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Table of Contents
Tax Credit Method
First of all, double taxation takes place in case of paying tax twice or more on the same income or good. The Tax Credit Method is widely used in order to avoid double taxation. It is appropriate when certain state calculates the tax on the basis of the total revenue of the taxpayer; it includes the income from the other state which can be taxed in that state. This method allows a to reduce the taxes in certain state that were paid in the other state which also was involved in the process of getting income by a person. In case when a certain state allows the reduction of the common amount of tax paid in another state on income that may be also taxed in that state, such method is called full credit tax method. On the other hand, when the reduction given by certain state for taxes paid in another state is limited to the part of its own tax that is common for the taxes in another state, such method is called ordinary credit (McDaniel & Ault, 1998).
Per-Income Limitation
Many of the countries sign bilateral agreements with other countries that would help avoiding double taxation of property and income. Such agreements are aimed at establishing the diapason of the authority that allows setting certain taxes for both states. Each category of income must be regulated by these agreements. This method helps countries establish the rules for the main categories of income like dividends, royalties, and interests. Method suggests that the beneficiary must pay the tax in the resident country; he makes a payment from the source country also as a resident to levying taxes. Nevertheless, these taxes for him will be limited (Double Taxation Relief: Revenue Protection, 2013).
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Those limits will have fixed rates according to the agreements and, in most cases, they will be lower than those on a national level. The rules that will be established have to provide the right to be refunded by the source company of the tax paid when it exceeds the amount which was stated by the agreement.
Anyway, the ways of refunding and direct application of those agreements must be discussed and installed by two countries insisting on the adoption of special forms. Additionally, there are also forms set up by the foreign tax authorities that may be equally used for tax operations (Agreements to Avoid Double Taxation: Forms, 2010).
Per-Country Limitation
In the USA, per-country method of tax limitation was established by the Tax Reform Act of 1976. The Act required all taxpayers to use this method. Such a decision had reflected a Congressional view on this problem. In their opinion, the combination of reduction losses from some countries and foreign tax credits from the others has been creating a great tax benefit.
Obviously, these average rates that were achieved by this method were not considered as a problem. Since all the taxpayers used this method, it ensured that losses in a foreign country first reduced other foreign income before the mechanism of the tax credit came into operation.
This Act concerned certain types of incomes that were removed from the overall credit and credit limit computations. Percent income has been a prominent instance of separate treatment as it was easy to manipulate with such a source.
According to this method of double tax avoiding, a taxpayer should elect calculating the limitation on the foreign tax credit. It could be done either on a country-by-country basis or with the help of aggregating all paid taxes to all foreign countries. The last way can be considered as the overall limitation. Per-country limitation method had been chosen with losses in some countries and profits in others. This was made because the losses have not prevented the crediting of taxes paid in the profit countries (McDaniel & Ault, 1998).
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