Essay about Double Taxation

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Introduction Double taxation arises when an individual or business acquiring income in a foreign country is required to pay taxes on that income in both the foreign country as well as the country of origin. For example, an American company operating in a developing country, in the absence of a tax treaty between the two countries may have to pay a withholding tax to the government of the developing country, as well as corporation tax to the United States government (Howard, 2001, p. 259). The purpose of this paper is to examine the merit of three basic systems, which is exemption system, credit system and deduction system. These systems are dealings with the essence of tax relief from international double taxation. A discussion of…show more content…
Hence it is frequently used term of capital import neutrality. In general, it can be said that a tax exemption system encourages businesses to trade outside their home country, thus accelerating the trends towards globalization and increase of global welfare. Countries that are purely on exemption system are often referred to as "tax havens" because the country does not tax any foreign source income (FSI) earned by individuals or corporations that have that country as their home country (Stephens, 1998). A tax haven is a place where foreigners may receive income or own assets without paying high rates of taxes. Generally speaking, the main characteristic of a tax haven is a very low effective tax rate on foreign income. Major tax havens are the Bahamas, Bermuda, Cayman Islands, Hong Kong, Panama, and Singapore. Most tax havens are developing countries where governments believe that tax haven status would accelerate their rate of economic growth (Howard, 2001, p.256). • The Tax-Credit System The credit system allows tax paid in one state to be used as credit against a taxpayer's liability in another state. The credit will be in the

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