Many countries have systems that tax their own residents on their worldwide income and tax non-residents on income that was earned within their jurisdiction. A consequence of this type of system is therefore that income earned by a resident individual or entity of one country (the home country) by working in another country (the host country) can give rise to a tax liability in both the host country and the home country in respect of the same income. Many countries have rules in their national tax law to deal with this type of situation by giving double tax relief to residents who have earned income and paid tax in another country. This may be done either by exempting the foreign income from taxation in the home country or by providing a tax credit in the home country for tax paid in the foreign country.
Similar rules on the elimination of double taxation are normally included in bilateral double taxation agreements. More than three thousand double taxation agreements have been concluded worldwide to date and the UK has signed well over a hundred of these agreements. In addition to providing for double taxation relief for individuals and businesses these agreements also allocate taxing rights in respect of many different types of income between the contracting states; provide for nondiscrimination; facilitate the exchange of tax information and provide for the resolution of disputes arising on matters covered by the agreement.
Details of the double taxation agreements concluded by the UK are available on the website of HM Revenue and Customs (HMRC). Anyone planning to work abroad either as an employee or on work for their own business should consult the double taxation agreement concluded between the UK and their host country. In cases where there is no double taxation agreement the national tax law of the host country will apply in determining the taxation of earnings or profits; but the UK makes provisions for relief from double taxation under its domestic law. When consulting a double taxation it is necessary to check that it is effective for the relevant tax years. After a treaty is signed the ratification procedures may take some time and there will therefore be some treaties that are signed but not yet in force. Also, a treaty may have been terminated or may have been replaced by a more recent agreement and this must be checked. Double taxation agreements are often updated by protocols or exchanges of diplomatic notes that update certain provisions and it is essential to check that the agreement consulted is the up to date version.
About the author: Peter Hann is an accountant based in Croydon, UK who specialises in international taxation.