Double Taxation Essay example

1765 Words Apr 7th, 2007 8 Pages
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
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• Deduction System

Under a deduction system, a resident may deduct the taxes paid to a host country as deductions in calculating his taxable income in his residence country.

The burden on taxpayer is very heavy if is using deduction system. A country that chooses the deduction system indicates that it prefers to increase tax revenues even though it will discourage the level of outbound investment and attract foreign investment into the country. The rationale underlying such a preference is that tax revenues are part of the countries main source of income.

System most advantages to Taxpayers
The exemption system definitely is the most advantageous for taxpayers as foreign source income is exempted from paying taxes, which relief from double taxation of the same income. By being exempt from tax liabilities in one state, the taxpayer are subject to lower income tax charges (August, 2004, p. 733)

System most preferred by Countries
Today's international tax system does not reflect a standardized system. No country in the world currently uses a pure form of exemption, credit or deduction system (Stephens, 1998, p.159). For example, current tax system in the United States consists of aspects of two different economic theories: capital export neutrality: credit system and capital import neutrality: exemption system. The system is a hybrid, neither wholly capital export neutral nor wholly capital import neutral (Stephens,…

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