Double taxation occurs when a person or business is subject to paying taxes on the same income in two different tax jurisdictions. This can happen for various reasons: for example, when the country in which one’s tax residence is established is not the same as the country in which the income is produced. Or, strictly national tax regulations do not provide for the taxation of foreign income either expressly or adequately.

Objectives of the Convention

The Convention aims to:

1. Avoiding Double Taxation: Ensuring that the same income is not taxed twice.
2. Preventing Tax Evasion: Establishing mechanisms for cooperation and exchange of information between the tax authorities of the two countries.
3. Provide Clarity and Certainty: Clear definition of the applicable tax rules, thereby significantly reducing tax disputes.
4. Promote Bilateral Investments: Creation of a fiscally favorable environment for both Italian and US investors, whether they are individuals or legal entities.

Conventions cover a wide range of types of income, each of which is subject to specific rules for the purpose of determining the country in which taxation is compulsory. These might include: real estate income, business income, dividends, pensions and other similar income, royalties, etc.

How to Avoid Double Taxation: The Tax Credit Method

One of the main instruments provided for by the Convention to avoid double taxation is the tax credit method. This method allows the taxpayer to deduct the tax paid on foreign income from the total taxes due in the country of residence, ensuring that the income is not taxed twice in full.

The process for applying the tax credit usually follows these steps:

1. Determining foreign income
2. Calculation of foreign taxes paid
3. Determination of national taxes
4. Application of the tax credit