Double taxation occurs when the same income is taxed in multiple countries or jurisdictions. Avoiding double taxation is crucial for businesses and individuals to minimize their tax burden and ensure fair treatment under the law.
There are several strategies that can be employed to avoid double taxation, including utilizing tax treaties, claiming foreign tax credits, and utilizing tax deferral mechanisms. Tax treaties are agreements between countries that provide for the avoidance of double taxation and establish rules for the allocation of taxing rights. Foreign tax credits allow taxpayers to reduce their home country tax liability by the amount of taxes paid in a foreign country. Tax deferral mechanisms, such as controlled foreign corporations and foreign trusts, can be used to defer the recognition of income in high-tax jurisdictions.
