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Three penalties you'll face if you don't treat double tax treaties correctly

by , 21 January 2014
It's important that you understand the provisions of double tax treaties correctly when you deal with international double taxation. If you don't, you'll face these three penalties.

If you don't interpret the provisions of double tax treaties correctly, you'll face the following three penalties:

  1. Penalties and interest for the underpayment of provisional tax;
  2. Cash flow problems because you paid in too much; or
  3. Get arrested for fraud because your figures are wrong.

The purpose of these treaties is to eliminate the problem of double taxation.

If you're not too sure about this, you'll be glad to know there are two steps you can use to overcome a double taxation problem.

Use these two steps to overcome a double taxation problem

Step #1: Determine if you're a resident in South Africa.


If you are, then you'll pay tax in South Africa on your worldwide income.

If you're not, you'll pay tax on your income or capital gain made in South Africa and you'll pay tax in your resident country.

Step #2: See if international double taxation exists.

The Practical Tax Loose Leaf Service explains that if you have to pay tax on the same profits, during the same period, in two or more countries, you must check which country has the taxing rights.

The countries in the Double Tax Agreement (DTA) will determine who has tax rights. You'll do the residence test, and the country with the first taxing rights will be the one you're living in.

If residency isn't a factor, then you'll use the source rules. This means if the source of income is from Country A, then Country A will have the first taxing rights.

If both countries have taxing rights, claim the foreign tax paid as a credit against your tax liability in the country where you're a resident.

You'll face harsh penalties if you don't treat double tax treaties correctly. Don't take that risk. Find out more about DTAs here.

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