*Double TaxationImposition of tax twice in one year on same Income is called Double Taxation.

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*Why this Issue arises ?

MR.Babar Deputy Commissioner FBR Large Tax payer Unit, Revenue Division

This is due to cross border investment and due to inter-country transactions

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Kinds of Taxations

Source based taxation

The country which provides you opportunity to generate income from source. Residence based taxation

If you are resident of a country which provides you public services and facilities.

*USA resident lawsA person who is the citizen of USA will be the resident of USAResident means A person who is legally a member of the USA having green card.*

*How Double Taxation can happen

Taxation by two or more countries of the same incomeTaxation of dividend incomeIn the United States a person holding more then one domicile

*As the example 1.1 explainsJoint stock company income is taxed twice every place in the worldIf a person has the domicile of more then one states then on his death each state can claim on its property then it can result in double taxation

Between Two Countries

In import and export

Dividend

Domicile CaseIn US if a person having two states domicile On his death Property will be taxed by two states

*Lets try to solve this issue

Pure Source base taxation Pure Residence base taxation

Remember this is not the right solution

*All the income is taxed only at the place where its earnedAll the income is taxed which state the person is resident

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Assumption

Resident Is the person/Company that born in one country then he will be the resident of that specific country.*

*Why Pure Residence Base Taxation can not exist?Cant collect taxes from foreigners doing business within their economy Reduce revenues in poor developing countries. Much easier to evade tax

*Because they are utilizing your resources and country have to collect the tax from the foreigners to increase its revenues.Because rich countries investors are using the less developed counties resources , so no resource tax will be given to the developing countiesIf a person is doing business in Pakistan and he is resident of USA then the us tax department will not be able to access his right income in Pakistan.

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*Why Pure Source Base Taxation cant exist?US Company in Pakistan will give Taxes to PakistanSo Revenues of Poor Developing Countries will be increased.Taxes rate will be lowered down to much

*Because there will be a very tough competition between the countries to attract the investors, so every country will try to lower its source base taxation ratesSo very rightly every company will go there, where tax rates are lower, so overall revenue of the countries from the tax will be reduced

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*If Pure Source Base Taxation

Zulfiqar Ali (Director, Board of Investment , New Muslim Town )

As our imports more then exports so on imported goods the taxes are already paid in the home on Source, that is why we can not tax it in Pakistan.

*Avoidance of Double Taxation in Joint Stock Company in USAvoid the corporate form of doing business Go to LLCs (Limited Liability Companies) It exist in USA UK and most developed countries

*LLC is the A business structured in which its owners are not personally liable for debts or other business liabilities such as damages from lawsuits. LLCs are taxed similarly to partnerships, thus avoiding double taxation.

Business owners form a Limited Liability Company (LLC) to reduce their personal liability. If you operate as a sole proprietor or partnership, you are personally responsible for any business debts or lawsuits against your business. Nearly everything you own can be at risk.When you set up an LLC, you separate your business and personal identities. This helps protect your personal savings, your house, your car, etc. LLCs can also provide business owners with other benefits like tax savings.*

* Pakistan Perspective

Raza Munawar (Additional Commissioner of FBR, Large tax payer Unit, Revenue Division.)

It is just misconception that the company income taxed twice, it is actually two entities who are taxed.

*Inter-Country Double Taxation Solution

Agreement/treaties between the countries for Double taxation

What is the Treaty?An agreement under international laws.

