source vs. residence principle

CFA Level III Portfolio Management
#1

i am totally confused by the residence and source jurisdiction.

i am refering to exercise 4 in reading 12, p. 320 of cfa readings

country A 45% taxes

country B 30% taxes

"after 5 decades of living in country A, a wealth entrepreneur, Andrew, has recently retired and taken up residency in country B. he no lives in country B, but has investments in country A.

let’s assume country A were to exercise residence jurisdiciton and country B source jurisdiction, the effective tax rate:

t credit method = max ( t residence, t source)

andrew would remit 30% to country B and apply that remittance toward country A’s 45%tax liability, effecitvely paying country A 15% taxes.

why does the tax liability arise in country A if it is the residence principle and he is resident in country B???

can someobody explain this easily to me?

#2

source of the investments is country A. Government of Country A needs its share of the kitty. Cannot get away without paying that.

#3

but country A has only a residence jurisdiction? and andrew does not live there?`!

#4

Given the Country A has a higher tax rate of 45% - and Max (Source, Residence) = 45% is the tax. and only 30% can go to Country B - the remaining has to go to country A. The only time no tax would be paid to country A - is if it had < 30% - as its tax rate.

Investments are in Country A.

#5

Think of it like this : source is irrespective of where you live and is an absolute rate on income generated in the source country only . Residence is what you net after you pay source taxes and is irrespective of where the money comes from

#6

Here is my train of thoughts for this sort of questions:

Source country always takes priority for taking the first share of taxes

with the credit method, 45% is the total tax rate.

becuz Tsource is in priority over T residence, and also becuz the guy lives in country B, he is taxed at country B tax rate of 30%.

because 30% tax is maxed out for country B, then the remaining for 15% goes to A.

seems to work well

#7

Exactly how I think of it.