Question One Explain the methods which each of the countries will use to give relief for double

taxation. Introduction Double taxation means the situation where a country levies tax on the same income that has already been taxed in the same or another country during the same year of income and from the same person. Double taxation occurs when the same transaction or income source is subject to two or more taxing authorities. This can occur within a single country, when independent governmental units have the power to tax a single transaction or source of income, or may result when different sovereign states impose separate taxes, in which case it is called international double taxation. For example, corporate profits are taxed when they are earned, and then taxed again as personal income when distributed to stockholders (shareholders) as dividend or (in case of an ownermanager) as salary. The source of the double taxation problem is that taxing jurisdictions do not follow a common principle of taxation. One taxing jurisdiction may tax income at its source, while others will tax income based on the residence or nationality of the recipient. Indeed, a jurisdiction may use all three of these basic approaches in imposing taxes. The problems presented by double taxation have long been recognized, and with the growing integration of domestic economies into a world economy, countries have undertaken several measures to reduce the problem of double taxation. An individual country can offer tax credits for foreign taxes paid or outright exemptions from taxation of foreign-source income. In giving relief to taxpayers of the residence countries adopted three methods for giving relief. These methods include the following; I. Exemption method

Under this method the country of residence does not tax the foreign income of its residents, that is the foreign income is said to be exempted.
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II.

Deduction method

In this method the foreign tax are treated as an expense of doing business. The country of residence taxes the foreign income but allows a deduction for any foreign taxes paid. III. Credit method

Under this method the income earned from overseas countries is taxed in the country of residence. The foreign tax paid is then deducted from the tax on the income charged by the country of residence. Thus the country of residence gives credit for the foreign tax suffered. As deduction method seems to give low relief to taxpayer, the OECD model introduce the two methods which are similar as before but did not include deduction method while giving more clarification about Credit and Exemption method. In this credit method the OECD model introduce the concept of Full Credit and Ordinary credit. Under Full credit the residence country give credit relief for all foreign tax suffered abroad by its residents, but under ordinary credit the residence county gives credit only to extent of domestic tax rate on the taxes paid overseas by his taxpayers. Again the OECD model then introduces the concept of exemption with progression and exemption with participation. UNITED KINGDOM CASE (UK/INDIAN DOUBLE TAX TREATY) In this case United Kingdom is using a credit method, Subject to UK resident regarding the allowances as the credit against UK tax. According to the treat between the two countries it specifies that the amount shall be in reference to which the Indian tax is computed that is UK use Full credit method. However according to the agreement with UK, India agreed to give relief for the foreign investors on the cost of building a factory in India.

INDIA CASE (UK/INDIA DOUBLE TAX TREATY) India uses the credit method to give relief to its residents against any tax payable outside the Indian teritory according to extract article 24(2). It further stipulates that the credit relief shall be applied to the tax paid by the resident of India in UK but the amount of credit shall not exceed that proportion of Indian Tax. Thus India uses ordinary credit method on giving relief. However United Kingdom and India specify that the income which in accordance with the provision convention not to be subjected to tax in contracting state rather may be taken into account for calculating the rate of tax to be imposed in that contracting state on other income.

AUSTRALIA CASE (THE AUSTRALIAN/GERMANY DOUBLE TAX TREATY) In this case Australia is using credit method. In the case of dividends the amount of the credit is limited to tax on profit derived, that is it does not include dividends tax paid in respect of the profit out of which the dividends is paid.

GERMANY CASE (THE AUSTRALIAN/GERMANY DOUBLE TAX TREATY) Germany is using exemption methods and also credit method, where an exemption method apply only to such dividend as are paid to company which is a resident of the Federal Republic of Germany by a company which is a resident of Australia of which at least 25% or more of the voting shares or of the total shares issued are owned by the Germany company that means Germany uses exemption with participation method in giving relief. However paragraph (2) of article 22 of that treaty shows that credit is allowed on income payable in respect of the following items of income the Australian tax paid respect of the agreement on;

Dividend to which paragraph (a) does not apply Interest to which paragraph (1) of article 22 applies Royalties as per article 12 Remuneration as per article 15.

