such as interest income, dividend income, and freelance income.

3. How is Double Taxation Being Prevented? Two Basic Methods

DTAs are generally using one of two basic methods to prevent double taxation: the exemption method and the deduction method.

• Exemption Method: In this method, the income earned in one country is being exempted from tax in the other country. For example, an income earned in one country is not being taxed in the country of residency.
• Deduction Method: In this method, the tax paid in one country is being deducted (subtracted) from the tax that will be paid in the other country. In the agreements to which Turkey is a party, the deduction method is generally being used.

4. The Deduction of Tax Paid in a Foreign Country in Turkey

Turkey is generally applying the deduction method to prevent double taxation. The working of this method is as follows:

• Right to Deduct: A taxpayer in Turkey has the right to deduct the tax they have paid on the income they have earned in a foreign country from the tax that has been calculated for the same income in Turkey.
• Limitation: The amount of the tax to be deducted can never exceed the amount of the tax that has been calculated for the same income in Turkey. This is a limitation that has been put to prevent taxpayers from evading taxes.

5. Certificate of Residency and Its Legal Importance

A certificate of residency is an official document that is showing in which country a person or an institution is a taxpayer.

• The Purpose of the Document: It is ensuring that a person is prevented from being accepted as a resident in two different countries.
• The Use of the Document: To benefit from agreements for the prevention of double taxation, it is required for taxpayers to present this document to the relevant tax office.

6. Legal Remedies in Double Taxation Problems

When a problem related to double taxation is being encountered, it is possible for taxpayers to apply to legal ways.

• Mutual Agreement Procedure: In DTAs, a mechanism called “mutual agreement procedure” is being found for the resolution of disputes between tax administrations. An agreement is being tried to be reached between countries upon the application of the taxpayer.
• Lawsuit Way: When administrative remedy ways are not giving a result, the way of a lawsuit being filed in the Tax Court is being followed.

7. Legal Support and Counseling

Double taxation is a complex subject that is requiring knowledge of international tax law and administrative law.

• The Requirement of Expertise: A wrong step that will be taken in this process can lead to serious pecuniary losses. For this reason, legal and financial support being taken from a tax lawyer or a financial advisor is of vital importance.

The Hidden Cost of Global Trade. Double taxation is being accepted as a significant problem brought by the global economy. However, these problems can be solved with the agreements for the prevention of double taxation that countries have signed and with methods such as deduction and exemption that are being found in these agreements. The examination of DTAs, the provision of certificates of residency, and legal support being taken from an expert in these complex processes before international procedures are being done are being seen as the most important steps for the lightening of the tax burden and the protection of rights.