Methods for the elimination of double taxation

What’s a double taxation?

Double taxation occurs when tax is paid more than once on the same taxable income or asset.

Types of double taxation:

Economic

Juridical

Types of double taxation:

Double taxation is economic if more than one person is taxed on the same item.

Double taxation is juridical when the same person is taxed twice on the same income by more than one state.

JURIDICAL

Juridical double taxation arises:

1) where each Contracting State subjects the same person to tax on his worldwide income or capital;

2) where a person is a resident of a Contracting State (R) and derives income from, or owns capital in, the other Contracting State (S or E) and both States impose tax on that income or capital;

3) where each Contracting State subjects the same person, not being a resident of either Contracting State to tax on income derived from, or capital owned in, a Contracting State; this may result, for instance, in the case where a non-resident person has a permanent establishment in one Contracting State (E) through which he derives income from, or owns capital in, the other Contracting State (S).

AGENDAChapter V

METHODS FOR ELIMINATION OF DOUBLE TAXATION

ARTICLE 23 A EXEMPTION METHOD

ARTICLE 23 B CREDIT METHOD

Principle of exemption method

… the State of residence R does not tax the income which according to the Convention may be taxed in State E or S.

Principle of credit method

…the State of residence R calculates its tax on the basis of the taxpayer's total income including the income from the other State E or S which, according to the Convention, may be taxed in that other State. It then allows a deduction from its own tax for the tax paid in the other State.

EXEMPTION

the income which may be taxed in State E or S is not taken into account at all by State R for the purposes of its tax; State R is not entitled to take the income so exempted into consideration when determining the tax to be imposed on the rest of the income; this method is called “full exemption”;

the income which may be taxed in State E or S is not taxed by State R, but State R retains the right to take that income into consideration when determining the tax to be imposed on the rest of the income; this method is called “exemption with progression”.

CREDIT

State R allows the deduction of the total amount of tax paid in the other State on income which may be taxed in that State, this method is called “full credit”;

the deduction given by State R for the tax paid in the other State is restricted to that part of its own tax which is appropriate to the income which may be taxed in the other State; this method is called “ordinary credit”.

an artiste earns 80,000 at home in State R(esidence) and 20,000 abroad in State S(ource) = worldwide income of 100,000; in State R the tax rates are progressive, namely 35% (average) on an income of 100,000 (= 35,000) and 30% (average) on an income of 80,000 (= 24,000); in State S the tax rate is either 20% (in case I) or 40% (in case II), leading to 4,000 or 8,000 source tax

Without any relief for double taxation, the total initial tax burden would be:

  Case I Case II

Tax in state R, 35 % of 100,000 35,000 35,000

+ tax in State S 4,000 8,000

Total taxes 39,000 43,000

With the “full exemption”, the home country, State R, simply omits the foreign income from its own taxation and only imposes tax on the domestic income of 80,000, at 30%:

  Case I Case IITax in state R, 30 % of 80,000 24,000 24,000+ tax in State S 4,000 8,000Total taxes 28,000 32,000Tax relief given by State R 11,000 11,000

With the “exemption with progression”, domestic income is taxed at the tax rate for worldwide income, i.e. 35%:

  Case I Case IITax in state R, 35 % of 80,000 28,000 28,000+ tax in State S 4,000 8,000Total taxes 32,000 36,000Tax relief given by State R 7,000 7,000

With the “full credit”, the home country, State R, simply allows the deduction of the foreign-source tax from the tax calculated on worldwide income:

  Case I Case IITax in state R, 35 % of 100,000 35,000 35,000less full tax in State S - 4,000 - 8,000Tax due 31,000 27,000Total taxes 35,000 35,000Tax relief given by State R 4,000 8,000

With the “ordinary credit”, the home country, State R, also allows a deduction of the foreign-source tax from the tax calculated on the worldwide income, but not more than the proportion of tax that would be attributable to the income from State S (maximum deduction). This limitation to the average tax rate is a maximum of 35% x 20,000 = 7,000 in this example and applies in Case II:

  Case I Case IITax in state R, 35 % of 100,000 35,000 35,000Less tax in State S - 4,000  Less maximum tax - 7,000Tax due in state R 31,000 28,000Total taxes 35,000 36,000Tax relief given by State R 4,000 7,000

CASE I

1. DeliverySummary of the figuresThese figures can be summarized as follows:

  Relief State R Tax State S Result

Full exemption 11,000 - 4,000 7,000

Exemption with progression 7,000 - 4,000 3,000

Full credit 4,000 - 4,000 0

Ordinary credit 4,000 - 4,000 0

1. DeliverySummary of the figures

  Relief State R Tax State S ResultFull exemption 11,000 - 8,000 3,000Exemption with progression 7,000 - 8,000 - 1,000Full credit 8,000 - 8,000 0Ordinary credit 7,000 - 8,000 - 1,000

CASE II

1. DeliveryTotal taxes:A. All income in State R Total tax=35,000

B. Income arising in two States, viz. 80,000 in state R and 20,000 in State S

Total tax if tax in State S is

  4,000 (case I) 8,000 (case II)

No convention 39,000 43,000

Full exemption 28,000 32,000

Exemption with progression 32,000 36,000

Full credit 35,000 35,000

Ordinary credit 35,000 36,000

1. DeliveryTaxes given up by the State R

  Total tax if tax in State S is

4,000 (case I)8,000 (case

II)

No convention 0 0

Full exemption 11,000 11,000

Exemption with progression 7,000 7,000

Full credit 4,000 8,000

Ordinary credit 4,000 7,000

1. DeliveryDEDUCTION METHOD

The deduction method allows residents/citizens to deduct foreign taxes paid treating them as a current expense so it becomes the effective means of providing relief when there is no Tax treaty.

