Double taxation

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Double taxation refers to the taxation of the same source of income twice. Generally, this occurs when a person receives income from different countries. Each country has its own tax rules and failure to comply with these rules can have legal and economic consequences.

There are double taxation agreements, which are defined by Bancolombia as “mechanisms through which two countries or governments determine where and under what conditions the income of persons doing business in those territories, whether exporting, importing or investing, should be taxed”. Specifically, Colombia began to sign agreements to avoid double taxation in 2005 and currently has international agreements on this subject with countries such as Peru, Ecuador, Bolivia, India, Portugal, Korea, Mexico, among others. The main objective is to prevent companies that obtain profits outside the country from having to pay double tax, taking into account that each agreement has its own particularities.

It is important to clarify that the aforementioned agreements do not apply to all taxes, but are effective for income tax and wealth tax, which are the main obligations for individuals and legal entities. For the Dian, this figure is an important instrument for the elimination of obstacles created to trade, investment and exchange in general between countries. It is also a key instrument for international cooperation among tax authorities.

The existence of these double taxation agreements is essential to encourage the economic growth of investments, since, among other things, they generate legal certainty to the extent that they always take precedence over the domestic regulations of each country. Taking into account that there is the possibility of using the domestic law of the country where tax residents are considered tax residents if it is more favorable, in case of dispute, it is settled with the rules of the domestic law of the country where the tax resident is considered tax resident.

Finally, it is important to note that treaties on double taxation cannot modify tax rates, since the value of taxes will always be determined by the rules of each state. The purpose of these agreements is to create procedures to determine when taxpayers, both active and passive, must assume certain powers and/or obligations in order to avoid the same tax being charged or paid twice. This creates a more favorable environment for investment and trade, facilitating the expansion of business in different countries and reducing tax uncertainty for companies and investors.