Residence-Source conflict example


On Schweser Book 2, page 99, on the blue box there is an example showing us calculations of the exemption, credit and deduction method to avoid double taxation.

In that exercise they mention the individual lives in a country that bases income tax on residency and has 1,500,000 of worldwide income, being 600,000 generated in a source jurisdiction company. The domestic country charges 40% on worldwide income and the source country charges 35% on income generated within its borders. They ask us to calculate the income tax paid on the foreign source income to each country.

Wouldn’t the residence tax be based on his 1,500,000 income? The answer calculates the 40% over the same 600,000.

Is it because the question specifically mentions “income tax paid on the FOREIGN SOURCE income”? Does that even make sense?

Yes, when they ask to calculate the foreign source income, they are meaning foreign income from source jurisdiction countries.

The purpose of the example is to help clarify the difference of the three methods of calculation.

Yes, but how about the residence tax? Isn’t it always calculated over worldwide income? In this case, therefore, wouldn’t it be 1,500,000?

Anyone able to figure this out?

Im sorry, i thought the answer was clear.

My interpretation would be worldwide income would include domestic and foreign.

They ask to calculate the foreign source income using the three methods. The 600k we know to be foreign income from a source jurisdiction country. Im not understanding how we could use anything else?

I’m referring to the residency tax jurisdiction country.

Its clear to me that source country tax is based on the $600k - the amount of income generated within that country.

However, the residency country bases taxes on worldwide income, so why its not 40% over the total $1,5m?

But what is it saying to calculate the resident premium on?

Let me give you an example…

Sales tax is 5%. a store does 1.5 million in total sales. and 600k in refrigerator sales.

How much sales tax is collected on refrigerators?

Confused along with andrevc here and I don’t think this has been cleared up by gad4. Reaching out to Schweser for clarification. Page 99, 2 things are explicitly stated: (1) The individual has total worldwide income of 1,500,000. (2) The domestic country charges 40% income taxes on *worldwide* income. The problem then proceeds to calculate residence tax off of the 600,000 of source country income.

Nothing in the text or example hints that the residence tax should be calculated on the 600,000 generated in the source country. The only thing that throws a bit of a curveball is the example of the exemption method on page 98.

I believe the residence tax should be 1.5mn x 0.40 = 600,000, and under the credit method the source tax of 600k x 0.35 = 210k would be applied against it as a credit.

Hi guyth,

I initially had the same question as you and came on here to get some clarification. After reading the responses, I think you’re both over thinking the question.

The question specifically says, “Determine the income taxes paid on the foreign source income and the country or countries to which it is owed under the:”

It’s only asking for the tax paid on the foreign source income, which means only on the $600k.

So even though you still owe tax to the residence country on the remaining $900k, it only asks you to calculate the tax owed on the $600k of foreign source income.

But I’m a hack so what the hell do I know?

Hope that helps.