Double Taxation

Question 1

explain the two types of double taxation and state whether they can be avoided.

Answer 1

economic double taxation is taxing the same person in the same country twice and cannot be avoided (eg. company profit and shareholder’s dividends are the same money and they’re both taxed)
legal double taxation means taxing the same person in two different countries (state of residency and state of source) and can be avoided.

Question 2

explain how the double taxation can be avoided (two methods).

Answer 2

1. exemption method
   - —full: (not used) income that was already taxed in SOS is not at all taken into account in SOR. it is like that income doesn’t exist (it is not accounted for in the tax base in SOR)
   - —ex. with progression: the income, taxed in SOS, is taken into account with the tax base, but it is not taxed
2. credit method
   - —full: (never used) SOR recognises the whole amount of tax on the income from SOS as credit. use of this cuts into budget of SOR tho.
   - —ordinary credit method = credit method with progression: (most used) only a part of tax paid in SOS is credited. max credit = income from SOS * tax rate of SOR. if the tax is smaller, then it is credited as a whole.