2. Double taxation

Question 1

What is international juridical double taxation and economic double taxation?

Answer 1

• International juridical double taxation:
  The same income is taxed in two different jurisdictions in the hands of the same person/taxpayer. (OUR FOCUS).
• Economic double taxation:
  The same economic activity is taxed twice; corporation tax (company) and dividend taxation (owner). Hence different taxpayers

Question 2

What are two factors that can affect source taxation?

Answer 2

1. Corporate income tax on P.E. profits.
2. Withholding taxes (WHT) on dividends, royalties, interests, etc. Comes from our state but is paid to another state → reduces profit in our state but we still want to tax it since it is sourced in our state.

Question 2

What are the two principle solutions to juridical double taxation?

Answer 2

• Tax exemption

- Tax credit

Question 3

What is tax exemption and what types are provided?

Answer 3

The Home State exempts foreign sourced income, but may require that the income has actually been taxed in another state.

1. Full exemption. All foreign income is exempted.
2. Exemption with progression. Only purposeful if the Home State has a progressive tax rate, and is thus commonly used for taxation of individuals. The foreign income is included in the Home State’s tax base, and there is an exemption made for the foreign income’s part of total tax. To calculate, the following formula is used:
   (Foreign income / Total income) * Home state tax on total income
   The outcome is a higher tax rate than if the foreign income had been completely exempted and only the domestic income had been the tax base.

Question 4

What is tax credit and what types are there?

Answer 4

The Home State provides for a tax credit equal to paid foreign taxes.

1. Full credit - Its simplest form; Home State Tax - Source State Tax. Makes it possible to get more credit than the Home State tax.
2. Ordinary credit - most usual form. Avoids “losing” on foreign taxes, since you can’t get more credit than the Home State tax. Use the following formula:
   Maximum credit = (Foreign income / Total income) * Home State tax on total income

Question 5

What are the different principles for handling income for tax credit?

Answer 5

1. The Overall Principle. All types and items of income are summed when calculating the maximum credit, no matter what country it comes from or what tax rate it has had.
2. Per Country. The maximum credit is calculated for each source country, meaning that income from different countries is not mixed. Different types of income can be mixed, as long as it is sourced in the same state.
3. Per Income Type. The maximum credit is calculated for each type of income, for example dividends, interest, royalties and business profits. Sometimes these are referred to as income baskets.
4. Per Item. The maximum credit is calculated for each item of income, which makes this type the most cumbersome. Items associated with different levels of taxation in the source state can hence not be mixed.

Question 6

What are pros and cons of the different exemption methods?

Answer 6

Full exemption:
+ Administratively easy and provides for capital import neutrality

Exemption with progression:
+ More in line with the ability to pay (“fair”)
- Only makes sense when there is a progressive tax in the home state

Both:
Usually no deduction of foreign business losses in the home state = symmetry in treatment of profits and losses

Question 7

What are pros and cons with the tax credit methods?

Answer 7

• Administratively burdensome
• Can be favourable or unfavourable, depending on version (full or ordinary), overall or per country etc. And on circumstances
• Usually combined with possibility to deduct foreign business losses in the home state = symmetrical treatment of profits and losses