1. DeliveryDEDUCTION METHOD…anyone in the United States with unlimited tax liability on his full worldwide income can choose not to take a tax credit for foreign tax, but to deduct the foreign tax as a business expense, so that the tax base will become considerably lower.

Germany also gives its residents with unlimited tax liability the option of choosing the deduction of the foreign tax from worldwide income as a business expense.

Deduction of foreign artiste tax as an expense is allowable in the Netherlands when no tax treaty is applicable and the unilateral rules for elimination of double taxation apply, giving residents the option to choose between either an ordinary tax credit or the deduction of foreign tax from taxable income

1. DeliveryDEDUCTION METHOD

When the foreign (artiste) tax is high or domestic income is low or negative, the choice of a deduction as an expense might become advantageous.

1. DeliveryTAX CODE OF KAZAKHSTAN

Chapter 27

SPECIAL CONSIDERATIONS IN TAXATION OF INCOME OF RESIDENTS FROM FOREIGN ECONOMIC OPERATIONS

ARTICLE 223

1. Delivery

Article 223(1). Offset of Foreign Tax

Amounts of taxes paid beyond the boundaries of the Republic of Kazakhstan on income or of taxes similar to income tax, from income received by the resident taxpayer from sources beyond the boundaries of the Republic of Kazakhstan, shall be subject to offset against the payment when paying corporate or personal income tax in the Republic of Kazakhstan, provided a document confirming the payment of such tax is available.

TAX CODE OF KAZAKHSTAN

Article 223(2). Offset of Foreign TaxTAX CODE OF KAZAKHSTAN

Offset of foreign tax shall not be granted in the Republic of Kazakhstan from the following types of income of a resident taxpayer from sources beyond the boundaries of the Republic of Kazakhstan:1) exempt from tax in accordance with provisions of this Code;2) subject to adjustment in accordance with Article 99 of this Code;3) taxable in the Republic of Kazakhstan in accordance with provisions of the international treaty, irrespective of the fact of payment and (or) withholding of taxes from such income in the foreign state within the excessively paid amount of tax in the foreign state. In this respect, amounts of tax paid in excess shall be determined as the difference between the actually paid tax amount and the amount of tax to be paid in the foreign state in accordance with the provisions of the international treaty.

Article 223(3). Offset of Foreign TaxTAX CODE OF KAZAKHSTAN

Amounts to be offset as provided for by this Article, shall be determined for each foreign state separately.

In that respect, amounts of tax to be offset, shall represent the smaller of the following amounts:

1) amount of tax actually paid in a foreign state from income received by the resident taxpayer from sources beyond the boundaries of the Republic of Kazakhstan;

2) amounts of income tax from income from sources beyond the boundaries of the Republic of Kazakhstan, assessed in the Republic of Kazakhstan in accordance with the provisions of this Chapter and Sections 4 or 6 of this Code, and also provisions of the international treaty.

Article 223(4). Offset of Foreign Tax

TAX CODE OF KAZAKHSTAN

In order to assess the total amount of credit of income tax paid in a foreign state from income received from sources in that state, the resident shall compile appropriate supplement to the corporate or personal income tax declaration.

Article 23Relief from double taxationIn accordance with the provisions and subject to the limitations of the law of each Contracting State …, each State shall allow to its residents (and, in the case of the United States, its citizens), as a credit against the income tax of that State:(a)the income tax paid to the other Contracting State by or on behalf of such residents or citizens; and(b)in the case of a company owning at least 10 percent of the voting stock of a company which is a resident of the other Contracting State and from which the first-mentioned company receives dividends, the income tax paid to the other State by or on behalf of the distributing company with respect to the profits out of which the dividends are paid.

TAX TREATY KZ-USA

TAX TREATY KZ-BELGIUMArticle 23Elimination of double taxation1.In the case of Kazakhstan, double taxation shall be avoided as follows: Where a resident of Kazakhstan derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in Belgium, Kazakhstan shall allow:

• as a deduction from the tax on the income of that resident, an amount equal to the income tax paid in Belgium;• as a deduction from the tax on the capital of that resident, an amount equal to the capital tax paid in Belgium.  Such deduction in any case shall not exceed the tax assessed on the same income or capital in Kazakhstan at the rates in effect therein. Where a resident of Kazakhstan derives income or owns capital which, in accordance with the provisions of this Convention, shall be taxable only in Belgium, Kazakhstan may include this income or capital in the tax base but only for purposes of determining the rate of tax on such other income or capital as is taxable in Kazakhstan.

1.

TAX TREATY KZ-BELGIUMArticle 23Elimination of double taxation2. In the case of Belgium, double taxation shall be avoided as follows:

1.

Where a resident of Belgium derives income or owns elements of capital which are taxed in Kazakhstan in accordance with the provisions of this Convention, other than those of paragraph 2 of Article 10, of paragraphs 2 and 7 of Article 11 and of paragraphs 2 and 6 of Article 12, Belgium shall exempt such income or such elements of capital from tax but may, in calculating the amount of tax on the remaining income or capital of that resident, apply the rate of tax which would have been applicable if such income or elements of capital had not been exempted.

In the case of Belgium, double taxation shall be avoided as follows: