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Two easy steps to overcome double taxation laws so you don't pay tax twice

by , 17 November 2014
According to SARS, South Africa has Double Tax Agreements (DTA) with 159 countries. This means if your company is in South Africa but earns foreign income, you risk paying tax twice. This happens because both countries tax the same amount of income.

There is good news though. Today we reveal two step to ensure you only pay tax on it once...

 
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But firstly, what is double taxation? 

 
Double taxation takes different forms and applies in different situations. The number of taxpayers involved in a transaction can affect the double taxation. 
 
For example, the country where income comes from will tax the dividend by a way of withholding tax. Then your country of residence will tax you by a way of tax assessment. 
 
If the same income is subject to two amounts of tax in the hands of two different taxpayers it's called economic double taxation. Therefore, the profit earned by the company that paid the dividend may be subject to corporate income tax
 
The corporate profits and the dividends are the same income, but they're subject to two amounts of tax in the hands of two different taxpayers (the company paying the corporate income tax and the shareholder) subject to the taxation on the distributed profits. 
 
Double taxation happens both in the domestic and cross-border situations.
 
Here are the top 10 of the 159 countries SA holds such Double Tax Agreements with:
 
1. Austria; 
2. Russia;
3. China;
4. India;
5. UK; 
6. USA;
7. Hong Kong;
8. Germany;
9. Japan; and
10. Spain.
 
But you don't need to despair and accept your double taxation fate if you receive foreign income from any of these countries.
 
There's a way around it and all you have to do is follow these two easy steps.
 
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Avoid international double tax by following these two steps

 
Step #1: Determine if you're a resident in South Africa. 
 
If you are, you'll pay tax in South Africa on your worldwide income.
 
If you're a non-resident, you'll only pay tax on income or capital gain made in South African.
Here's how to determine if you count as a resident:
 
1. Ordinarily resident – if you're ordinarily a resident in the country;
2. Physical presence – you're a resident by reason of your physical presence in South Africa. (In this case you qualify as a resident of South Africa with effect from the first day of that relevant year of assessment.)
 
Step #2: Consider if there's a problem of international double taxation.
 
If you have to pay tax twice on the same profits, during the same period, in two or more countries, you must determine which country has the right to tax that income. Do this by doing a residency test and following the source rule. 
 
If both countries have taxation rights, you can claim the tax you paid the country of source as a credit against your tax liability in the country where you're a resident.
 
Following these two simple steps to avoid the burden of international double tax.
 
For more on South Africa's international tax laws, check out the Practical Tax Loose Leaf Service
 



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