Today, many individuals and companies carry out their economic activities in more than one country. Taxation of the same person in more than one country, in the same period, on the same tax subject is called double taxation. Double taxation is an undesirable situation due to its negative effects on free competition, damaging the principle of equality in taxation and restricting capital transfers between countries. For this reason, countries carry out a number of studies to prevent double taxation and become a party to agreements. In this article, we will cover the steps to avoid double taxation as well as the details of the applications according to the legal legislation.
The most important way to prevent double taxation is through agreements between countries. International conventions, to which two or more states are parties, regulate issues such as which state will have taxation jurisdiction, which methods will be used to prevent double taxation in cases where taxation jurisdiction overlaps, and which income elements will be included in the scope of double taxation prevention.
Foreign capital investments are extremely important in terms of providing resources to the economy of our country. In order to encourage foreign investors to come to our country, to increase commercial activities, to develop economic relations and to reduce the aforementioned negativities, Turkey is currently party to double taxation avoidance agreements with 86 countries. These countries are as follows: Austria, Norway, South Korea, Jordan, Tunisia, Romania, the Netherlands, Pakistan, the United Kingdom, Finland, Cyprus, France, Germany, Sweden, Belgium, Denmark, Italy, Japan, the United Arab Emirates, Hungary, Kazakhstan, Macedonia, Albania, Algeria, Mongolia, India, Malaysia, Egypt, the People's Republic of China, Poland, Turkmenistan, Azerbaijan, Bulgaria, Uzbekistan, the United States, Belarus, Ukraine, Israel, Slovakia,
Kuwait, Russia, Indonesia, Lithuania, Croatia, Moldova, Singapore, Kyrgyzstan, Tajikistan, Czech Republic, Spain, Bangladesh, Latvia, Slovenia, Greece,
Syria, Thailand, Sudan, Luxembourg, Estonia, Iran, Morocco,
Since the concept of "residency" differs according to the domestic laws of states, persons who wish to benefit from international agreements must obtain a certificate of residency from the competent authorities of the state in which they are a resident and submit this certificate to the relevant tax authorities.
In double taxation avoidance agreements, there are some principles for determining the country of taxation.
- According to the principle of residence, the income of a person living under the sovereignty of a state is taxed in the country of residence, regardless of which country it is derived from.
- According to the source principle, the place where the income to be taxed is derived is important, not the place where the person is resident.
- According to the nationality principle, a person pays taxes to the country of which he or she is a citizen, regardless of where he or she derives his or her income.
None of these principles is strictly preferred. Principles are determined according to the country with which the agreement is concluded. For example, in the case of agreements with developed countries, the origin principle is emphasized, while in the case of agreements with developing or undeveloped countries, the residence principle is emphasized.
According to the double taxation avoidance agreements between countries, there are some methods to avoid double taxation. These methods seen in the agreements are as follows:
- Offset method: According to this method, the country of residence deducts similar taxation in the source country from the total tax when calculating the tax.
- Deduction method: The tax base is defined as the total amount of taxable income less expenses determined by law. In this method, taxes paid in the source country are deducted from the total income while subject to taxation in the country of residence - especially in income and wealth taxes - in other words, the tax paid in the source country is shown as an expense.
- Exception method: In this method, the subject matter subject to taxation in another country is excluded from taxation in the other country. There is no need to conclude an agreement with another country for the application of the exception method. Taxation in another country may be exempted by national regulations.
Income Elements Regulated in Double Taxation Treaties
In double taxation avoidance agreements, various income elements are handled differently. According to these income elements, it is determined which country has taxation authority or both countries are authorized. In cases where both countries are authorized to tax the income item, the measures mentioned above are applied to prevent double taxation.
The income elements addressed in the agreements can be listed as follows: Income from real estate assets, commercial earnings, international transportation earnings, dividend income, interest income, intangible rights, capital appreciation gains, income from self-employment activities, wage income, income from company board members, income from artists and athletes, pensions of private sector employees, wage income and pensions of public sector employees, income from teachers and students, and other income. Each of these elements is dealt with separately in contracts and subject to different principles and methods. For example, according to the Agreement on the Avoidance of Double Taxation between Germany and Turkey;
-Almanya’da yaşayan Türk vatandaşlarının kâr payından elde ettikleri gelirler Almanya tarafından vergilendirilir, Türkiye’ye ise en fazla %15 olmak üzere sınırlı bir vergilendirme yetkisi tanınmıştır. Türkiye’de ödenen vergi, Almanya’da ödenen vergiden mahsup edilecektir.
Self-employment earnings will be taxed in Turkey and exempt from taxation in Germany if they have a permanent establishment in Turkey or if they spend at least 183 days of their 12-month activity period in Turkey. As can be seen from the example, there are different regulations for each item.
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