Double Taxation
Introduction
Double taxation arises when an individual or business acquiring income in a foreign country is required to pay taxes on that income in both the foreign country as well as the country of origin. For example, an American company operating in a developing country, in the absence of a tax treaty between the two countries may have to pay a withholding tax to the government of the developing country, as well as corporation tax to the United States government (Howard, 2001, p. 259).
The purpose of this paper is to examine the merit of three basic systems, which is exemption system, credit system and deduction system. These systems are dealings with the essence of tax relief from international double taxation.
A discussion of various countries on their practices on tax relief system and the rationale for using the system will be presented, followed by an analysis of the most advantages system to taxpayers. Finally identifies the system that most preferred by countries and the justification for adopted such system.
Systems adopted by countries to ameliorate the burden of International Double Taxation
Double taxation is always considered to be one of the most important issues in international taxation. With the more and more business moving towards globalization and cross-border investment, double taxation is often cited as a major obstacle to liberate economic progress.
There are basically three types of systems for double taxation relief, the exemption system, credit system & reduction system. The globalization drive has led to an increased knowledge and understanding of the various taxation systems in countries around the world.
The Exemption System
Under exemption systems, a taxpayer of a country (the residence country), will not be taxed regardless of where the income is generated, instead, taxpayers are taxed based on the source of their income (the host country), that is, only the country where the income is generated has taxing
Double taxation arises when an individual or business acquiring income in a foreign country is required to pay taxes on that income in both the foreign country as well as the country of origin. For example, an American company operating in a developing country, in the absence of a tax treaty between the two countries may have to pay a withholding tax to the government of the developing country, as well as corporation tax to the United States government (Howard, 2001, p. 259).
The purpose of this paper is to examine the merit of three basic systems, which is exemption system, credit system and deduction system. These systems are dealings with the essence of tax relief from international double taxation.
A discussion of various countries on their practices on tax relief system and the rationale for using the system will be presented, followed by an analysis of the most advantages system to taxpayers. Finally identifies the system that most preferred by countries and the justification for adopted such system.
Systems adopted by countries to ameliorate the burden of International Double Taxation
Double taxation is always considered to be one of the most important issues in international taxation. With the more and more business moving towards globalization and cross-border investment, double taxation is often cited as a major obstacle to liberate economic progress.
There are basically three types of systems for double taxation relief, the exemption system, credit system & reduction system. The globalization drive has led to an increased knowledge and understanding of the various taxation systems in countries around the world.
The Exemption System
Under exemption systems, a taxpayer of a country (the residence country), will not be taxed regardless of where the income is generated, instead, taxpayers are taxed based on the source of their income (the host country), that is, only the country where the income is generated has taxing