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1、3. Double Taxation Relief,School of Public Finance and Taxation,SLUC,1,A. Introduction,1. Because most countries tax on the basis of both the residence status of the taxpayer and the source of income, foreign-source income earned by a resident of a country may be taxed by both the country of source
2、and the country of residence. When tax rates are high, its very necessary to relieve double taxation.,School of Public Finance and Taxation,SLUC,2,2.three types of double taxation: (1) source-source conflicts (2) residence-residence conflicts (3) residence-source conflicts (most popular) 3. Tax trea
3、ties typically provide relief from the above three major types of international double taxation.,School of Public Finance and Taxation,SLUC,3,4.relief from double taxation resulting from the residence-source conflicts is ordinarily granted by the residence country. In other words, the source country
4、s right to tax has priority over the residence countrys right.,School of Public Finance and Taxation,SLUC,4,B. International Double Taxation Defined,1. There isnt any precise definition of the term “double taxation”. 2. legal definition of international double taxation-narrow: Imposition of comparab
5、le income taxes by two or more sovereign countries on the same item of income (including capital gains) of the same taxable person for the same taxable period.,School of Public Finance and Taxation,SLUC,5,3. economic definition of international double taxation-broad: The taxable person may be differ
6、ent persons.,School of Public Finance and Taxation,SLUC,6,Examples: (1) Jack is the resident of U.S. and he also gets service income in China in 2011. Then both US and China will tax on his service income. (2) T Co. is incorporated in France but has its effective management in Singapore. Then both F
7、rance and Singapore will tax on the income of T Co.,School of Public Finance and Taxation,SLUC,7,(3) P Co. is the parent company in Japan and Q Co. is the subsidiary company in China. Q will pay the dividend to P. Obviously the dividend is from the profit after tax in China. Then the dividend of P w
8、ill be taxed by Japanese government too.,School of Public Finance and Taxation,SLUC,8,4. If the comparable income is taxed by two different types of tax, such as sales tax and consumption tax, or income tax and wealth tax, it is not included in the double taxation discussed here. Can you give an exa
9、mple of China?,School of Public Finance and Taxation,SLUC,9,5. International double taxation should be distinguished from internal or domestic double taxation. Domestic double taxation often happens in federalism countries. Eg. In U.S., the taxes include federal taxes, state taxes and local taxes.,S
10、chool of Public Finance and Taxation,SLUC,10,Central government taxes,Taxes shared between the central and local government,Local government taxes,Offices of SAT,Local tax bureaus,Customs,SAT,Customs Duty, VAT and Consumption Tax on import,School of Public Finance and Taxation,SLUC,11,C. Relief Mech
11、anisms,There are three methods in common use for granting relief from international double taxation. Deduction method Exemption method Credit method (most difficult),School of Public Finance and Taxation,SLUC,12,1. Deduction Method,1. Definition: Foreign taxes paid by a resident of a country are ded
12、ucted as current expenses in computing the residents taxable income in the resident country. A deduction is a reduction in the gross (total) amount that must be included in the taxable base.,School of Public Finance and Taxation,SLUC,13,2. Example: T Co. is the resident of country A.,School of Publi
13、c Finance and Taxation,SLUC,14,(1) without relief of double taxation: Foreign tax: 30*30%=9 Domestic tax: 100*40%=40 Total tax: 9+40=49,School of Public Finance and Taxation,SLUC,15,(2) Deduction method Foreign tax: 30*30%=9 Foreign income taxable: 30-9=21 Total income taxable: 70+21=91 Total tax: 9
14、1*40%=36.4,School of Public Finance and Taxation,SLUC,16,Exercise 1:,School of Public Finance and Taxation,SLUC,17,3. Valuation: The deduction method is the least generous method of granting relief from international double taxation, so it is not sanctioned by the OECD Model Treaty and UN Model Trea
15、ty. But several countries that have adopted the credit method have retained the deduction method as an optional form of relief.,School of Public Finance and Taxation,SLUC,18,For example, U.S.: deduction method and credit method Netherland: the foreign withholding tax can be deducted as expenses.,Sch
16、ool of Public Finance and Taxation,SLUC,19,4. Conclusion: The effect of the deduction method is that residents earning foreign-source income and paying foreign income taxes on that income are taxable at a higher combined tax rate than the rate applied to domestic-source income. So the deduction method creates a bias in favor of domestic investment over foreign investment.,School of Public Finance and Taxation,SLUC,20,From the viewpoint of national self-inter
