ACCT 359: International Double Taxation Relief

what is the legal definition of international double taxation?

the imposition of comparable income taxes by two or more sovereign countries on the same item of income of the same taxable person for the same taxable period

what is the economic definition of international double taxation?

multiple taxation on the same items of economic income

how are the legal and economic definitions different?

the legal definition adopts the separate legal entity approach, whereas the economic definition does not

what are the three main relief mechanisms in international double taxation?

• deduction method

• exemption method

• credit method

deduction method

residence country allows its taxpayers to claim a deduction for income taxes paid to a foreign government for foreign sourced income

exemption method

residence country provides its taxpayers with an exemption for foreign-sourced income

credit method

foreign taxes paid by a resident of a country are credited against the residence country’s tax on the resident’s foreign sourced income

when do countries using the credit method not allow tax refunds?

foreign effective tax rate > domestic effective tax rate

which is the best method for eliminating double taxation?

credit method

what are the three limitations of the credit method?

• overall/worldwide

• country-by-country

• item-by-item

overall/worldwide limitation

credit is limited to the lesser of the total of foreign taxes paid and the domestic tax payable on the total foreign income

country-by-country limitation

credit is limited to the lesser of the taxes paid to each foreign country and the domestic tax payable on the taxpayer’s income from each country

item-by-item limitation

credit is limited to the lesser of the foreign tax paid on each particular item of income and the domestic tax payable on that item of income

tax sparing

allowing a tax credit in the residence country for the foreign taxes that were not paid because of a tax incentive in the source country