Aspects of double taxation relief in the light of double taxation treaties concluded by Malta

Abstract

For a state to impose taxes on income and capital gains there must be what is referred to as a connecting factor justifying its claim. The connecting factor can be, amongst others, residence, nationality, domicile or origin of income. A single connecting factor may by enough to award a state the right to taxation. Consequently when more than one state proves the existence of a connecting factor, the issue of double taxation arises. For instance, when a person resident in country A receives income which was in one way or another generated in country B, this multiplicity of connecting factor arises. Both country A and B have a justification to claim taxation rights over that income. Double taxation of income and capital, besides being unjust makes foreign trading less profitable and in so doing discourages international trading. However, taxation being one of the main pillars of any country's economy, no country is willing to give up taxation rights over income or capital without reasonable justification. In the absence of a universal tax regime, countries have tried to co-operate to come up with systems which seek a balance between a state's right to tax and a person's right of protection from the effects of double taxation. States have sought to avoid double taxation in a number of ways. A country may decide not to tax overseas income either generally or of a particular sort. If total exemption is not un ulternutive, there arc three other options a country may adopt: 1. A country may enter into a double taxation agreement with another country. This exempts some of the income from tax in one country and gives credit for foreign taxes on other income; 2. A country may unilaterally allow a foreign tax paid as a credit against its tax liability; 3. The third option is where foreign tax is treated like any other business expense and becomes deductible when computing the profits of the business. In Malta there are four systems through which double taxation relief may be awarded: • under Section 81 of the Income Tax Act double taxation relief is available if foreign tax has been suffered in a country with which Malta has a double taxation treaty; • section 83 provides for double taxation relief in respect of commonwealth income tax; • relief from double taxation is granted on a unilateral basis where overseas tax is imposed on income received from a country with which Malta does not have a treaty and where relief from commonwealth income tax is not applicable; • where the taxpayer is a Maltese company that holds more than 10% of the voting power of the overseas company, paying the dividend, unilateral relief is also available. Where a Maltese company is in possession of a certificate from the auditor stating that income or capital gains are received from abroad, and such income or capital gains are allocated to its Foreign Income Account, a flat-rate foreign tax credit is made available. The availability of this type of relief is subject to the condition that the other three options are not available. The application of internationally established rules, or rather guidelines for the awarding of double taxation relief to the Maltese context through double taxation agreements constitutes the primary focus of this study