How Tax Treaties Eliminate Double Taxation on Income

The Double Tax Avoidance Agreement (P3B) sets out how taxing rights on income are allocated between the source country and the residence country. It defines three allocation patterns: exclusive taxation by one state, shared rights between source and residence, and shared rights with a capped rate. These rules aim to prevent double taxation.

The exclusive rule uses the phrase ‘shall be taxable only’, granting a single country the right to tax. In the shared arrangements, the source country taxes first and the residence country receives a residual tax right, expressed as ‘may be taxed … but the tax so charged shall not exceed’. Double taxation is eliminated either by the exemption method, where the residence country does not tax again, or by the credit method, which allows a limited credit equal to the tax paid by the source country.

Consequently, the treaty serves as the primary tool to lessen double‑tax burdens for cross‑border taxpayers. A lower tax in the source country expands the residence country’s taxing right, and vice versa. Similar relief can also be achieved unilaterally through each nation’s domestic anti‑double‑tax provisions. Read the full source at news.ddtc.co.id (https://news.ddtc.co.id/literasi/buku/1814491/bagaimana-cara-kerja-p3b-dalam-menghilangkan-dampak-pajak-berganda).