DOUBLE TAXATION
Nyantamba, G (2019)
Nyantamba,G.
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Meaning
• The term double taxation refers to
being exposed to tax more than once
on the same income/profit and the
same
• The imposition of tax on the same
income of the same person at the
same time twicedeposited
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Types of double taxation
• Economic double taxation
• Juridical (international) double
taxation
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Economic double taxation
• Any situation where an amount of
income is taxed twice. It is broadly
covers those situation. E.g. the same
income subject to corporate tax and
profits as dividend suffers
withholding tax or wages suffers
PAYE and once spent suffers VAT
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Juridical (international)
double taxation
• Refers to the imposition of income
tax or comparable profits tax on the
same income in two or more different
tax jurisdictions for an identical or
same period or year of income in
respect of the same taxpayer.
• More than one country tax the same
income
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Juridical (international)
double taxation
• Imposition of comparable taxes in
two (or more) states on the same
taxpayer in respect of the same
subject matter and for identical
periods.
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Juridical (international)
double taxation cont..
Causes/ reasons..
a) Taxing citizens and non citizens in the
country territory when income
originates
b) If the taxpayer is resident of more
than one country
c) When country does not consider
residential status in taxing
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Juridical (international)
double taxation cont..
Causes/ reasons cont..
• There fore the main cause of the
international double taxation is the
crashing between the source and the
residence principles of double taxation.
• Also the existence of different
interpretation of resident and source of
income between countries
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Impacts of double
taxation
• Increases burden to taxpayers and
hence encourage evasion and avoidance
• Creates unnecessary reallocation of
resources to minimize tax liability
• Discourage people to work to avoid being
taxed twice
• Causes decrease in investment
•
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Impacts of double
taxation cont..
• Lead to capital flight and progressive
income distribution
• May cause obstacle on capital movement
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DOUBLE TAXATION
RELIEF
• The relief can be unilateral or by
agreements ( bilateral and multilateral)
Unilateral relief is where individual
country can offer tax credits or
reductions for foreign taxes paid or
outright exemptions from taxation of
foreign source income.
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DOUBLE TAXATION
RELIEF cont…
Agreements or Treats
This is where countries (two or more)
negotiates treaties in order to reduce the
impact of double taxation. Eg. Exemption,
reduction or harmonization of overall tax
rates. To encourage trade and development,
double taxation treaties are entered into
by various nations
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Double taxation
treaties functions
1. To reduce or eliminate international double
taxation impact on taxpayers with foreign
income through exemption and reduction
2. Enables investors to know the income
earned in a foreign country, and in fact it
facilitates or encourages foreign trade,
labor
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Double taxation
treaties functions cont.
3. Help in avoiding unfair tax liabilities in
foreign countries, and discrimination
against foreign investments
4. May help to prevent tax avoidance or
evasion
5. Defend countries’ right to tax economic
transactions or income earned in their tax
jurisdictions.
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UNILATERAL
MEASURES
DOUBLE TAXATION RELIEF METHODS
1. Deduction method
2. Exemption method
3. Credit method
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DOUBLE TAXATION RELIEF
METHODS CONT…
Deduction method
• Foreign taxes are treated as an expense
of doing business. The country of
residence taxes the foreign income but
allows a deduction for any foreign taxes
paid.
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Example
A resident taxpayer earned Tshs 8,000,000 from
Tanzania and Tshs 2,000,000 from Kenya. The tax
rate in Kenya was 20% flat rate, while in Tanzania
there were two tax rates one for income above
Tshs 8,000,000 which was 30% and another for
income not above Tshs 8,000,000 which was 25%.
Determine tax burden when?
a) No tax relief
b) Deduction method is used
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DOUBLE TAXATION RELIEF
METHODS CONT…
Exemption method
• The country of residence does not tax
the foreign income of its tax residents.
Foreign income is said to be exempt
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DOUBLE TAXATION RELIEF
METHODS CONT…
Exemption method
• The country of residence does not tax
the foreign income of its tax residents.
Foreign income is said to be exempt
Two types of exemption method
a) Full exemption method
b) Exemption with progression method
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Exemption method cont..
full exemption method, the country of
residence omits the foreign income from
its own tax system and taxes only
domestic income
exemption with progression includes the
exempted income when determining the
tax rate to apply to domestic income in
case of progressive tax rate systems
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Example
A resident taxpayer earned Tshs 8,000,000 from
Tanzania and Tshs 2,000,000 from Kenya. The tax
rate in Kenya was 20% flat rate, while in Tanzania
there were two tax rates one for income above
Tshs 8,000,000 which was 30% and another for
income not above Tshs 8,000,000 which was 25%.
Determine tax burden when?
a) No tax relief
b) full exemption method is used
c) exemption with progression approach is used
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DOUBLE TAXATION RELIEF
METHODS CONT…
Credit method
• Income earned from the overseas
country is taxed in the country of
residence.
Then foreign tax paid is then deducted
from the tax on the income charged by
the country of residence
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Credit method cont..
Two types of credit methods
• Full Credit method; countries of
residence allow deduction of the total
amount of foreign tax when computing the
tax liability of resident taxpayers
• Ordinary credit method; maximum
deduction to the proportional of taxes
that could have been paid on the foreign
income if the income were earned in the
residence country
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Example
A resident taxpayer earned Tshs 8,000,000 from
Tanzania and Tshs 2,000,000 from Kenya. The tax
rate in Kenya was 20% flat rate, while in Tanzania
there were two tax rates one for income above
Tshs 8,000,000 which was 30% and another for
income not above Tshs 8,000,000 which was 25%.
Determine tax burden when?
a) No tax relief
b) full credit method is used
c) Ordinary credit method is used
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Double taxation relief in
Tanzania
Tanzania use both methods ( Exempt and credit) in
providing relief to foreign income tax. For
example, foreign income paid from business
income earned under foreign controlled entities
of resident persons is given through ordinary tax
credit (Section 77)
Foreign income tax’ means income tax imposed by a
foreign country and includes a final withholding
tax or branch profits tax imposed by a foreign
country
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Double taxation relief in
Tanzania
Section 77of the ITA Act, 2004 provides the
authority for granting foreign income tax credit
to a resident person, other than a partnership,
for a year of income for any foreign tax paid by
the person
foreign tax credits claimed shall not exceed the
average rate of Tanzania income tax of the
person for a year of income applied to the
person’s taxable foreign income on which the
foreign income tax was paid
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Example 1
A resident taxpayer earned Tshs 8,000 from
Tanzania and Tshs 2,000 from Kenya, so the
worldwide income was Tshs 10,000. The tax rate
in Kenya was 40% flat rate, while in Tanzania the
tax rate was 30%.
Required:
Discuss the treatment of foreign income tax paid in
Kenya under the Tanzania income tax laws.
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Example 2
In the year 2006 Mr. Alex Chou was a resident in
Tanzania. He earned foreign income equivalent to
Sh. 126,200,000. Foreign tax was paid equivalent
to Sh.41,900,000. He had no income in Tanzania.
He filed a return of income for the year of
income 2006 and declared the foreign income of
Sh. 126,200,000 and claimed a credit for the tax
paid of Sh. 41,900,000.
• Required: Compute the tax to be paid in Tanzania
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