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Income Tax Laws – I

Notes 14.3 Double Taxation Relief

Double taxation refers to a situation where the same income becomes taxable in the hands of the
same company or individual (tax-payer) in more than one country. Such a situation arises due to
different rules for taxation of income in different countries. If a person is resident of a country,
he/she may have to pay tax on any income earned outside that country as well. Thus, the same
person may be taxed in respect of his/her income on the basis of source of income rule in one
country and on the basis of residence in another country leading to double taxation.

In the present era of cross-border transactions across the globe, the effect of taxation is one of the
important considerations for any trade and investment decision in other countries. One of the
most significant results of globalisation is the visible impact of one country’s domestic tax
policies on the economy of another country. This has led to the need for continuously assessing
the tax regimes of various countries and bringing about necessary reforms. Where a taxpayer is
resident in one country but has a source of income situated in another country it gives rise to
possible double taxation. DTAAs lay down the rules for taxation of the income by the source
country and the residence country. Such rules are laid for various categories of income, for
example, interest, dividend, royalties, capital gains, business income etc. Each such category is
dealt with by separate article in the DTAA.

14.3.1 Main Reasons for Double Taxation

The concept of Double Taxation comes into existence generally due to the following reasons:

1. A Company or a person may be resident of one country but may derive income from
other country as well, thus he/she becomes taxable in both the countries.
2. A Company or a person may be subjected to tax on his/her world income in two or more
countries, which is known as concurrent full liability to tax. One country may tax on the
basis of nationality of tax-payer and another on the basis of his/her residence within its
border. Thus, a person domiciled in one country and residing in another may become
liable to tax in both the countries in respect of his/her world income.

3. A company or a person who is non-resident in both the countries may be subjected to tax
in each one of them on income derived from one of them. For example, a non-resident
person has a permanent establishment in one country and through it he/she derive income
from the other country.

14.3.2 Rules due to which Double Taxation Arises

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 i.e.
(a) Source of income rule: Under which the income of a person is subjected to taxation in the
country where the source of such income exists i.e. where the business establishment is
situated or where the assets/property is located irrespective of whether the income earner
is a resident in that country or not; and
(b) Residence rule: Under which the income earner is, taxed on the basis of his/her residential
status in that country. Hence, if a person is resident of a country, he/she may have to pay
tax on any income earned outside that country as well.
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/

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