International Double Taxation occurs when two different
countries impose a comparable tax on the same
taxpayer on the same taxable item. For example,
someone who is resident for tax purposes in one
country and who earns an interest – bearing deposit
with a bank in another country is potentially
exposed to income tax on the interest in both
countries.
It is not unusual for a business or an individual
who is resident in one country to earn taxable
income (earnings, profits) in another country. This
person may be in a position whereby he is obliged by
domestic income tax laws to pay tax on that income
in his country of residence locally, and pay tax
again in the country in which the gain was made.
Since this is inequitable many nations develop
bilateral double taxation agreements with each
other. Conventionally, this requires that tax be
paid in the country of residence and be exempt in
the country from which it arises. To do this, the
taxpayer must declare himself (in the foreign
country) to be non – resident there. The second
aspect of the agreement is that the two taxation
authorities exchange information about such
declarations, and so they may investigate any
anomalies that might indicate tax evasion, for this
reason tax treaties exist between many countries on
a bilateral basis to prevent double taxation.
From the above information it is clear to see
that what the Double Taxation Agreement intends to
do is to avoid a person whether natural or legal
from being taxed twice on the same income and at the
same time, it provides the machinery for the
prevention of tax evasion. The machinery that is
generally used to help prevent this evasion is tax
treaties. In general, tax treaties attempt to
eliminate most forms of International Double
Taxation and various other forms of International
Double Taxation when a failure to do so would have a
harmful impact on international trade and
investment.
I must point out that these countries in the
English speaking Caribbean which were former
colonies of Britain did not have double taxation
treaties which were formally negotiated with the
United Kingdom. What they had was a Double Taxation
Arrangement which was imposed unilaterally by the
mother country. There was no option for the
countries to formally negotiate double taxation
treaties with Britain or any other country. The
United Kingdom double taxation agreements with
countries such as Denmark, Norway, Sweden,
Switzerland and the United States of America were
extended to these states. At present the Tax
Administrations can negotiate with other countries
with a view to determine reciprocal arrangements.
They also have the CARICOM Double Taxation
Agreement.
The CARICOM Double Taxation Agreement
On 29th November, 1994 Trinidad and Tobago
ratified the CARICOM Double Taxation Agreement (“The
Treaty”). This Treaty replaced the 1973 tax treaty.
The less Developed Countries/more Developed
Countries treaty which was previously concluded
between the more developed countries within CARICOM,
that is, Barbados, Guyana, Jamaica and Trinidad and
Tobago and the less developed CARICOM Countries
being Antigua, Belize, Dominica, Grenada,
Montserrat, St. Lucia, St. Vincent, St Kitts and
Nevis, and Anguilla.
It was hoped that the Treaty would be more
successful in its implementation and effect than the
Less Develop Countries/more Develop Countries Treaty
which was never formally ratified or honoured by all
of the Countries that were parties to it. In any
event the Less Develop Countries/more Develop
Countries Treaty was limited in its scope as it was
designed only to try to stimulate International
Trade and investment between the more Develop
Countries and Less Develop Countries, and not among
the more Develop Countries themselves.
The Treaty was intended to encourage and
facilitate trade and investment between residents of
all CARICOM member states who ratified the agreement
by removing the barriers which previously existed
mainly because of the high effective rate of tax
levied on income derived from one CARICOM territory
by a resident of another.
The Treaty is also unusual in two ways in that
firstly it is a multilateral treaty and secondly it
provides for income arising in one CARICOM territory
by a resident of another to be taxed in the source
country.
The Treaty also exempts dividends payable by a
company resident in one CARICOM territory from
taxation not only in the country in which the income
arises but also in the country in which the
Shareholder is resident.
The Treaty has undoubtedly helped to level the
playing field so that investment decisions by
investors within CARICOM are now based mainly on
commercial grounds rather than on taxation
considerations.
We have noticed that the Double Taxation
Agreement or Treaty exempts dividends payable by a
company resident in one CARICOM territory from
taxation both in the country in which the income
arises and also in the country in which the
Shareholder is resident. Perhaps in doing so, the
argument was based on the fact that a corporation
pays income taxes on its profits and may decide to
issue a portion of those proceeds as dividends to
its Shareholders. When it is paid to Shareholders as
dividends, it is taxed as income for that individual
(if it is embodied in the Income Tax Act). This is
referred to as the dividend tax. Opponents to this
tax refer to it as a “double taxation”.
Whatever were the arguments put forward while
negotiating the Double Taxation Agreement, by not
taxing dividends, it help to increase trade and to
some extent development. A good illustration of this
was the situation where a company in Trinidad
established or acquired a subsidiary company in
Jamaica. Dividends received from the Jamaican
subsidiary Company would have been subject to 33 1/3
withholding tax in Jamaica. The dividends would also
have been subject to tax in Trinidad and Tobago at
the prevailing corporate tax rate with a credit for
half of the Jamaican withholding tax. Assuming a
Trinidad and Tobago corporate tax rate of 30%, the
dividends would be subject to tax in Trinidad and
Tobago of approximately 16.67%, giving rise to a
combined effective rate of tax on the dividend in
Jamaica and Trinidad of approximately 46.67%.
It should be noted that under the British rule
Tax Administrations had no choice in negotiating
conventions, agreements, arrangements or treaties.
The conditions were predetermined by the United
Kingdom and they were binding, for example.
“Dividends paid by a company resident in one of
the territories to a resident of the other territory
who is subject to tax in that other territory in
respect there of and not engaged in trade or
business in the first mentioned territory through a
permanent establishment situated there in shall be
exempt from any tax in the first mentioned territory
which is chargeable on dividends in addition to the
tax chargeable in respect of the profits and income
of the company”.
The only exception would be where a non –
resident is trading through a permanent
establishment for example; a United Kingdon Company
in Grenada through a subsidiary. Apart from that,
what is significant is the adoption of the
“residence” principle in the taxation of dividend
income. It is clear to see that the arrangement
between the imperial country and the colony was that
dividend income was not to be taxed in the country
where it had its source.
One of the options that tax administration now
has is, it can negotiate freely and voluntarily with
other countries through tax treaties on how to tax
pensions, salaries, wages, interest dividends etc,
and it can even terminate the agreement if it is not
in the best interest of the revenue.
Thank you.
Ms. Hyacinth Bailey
Antigua and Barbuda
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