*all of these international agreements under international law are equally treaties, and equally acceptable*

*Role of the UNin TreatiesRegistered with the UNTo prevent the proliferation of secret treatiesAmendments to these treatiesTo prevent the International investors against double taxation

*If it is not registered it will be illegal treaty in 19th, 20th century many secret treaties were proliferated by the enemy states. so to avoid its

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*Models of Double taxation Avoidance TreatiesWe have many models but most accepted are

OECD model UN model

*OECD Model Treaties

Normally tax a person on residential status (page4 DTA vol. 1)Two developed or developing and developed country Pakistan most treaties are registered with OECD

*UN Model Treaties

Towards the interest of developing countries It encourages the source base taxation These are very few

*Fundamentally, the treaties strike a compromise between source and residence taxation.*

How The OECD Model Treaties Formed

*Pakistan Double Taxation agreements/ Treaties

Full Scope Treaties Limited Purpose Treaties

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Full Scope Treaties That treaties which cover almost whole of the system of the taxation with the other country

Limited Purpose TreatiesTreaties in which we specifically mention special area of our agreement. e.g. shipping, airlines

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*Full Scope Treaties Pakistan has double taxation treaties with 52 countries some of them are mentioned below:-

1Bangladesh6Singapore2China7USA3Iran8Thailand4Germany9United Kingdom

5Japan10Turkey

*Limited Purpose Agreement

1Saudi Arabia (Income from Airlines). 3Iran (Income from airlines)Iran (Income from Shipping)

2India (Income from Airlines)

*Who can have the access to these Treaties?

Both contracting states residents

*Citizen of USA means a person that is a legally recognized as a member of a state*

*If a person is Resident of two statesPakistan due to 183 days USA due to the citizenA USA citizen resides in Pakistan for more then 183 days then he will be resident of both Pakistan and USA.

*The solution is Permanent homeEconomic relations are closer.Habits match

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http://en.wikipedia.org/wiki/Double_taxationMR.Babar Deputy Commissioner FBR Large Tax payer Unit, Revenue Divisionhttp://www.taxjustice.net/cms/upload/pdf/Source_and_residence_taxation_-_SEP-2005.pdfZulfiqar Ali (Director, Board of Investment , New Muslim Town )

http://en.wikipedia.org/wiki/Limited_liability_companyRaza Munawar (Additional Commissioner of FBR, Large tax payer Unit, Revenue Division.)http://unpan1.un.org/intradoc/groups/public/documents/un/unpan002084.pdfhttp://www.cbr.gov.pk/newdt/TaxTreaties/Double%20Taxation/Defualt.asp#1

http://answers.oneindia.in/index.php?category=52

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**USA resident lawsA person who is the citizen of USA will be the resident of USAResident means A person who is legally a member of the USA having green card.**As the example 1.1 explainsJoint stock company income is taxed twice every place in the worldIf a person has the domicile of more then one states then on his death each state can claim on its property then it can result in double taxation

*All the income is taxed only at the place where its earnedAll the income is taxed which state the person is resident

**Because they are utilizing your resources and country have to collect the tax from the foreigners to increase its revenues.Because rich countries investors are using the less developed counties resources , so no resource tax will be given to the developing countiesIf a person is doing business in Pakistan and he is resident of USA then the us tax department will not be able to access his right income in Pakistan.

**Because there will be a very tough competition between the countries to attract the investors, so every country will try to lower its source base taxation ratesSo very rightly every company will go there, where tax rates are lower, so overall revenue of the countries from the tax will be reduced

**LLC is the A business structured in which its owners are not personally liable for debts or other business liabilities such as damages from lawsuits. LLCs are taxed similarly to partnerships, thus avoiding double taxation.

Business owners form a Limited Liability Company (LLC) to reduce their personal liability. If you operate as a sole proprietor or partnership, you are personally responsible for any business debts or lawsuits against your business. Nearly everything you own can be at risk.When you set up an LLC, you separate your business and personal identities. This helps protect your personal savings, your house, your car, etc. LLCs can also provide business owners with other benefits like tax savings.**all of these international agreements under international law are equally treaties, and equally acceptable**If it is not registered it will be illegal treaty in 19th, 20th century many secret treaties were proliferated by the enemy states. so to avoid its

**Fundamentally, the treaties strike a compromise between source and residence taxation.**

**Citizen of USA means a person that is a legally recognized as a member of a state**

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