Economic and financial section > Double taxation and tax evasion

— 4i —
If point Dx is above M, and if the country of origin collects BD1; the country of
domicile collects AL = CM under Method IV (Rome Convention) and CDj (which is less
than CM) under Method I, the method described as the “total deduction” system.
Method V. — American Legislation.
Under this system, just as in Methods I and III above, there is no assignment of income
as between any two countries. Taking the income exactly as it is taxed, American legislation
recognises the principle of deduction, as in Method I, but sets a limit to its action. Instead
of dividing up the tax, as in Method III, American law lays down a maximum limit of deduction,
calculated solely in accordance with the laws of the country of domicile.
Any income-tax paid to a foreign country by a taxpayer who is a citizen of the United
States on his income derived from a foreign country is deducted from the total amount of the
Federal tax (Section 222 (a), paragraph 2, of the Federal law).
A maximum, however, is imposed in paragraph 5:
“The amount of the credit taken under this subdivision shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayer’s net
income .... from sources without the United States bears to his entire net income ...
for the same taxable year.”
Fig.11
Take the case of a citizen of the United States whose total income, OB, is $100,000, part
of which, AB, $20,000, is earned in country Y. Let BD be f
the tax collected by Y on the $20,000 and BC the American
tax on the $100,000. Under the law a maximum rate of
relief, BP, is fixed. This maximum is determined in such
a way that the ratio of BC to BP is the same as the ratio of
OB = 100,000 to AB = 20,000. Point P on the graph
will be obtained by drawing a straight line AP parallel to
the straight line OC.
In this way, if the tax collected by the country of origin
is less than BP, the United States will collect CD, and we
get the same result as under Method I.
If, in consequence of the increase of the rate of taxation
in the country of origin, point Dj, indicating the tax BDj^
collected by the country of origin, falls above P, the United
States collect CP and the country of origin
section DjP, therefore, exists to some extent.
BDj. Double taxation, represented
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As we pointed out previously, the systems which we are about to consider, i.e., the systems
proposed by the technical experts of the League of Nations, assume that the countries concerned
have, as in Method IV, carried out a classification of income by previous agreement. After
this assignment of a revenue has been made, certain rules for calculating the tax are proposed
(Resolutions— Chapter II, paragraph 3).
In principle, the country of domicile alone is entitled to collect the general income-tax.
But, as an exception to this principle, the experts, lay down that the country of origin may
tax income accruing from immovable property, agricultural undertakings and industrial and
commercial establishments, exclusive of dividends.
The methods recommended by the technical experts for the prevention of double taxation
which may result from these exceptions are indicated below as Methods VI and VII.