Question

International double taxation exists in its purest form when a single item of income is subject to income is subject to income tax by more than one country. Discuss the four mechanisms presented in the text to eliminate or perhaps mitigate double taxation?

Answer 1

International Double Taxation:

It is a subject directing tax on tax from one country to another on the same income source.

The impact of double taxation effects can be distinguished from one country to another country and the rates are decided by the level of income of its own citizens.

In order to develop efficiency and to ensure economic development removal of international double taxation is a necessity.

This tax can occur at any level whether it is being a corporate or a personal/individual level.

Double taxation is an unintended tax structure and most often the governments try to avoid such impact.

International businesses often come under the international taxation burden first at the country where the income is earned and next at the home country.

Organization for economic corporation and development was formed in order to evade such burden of multiple taxes and even some countries have huge rates of taxes.

International double taxation can be mitigated through some mechanisms they are:

1. Exemption method
2. Credit method
3. Deduction method
4. Bilateral tax treaty

EXEMPTION METHOD: It is capital import neutrality scheme. The business operations are treated equally within the source country.

CREDIT METHOD: it is quiet exactly similar to exemption method but only variation is that it focuses entirely on exports. Equal tax treatments for all tax payers residing in residing country

DEDUCTION METHOD: It is neutral in all respect, no special treatment is given to foreign taxes, it is also treated like any other expenditure.

BILATERAL TAX TREATY: