Help Needed for Credit and Exemption Method

CFA Level III
#1

Hi all, I am confused with the credit and exemption method and would like to check if my understanding is correct, any comments are appreciated. Lets assume we have the following 2 scenarios: Scenario 1: Country A (source jurisdiction) - 35% tax rate Country B (residence jurisdiction) - 50% tax rate Scenario 2: Country A (source jurisdiction) - 50% tax rate Country B (residence jurisdiction) - 35% tax rate Assuming that I am staying in Country A and generate a foreign income in Country B of $1,000. Under the Credit Method: Scenario 1: Pay 35% on $1,000 to A and 15% on $1,000 to B Scenario 2: Pay 50% on $1,000 to A Under the Exemption Method: Scenario 1: Pay 35% on $1,000 to A Scenario 2: Pay 50% on $1,000 to A Are my interpretations correct? Pls do let me know if it is wrong

#2

Looks correct to me. Just wanted to clarify. Under the credit method, you are paying the tax liability in both the countries but you apply that payment to source country from the residence country, effectively paying the max amount only.

#3

Thanks for the clarification. Just to check, under the credit method for scenario 2 and the exemption method for the 2 scenarios, we only make payment to country A because it is the source country and even though the foreign income is generated in Country B, we make no payment at all to country B right?

#4

2010CFACFA Wrote: ------------------------------------------------------- > Thanks for the clarification. Just to check, under > the credit method for scenario 2 and the exemption > method for the 2 scenarios, we only make payment > to country A because it is the source country and > even though the foreign income is generated in > Country B, we make no payment at all to country B > right? Yea I was taken by that but Problem 4, Pg 263, Reading 16, Vol. 2 shows us both ways. Defined source and residence country is what matters, not where you get your income from. So it is correct.

#5

absolutely correct

#6

Thanks a lot guys

#7

Are we sure this is correct for exemption method?? Under exemption method - foreign source income is totally exempt from domestic tax. So in this case, if the foreign income is generated in country B, you only pay the foreign country at foreign rate: Pay B 50% and 35% for the two scenarios respectively?? I think my confusion is coming from the foreign Country B claiming residence jurisdiction (not source). UGHHHH