What is a Double Taxation Agreement?

The term double tax is used in taxation processes. Double taxation is the system of tax-levying for two or more jurisdictions. This means that there is taxation twice on an income. In a big organization, this taxation can be evidently done twice or in various ways. The government can tax an organization on the profits it makes and on its operations. This can be termed as double taxation. There are instances of this double taxation in the United States. This happens when the US government do the taxation on the corporate finances or rather income, and then after the taxation is done, it also levies the taxes on the dividends that are shared among the company’s shareholders. For the double taxation, it can also happen when both countries assume the taxation done in both countries for the same asset traded between the two countries, or taxation for the transactions between both.

Both the United States (US) and the United Kingdom (UK) have an agreement (Treaty) made purposely for the double taxation issues, also known as UK US Double Tax Treaty.

This agreement favors the resident in a way that, they can be exempted from being taxed on the income-generating activities or trading items, that they source from within the United States. This is done through the exemption process from the taxation, or else through minimizing the rates of taxation. The rate of income taxation between the two nations is different. The taxation rate for UK residents is higher than the rates of taxation in the US. The US requires all its citizens to pay tax to it regardless of where they are located. The US requires its citizens to file the United States Federal tax and the tax should be paid to the IRS (Internal Revenue Service).

Both Nations have the rules that do allow credits for the taxes paid to other countries. To make this process flow in an organized and lawful method, both countries have a designed treaty to solve the issues of the double taxation issue. However, the United States does give credits for United Kingdom taxes. This means that the US will have to give credits for foreign taxes paid. This will only happen in an instance where the credit is given against the income of an individual, to the limit of the amount that the individual would pay for the tax in the United States. An individual who is leaving the UK to live or else for work abroad may be allowed to claim back some of the income tax that they have paid. In the UK, the question of whether to pay tax depends on the residence of an individual. However, UK residents will have to pay the taxes on their foreign incomes.

The matters on double taxation need a clear understanding of citizens and particularly the tax-paying individuals. Understanding the terms of the double taxation procedures will help in gaining the knowledge on how to deal with the tax-related issues. An example of an issue like that is of Social Security benefits that are received by the United States citizens and the green card holder who reside in the UK, who are exempted from taxations in the US and are said to be the only taxable in the United Kingdom.