Double taxation - tax return?

CFA Level III
#1

Hi all,

Just a quick question. Say the tax rate in my source country is 30% and in my residence country is 20%. Say I earned $1000 in the source country and pay taxes of $300. Under the credit method, would I receive $100 back from my residence country or would they impose a floor of $0?

Thanks in advance.

#2

Assuming that this is your only income, I can’t imagine that the residence country would pay you $100. At best, you’ll probably have a $100 carryforward.

#3

Makes sense, thank you!

#4

My pleasure.

#5

Sorry S2000magician, that seemed like a hazardous guess. Here is the right answer.

Resident country will not pay you the balance! The resident country will recognize that fact that you had paid taxes in the other country by giving you a credit which will be limited to the amount that would otherwise be due had the income arose in the residence country. Make sense? So, in the residence country if the taxes due were only 200 (that 200 is computed based on the residence country’s tax rates) then if a higher tax was paid in the other country, the residence country wouldn’t help you recover the excess.

Now this assumes that there is no DTAA (Double Taxation Avoidance Treaty) between the two countries. If there were, the tax rates would be decided based on the Treaty provisions or the home country tax rates, whichever is more beneficial. Based on your question, it appears there was no DTAA between the two countries.

#6

No need to be sorry: I made it very clear that it was a guess.

#7

The way that I was looking at the problems was less about the source and more about the country that would give the discount.

(Tno deductible country ) + (Tdeductible country)(1 - Tno deductible country)

math makes makes the overall tax paid the same but the location of those tax dollars is skewed using

(Tresidence ) + (Tsource)(1 - TResidence) .

If a country will not allow me to deduct the income earned in their country then I still have to pay it. If I’m a US based company with a subsidiary in Argentina I can not tell the Argentine government that I had to pay taxes on the income generated in Argentina in the states already so I want a discount.

#8

Ok, cheers!