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  • Double taxation

    In most instances, MAP cases involve cross-border double taxation. This can happen when the domestic taxation provisions of two jurisdictions overlap. The two types of double taxation are:

    • juridical double taxation – where the same taxpayer is taxed in two jurisdictions on the same income, profits or gains
    • economic double taxation – where two separate taxpayers are taxed on the same income, profits or gains in different jurisdictions.

    In the present context, juridical double taxation may arise if:

    • each jurisdiction subjects the same taxpayer to tax on their world-wide income – for example, the taxpayer may be a resident of, and be taxed on the same income in both jurisdictions
    • a resident of one jurisdiction derives income in the other jurisdiction and both jurisdictions impose tax on that income or part of that income – for example, if the country of source imposes a withholding tax on a royalty payment, and the country of residence taxes the taxpayer on their world-wide income by assessment.

    Economic double taxation may arise where a jurisdiction adjusts a resident taxpayer’s taxable income by applying the arm's length principle to transactions between it and an associated taxpayer in another jurisdiction (a primary transfer pricing adjustment).

    This may result in double taxation because the taxpayer whose taxable income is increased will be liable to pay tax in one jurisdiction on an amount of profit the associated taxpayer will also be liable to pay tax on in the other jurisdiction.

    Relieving juridical double taxation

    Australia’s domestic law and tax treaties provide mechanisms to relieve juridical double taxation including:

    • an exemption for foreign source income or a foreign income tax offset under domestic law
    • credits (in the form of foreign income tax offsets domestically) for foreign tax paid being allowed against Australian tax payable under the relevant treaty.

    Other mechanisms in Australia’s tax treaties can prevent juridical double taxation from occurring in the first place, for example:

    • residency tie-breaker rules
    • allocating exclusive taxing rights over certain types of income.

    Most of Australia's tax treaties contain an article which eliminates double taxation by obliging the country of residence to provide relief from juridical double taxation.

    Applying this article is subject to the provisions of Australia’s domestic law about the allowance of a tax offset against Australian tax for income tax paid in a foreign country (Division 770 of the ITAA 1997). The domestic provisions, however, cannot affect the general principle of this article to eliminate juridical double taxation.

    Relieving economic double taxation

    Economic double taxation can arise when a jurisdiction makes a primary transfer pricing adjustment consistent with the associated enterprises article in Australia’s tax treaties.

    The other jurisdiction may then be required to make an appropriate adjustment to the amount of tax charged on the profits of the associated enterprise in that jurisdiction in order to relieve economic double taxation (a correlative adjustment). A correlative adjustment may not resolve all double taxation.

    When another jurisdiction makes the primary transfer pricing adjustment, the Australian CA can provide unilateral relief under section 24 of the International Tax Agreements Act 1953 (the Agreements Act 1953); however, usually CAs of both jurisdictions will consult with each other.

    Section 24 of the Agreements Act 1953 allows for adjustments to taxable income or to a tax loss. Your tax losses may increase when we apply this section.

    See also:

    Taxes included in a tax treaty

    The 'taxes covered' article outlines the taxes that a particular tax treaty covers. For Australia, this may include:

    • federal income tax
    • fringe benefit tax
    • resource rent tax.

    Penalties and interest on such taxes are excluded.

    See also:

      Last modified: 22 Mar 2021QC 56904