Question

List and briefly explain methods of of elimination of double taxation!

Answer 1

Eliminating the double taxation of income, the most commonly used methods, internationally ,are the track credit method and it back exemption method .

* Tax credit method.

The danger of double taxation arises if the resident of a contracting state (taxpayer) derives income from the other contracting site and both the contracting state attempted to tax the taxpayer on the same income. To alleviate this, under the credit method, the contracting state ( home country) of which the taxpayer is a resident would allow the taxpayer to claim a credit for the tax paid to the other contracting state ( host country) against the tax otherwise payable in the home country on the income derived from the host country.

* Tax exemption method

Nations will sign treaties about taxation.Extension method is adopted on certain categories of income such as business profits , income from immovable property etc to eliminate double taxation. Under extension method, a contracting state simply does not tax income that ,according to the tax treaty, may be taxed in other contracting state.

Among these two methods, tax credit method is more popular than tax exemption method, given that most countries which primarily adopt the extension method also apply the credit methods to eliminate double taxation of , eg investment income such as interest, dividends and royalties.