Double Taxation Explained

Double taxation, as the name suggests, makes the same income or earnings taxable twice at different
levels. This taxation principle

May be applied both at corporate and personal levels. In addition, when there is international trade, this
taxation is applied in two different countries.

For example, when earned, corporate profits

Are taxed as corporate tax

And then taxed again as personal income when distributed as dividends among the stockholders.

An owner must pay the tax levied on the earnings of an entity. Plus, if the owner is also the shareholder
who receives the dividend

From the company, the tax at the personal level gets levied, next.

Types

Double taxation is observed to exist in two forms – corporate and international.

#1 – Corporate Dual Taxation

For corporate taxation, when an organization earns a profit and an income, the tax is levied on the
overall income it generates as a business unit. After the tax deduction, when the remaining amount is
distributed among shareholders, they are taxed at an individual level as well for the share profits they
receive on a personal level. This is how tax payment occurs twice for a corporation.

So far as corporate taxation is concerned, only C-corporations have to pay double tax. This is because S-
corporations are similar to partnership ventures as they facilitate the distribution of profits.

Similarly, Limited Liability Companies (LLCs) and sole proprietorship ventures remain exempted from the
double tax payment as they represent pass-through entities. In such firms, profits pass through the
owners and co-owners as individuals, thereby making them liable for taxes on an individual level only

#2 – International Dual Taxation

In international trade, where two countries exchange goods and products for money, the parties dealing
in the items must pay the taxes levied on those products in both countries. This is how twin taxation
applies when purchasing and selling products involving two nations.
Countries that want to avoid dual taxation have the alternative of signing a double taxation treaty with
the required nations. Such treaties set certain guidelines and rules that govern all taxation matters
concerning the trade and investment of the countries involved. For example, nation A and nation B can
mutually agree upon specific clauses and sign an agreement to avoid paying dual taxes within each
other’s boundaries.

Benefits & Problems

Let us have a look at the pros and cons of this dual taxation system:

 While double taxation helps the governments of the countries earn significant revenue, it
increases the tax burden of the citizens.
 In short, this taxation system is a source of additional revenue for the nations, but it imposes
additional tax liability on people on individual levels.
 In corporate taxation, the businesses pay taxes on an income first. Then, the shareholders pay
taxes on an individual level against the dividends distributed from the same income. Hence, it’s
an additional tax for the same source of earnings.
 In foreign trade, the businesses pay taxes to the source country, where the income generates.
Then, they pay the tax in their nation for the products they bring backetween partners, taxed
only on a personal level and not as an entity.