Question

[Taxation]Historically, taxpayers have implemented strategies to mitigate or eliminate the effects of double taxation. Why might taxpayers think twice before implementing such strategies today? Explain.

Answer 1

Double taxation

it means asituation where tax is paid more than one time for the same income or asset.Double taxation can be juridical or economical.double taxation can be juridical when the same person is taxed twise or more for a same source of income and when it comes to economicalis two or more persons taxed for a same income.So in order to reduce such situation ,tax payers are adopting some measures.The stratgies adopted by tax payers to mitigate tax are

full exemption

under this method if a tax payer is paid tax in one state,then the residence state exempt the full portion of tax to be paid by him.

exemption with progression

here if the tax payer paid tax in one state,then the residence state can charge tax on the remaining portion of income.This is called exemption with progression.

full credit

under this method,the residence state mey fully deduct that portion of income that has taken for tax payment

ordinary credit

the deduction given by residence state for tax paid in other state is restricted to that part of its own tax which is appropriate to the income which may be taxed in the other state .

Now tax papyers are implementing these strategies in order to avoid the double taxation.For an individual tax is an expenditure,when it comes to double taxation,then their expenditure might be increase twise and their profitability will reduce.A non profitable firm may face many difficulty,it will negatively affect their long term goal and may affect their survival also.So the tax payers should not get into the double taxation.they should adopt any method mentioned above to reduce the effect of double taxation.