One of the most common phenomena of globalization and the international exchange of products and services is double taxation. In international trade the question usually arises: where should taxation take place, under the confusion of whether it should be done in the country of origin of the generating fact or in the place where the product or service is offered. This article will provide a brief analysis of its background and basic structure.
Globalization means that countries’ economies are interconnected thanks to the increased flow of goods, services and capital. This has led countries to abandon their rigid, closed market tendencies and make their economic systems flexible. Consequently, the taxation system has also mutated along with international business transactions. The latter has opened up two important issues, which are the basis of the theory of international double taxation.
a. Offshoring
It occurs when a tax jurisdiction (tax territory) attracts capital as a result of low or no taxation in its territory. Enabling companies and businesses to benefit from these circumstances. These places are often referred to as tax havens.
b. International double taxation
This occurs when the taxpayer is considered resident for tax purposes in two countries at the same time, a situation that occurs due to the different definitions of tax residence that each country may have. The following is an extensive analysis of international double taxation.
International double taxation
This phenomenon has already been mentioned as a result of the internationalization of economies and occurs when two tax jurisdictions require the taxation of certain income for themselves. Tax law professor Giuliani Fonrouge points out that there are two types of links between the active subject (taxpayer) and the tax liability; these are the subjective criteria and the economic criteria.
Within the subjective criteria, the aspects of nationality and domicile of the taxpayer are taken into account to establish the place that will have jurisdiction to levy taxes. In other words, the place where the taxpayer is resident has the right to tax all income earned by the taxpayer. The economic criteria, on the other hand, take the aspect of territoriality or source (where the generating event occurs) to establish the place where taxes must be paid[1].
Each of these criteria is adopted by the legislation of the countries that intend to tax income, establishing a tax link between the obligation and the taxpayer. Although it is possible to follow only one of the theoretical lines, it is also possible to adopt both, adapting each one to the needs of the States.
Types of double taxation
After understanding this phenomenon, it is important to identify the types of double taxation, of which there are two:
a. Economic double taxation
This occurs when two States levy the same taxable event with taxes of similar characteristics, but with different taxpayers; formally different taxpayers, but with economic ties that allow them to be considered as one and the same.
b. Legal double taxation
This corresponds to the typical figure of double taxation. Therefore, it occurs when two or more States tax the same concept of income obtained by a single taxpayer.