Question two For one country chosen, comment on the effect which the chosen method are likely to have an outward investment by resident of that country. By definition the term outward investment means a business strategy where a domestic firm expands its operations outside the domestic country. It is achieved when taxpayer trying to enjoy the relief which are given by its country of residence who invest in the foreign countries. If we take an example of Australia that use credit method on giving relief to foreign tax paid by its taxpayers means that for Australian resident person, the source of income will not matter in the sense that such person is taxed in the same way as if all the income was derived from Australia. But credit method will led to an outward investment if the foreign tax rate of Germany is higher hence taxpayer give more relief through investing outside the country due to great relief through being credited and more enough is when the country is applying the full credit method to grants the relief. It has been said that if tax rate of both contracting state are the same then the export neutrality will occur and if the rates in one of the contracting state are higher than the other state then outward investment is favorable while if the tax rate is low in the contracting state then foreign investors will be attracted to invest in their country of resident. Question three Comment on the impact of each method (one) above on the cost of operation and country tax base. Based on the question above we have both credit method and exemption method as the main method as per OECD Model where by each method has its own impact on the cost of operation and in protecting the countrys tax base. Tax base involves all components that are liable to tax while cost of operation involves the costs incurred in application of the methods to both taxpayer and the state. Credit methods tend to protect the tax base. A credit method taxes foreign income, so keeping it within the country tax base, however if the country of resident taxes are generally lower than in countries from which its residents derive income, profit and gains then the credit method will still not results in any tax revenue for the home country on the foreign income, profit and gains of its residents. Thus the credit method does not encourage the use of tax heaven countries, hence the credit method do protect the countrys tax base.
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However for the case of cost of operation the credit method is more cost full as it involves a lot of administrative cost and its difficult to operate since one requires to know exactly the rate of taxes in both county and the country of resident must; Determine the amount of taxable income, profit and gain in foreign country for its residents Determine the amount of tax paid in 3rd party country that is country of source for the foreign profit, income or gain earned. Determine the amount of credit relief to be granted to the taxpayer for the foreign tax suffered. Determine the amount of tax paid in the domestic country in respect of foreign income, profit or any taxable gains earned and Train experts as it involves more or tedious calculations. Under Exemption method it is simple to apply for a foreign tax credit as the foreign profit, income or gain is said to be exempted thus there is no need to find out the information concern about the foreign profit earned by its residents thus becoming easy to use and apply but the method tends not to protect the tax base as it eliminating the foreign income, profit and capital gains earned as well. The main effect of the method in tax base of the county is that it encourages capital export by its resident into other countries, thats its gives incentives of investing companies outside the country rather than domestic companies.

Question four Shows from each country what type of taxes are given double tax relief. UNITED KINGDOM /INDIAN DOUBLE TAX TREATY The treat agreed the relief on; a) For the case of United Kingdom; United Kingdom is giving relief to India on income, profit or chargeable gains from sources within India but does not include in the case of dividend, tax payable in respect of the profit out of which the dividend is paid, but in the case the dividend paid by a resident of India to a company which is a resident of United Kingdom and which controls directly or indirectly the voting power in the company paying the dividends the credit shall take into account as per paragraph (a) of article 24 of the treaty that is charging the voting power country do not exceed 25% of the issued share capital.
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b) For the case of India; India is giving a relief to a taxable profit or income earned from United Kingdom also it give relief for the foreign investors on the cost of building a factory in India.

THE AUSTRALIAN/GERMANY DOUBLE TAX TREATY The convention agreed the relief on the following; c) For the case of Australia; Australia is giving relief in respect of income or profit derived by a person who is a resident of Australia from sources in Federal Republic of Germany but excludes in the case of dividend, tax paid in respect of the profit out of which the dividend is paid. d) For the case of Federal Republic of Germany; The Federal Republic of Germany is giving relief to a withholding tax (direct tax) received by resident company of Federal Republic of Germany distributed by a company which is resident in Australia of which at least 25% or more of the voting shares or of the total shares issued are owned by the Germany company. Also the convention between the two countries agreed for relief on the following items to be granted as a credit relief against Germany tax; i. ii. iii. iv. Dividend to which subparagraph (a) does not apply, Interest to which paragraph (1) of Article 11 applies, Royalties to which paragraph (1) of Article 12 applies and Remuneration to which Article 15 applies.

REFERENCE http://www.businessdictionary.com/definition/double-taxation. http://www.answers.com/topic/double-taxation-agreements#ixzz1wcU5Ysrn.

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/initiatives_small_ business/venture_capital/tax_obstacles_venture_capital_en.pdf.

http://www.oecd.org/dataoecd/52/34/1914467.pdf. http://internationaltaxation.taxmann.com/oecd-modal-tax-commentary-2010.aspx