Question

List and briefly explain methods of elimination of double taxation!

Answer 1

2 main methods for elimination of double taxation are-

1) Tax Credit method - Under this method, income is taxable in both countries but the residential country will grant tax reduction or credit on the tax amount charged in the source country. It can be of various forms-

a) Ordinary credit - In this , the tax relief is granted for the international tax faced by the person paying tax, against the tax levied domestically on same income. The amount of relief on tax credit will be the lower amount payable in the home and foreign country.

b) Full credit - In this,the amount of tax paid in the source country is given full credit.If the tax amount in the source country is more than the tax amount in the residential country, as a consequence , residential country give up its amounted tax on other income.

2) Exemption method- Under this method, income is taxable in one country of the two, and exempted in the other.It can be of in various forms -

a) Full exemption- The whole income may be exempted completely when determining the tax rate to be applied in the country.

b) Exemption with progression- This method is used where tax is calculated in the residential country with the use of graduated tax rates.The tax applied by the country of residence is taken into account for knowing the rate of tax applicable to that country.