Types of double taxation: Double taxation is juridical when the same person isJ U R ID IC A L taxed twice on the same income by more than one state. Double taxation is economic if more than one person is taxed on the same item.
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).
AGENDA Chapter 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 taxpayers 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.
E X E M P T IO Nthe income which may be taxed in State E or S is nottaken into account at all by State R for the purposes of itstax; State R is not entitled to take the income soexempted into consideration when determining the tax tobe imposed on the rest of the income; this method iscalled “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”.
C R E D ITState R allows the deduction of the total amount of taxpaid in the other State on income which may be taxed inthat State, this method is called “full credit”;the deduction given by State R for the tax paid in theother State is restricted to that part of its own tax whichis appropriate to the income which may be taxed in theother State; this method is called “ordinary credit”.
an artiste earns 80,000 at home inState R(esidence) and 20,000 abroadin State S(ource) = worldwide incomeof 100,000; in State R the tax rates areprogressive, namely 35% (average)on an income of 100,000 (= 35,000)and 30% (average) on an income of80,000 (= 24,000); in State S the tax rate is either 20%(in case I) or 40% (in case II), leadingto 4,000 or 8,000 source tax
Without any relief for double taxation, the totalinitial tax burden would be: Case I Case IITax in state R, 35 % of 100,000 35,000 35,000+ tax in State S 4,000 8,000Total taxes 39,000 43,000
With the “full exemption”, the home country, State R,simply omits the foreign income from its own taxationand only imposes tax on the domestic income of80,000, 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 incomeis 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, simplyallows the deduction of the foreign-source tax from thetax calculated on worldwide income: Case I Case II Tax in state R, 35 % of 100,000 35,000 35,000 less full tax in State S - 4,000 - 8,000 Tax due 31,000 27,000 Total taxes 35,000 35,000 Tax relief given by State R 4,000 8,000
With the “ordinary credit”, the home country, State R, also allows adeduction of the foreign-source tax from the tax calculated on theworldwide income, but not more than the proportion of tax that wouldbe attributable to the income from State S (maximum deduction). Thislimitation 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 II Tax in state R, 35 % of 100,000 35,000 35,000 Less tax in State S - 4,000 Less maximum tax - 7,000 Tax due in state R 31,000 28,000 Total taxes 35,000 36,000 Tax relief given by State R 4,000 7,000
Summary of the figures 1. Delivery These figures can be summarized as follows: Relief State R Tax State S ResultFull exemption 11,000 - 4,000 7,000Exemption with progression 7,000 - 4,000 3,000Full credit 4,000 - 4,000 0Ordinary credit 4,000 - 4,000 0 C AS E I
Summary of the figures 1. Delivery 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 C AS E II
1. Delivery Total taxes:A. All income in State R Total tax=35,000B. Income arising in two States, viz. 80,000 in state R and 20,000 Total tax if tax in State S isin State S 4,000 (case I) 8,000 (case II)No convention 39,000 43,000Full exemption 28,000 32,000Exemption with progression 32,000 36,000Full credit 35,000 35,000Ordinary credit 35,000 36,000
Taxes ery 1. Deliv given up by the State R Total tax if tax in State S is 8,000 (case 4,000 (case I) II)No convention 0 0Full exemption 11,000 11,000Exemption with progression 7,000 7,000Full credit 4,000 8,000Ordinary credit 4,000 7,000
DEDUCTION METHOD1. Delivery 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.
DEDUCTION METHOD1. Delivery …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
DEDUCTION METHOD 1. DeliveryWhen the foreign(artiste) tax is high ordomestic income is lowor negative, the choiceof a deduction as anexpense might becomeadvantageous.
TAX Delivery OF KAZAKHSTAN 1. CODE Chapter 27 SPECIAL CONSIDERATIONS IN TAXATION OF INCOME OF RESIDENTS FROM FOREIGN ECONOMIC OPERATIONS ARTICLE 223
TAX Delivery OF KAZAKHSTAN 1. CODE 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 Tax 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.
TAX CODE OF KAZAKHSTAN Article 223(3). Offset of Foreign Tax 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.
TAX CODE OF KAZAKHSTAN Article 223(4). Offset of Foreign Tax 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.
TAX TREATY KZ-USAArticle 23Relief from double taxationIn accordance with the provisions and subject tothe limitations of the law of each ContractingState …, each State shall allow to its residents(and, in the case of the United States, itscitizens), as a credit against the income tax ofthat State:(a)the income tax paid to the other ContractingState by or on behalf of such residents orcitizens; and(b)in the case of a company owningat least 10 percent of the voting stock of acompany which is a resident of the otherContracting State and from which the first-mentioned company receives dividends, theincome tax paid to the other State by or onbehalf of the distributing company with respect tothe profits out of which the dividends are paid.
TAX TREATY1. KZ-BELGIUMArticle 23Elimination of double taxation3.In the case of Kazakhstan, double taxation shall beavoided as follows:Where a resident of Kazakhstan derives income or ownscapital which, in accordance with the provisions of thisConvention, 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, anamount equal to the capital tax paid in Belgium. Such deduction in any case shall not exceed the taxassessed on the same income or capital in Kazakhstan at therates in effect therein.Where a resident of Kazakhstan derives income or ownscapital which, in accordance with the provisions of thisConvention, shall be taxable only in Belgium, Kazakhstan mayinclude this income or capital in the tax base but only forpurposes of determining the rate of tax on such other incomeor capital as is taxable in Kazakhstan.
In the case of Belgium, double taxation shall be avoided as follows: TAX TREATY1. KZ-BELGIUM Article 23 Elimination of double taxation 2. In the case of Belgium, double taxation shall be avoided as follows: 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.