Economic and financial section > Double taxation and tax evasion

— 42 —
Method VI.
The technical experts propose that the State of domicile shall deduct from the general income-
tax a sum which will be:
(a) Either the tax calculated according to the State’s own scale and charged exclusively on income
produced in the other countries, each of the latter being taken separately ;
(b) Or the tax actually paid abroad on income arising abroad; this sum may be limited to the amount
to be deducted in accordance with paragraph (a).
In order to prevent a taxpayer whose entire income arises abroad from escaping all taxation
in his State of domicile, the amount to be deducted on the above basis should in all cases be
restricted to some fraction of the total tax chargeable in the State of domicile.
Paragraph (a) may be explained as follows: Let AB represent income taxed by the country
of origin Y, i.e., the income in respect of which relief is to
be given. As the tax is graduated, we must draw, from O,
the line OBj = AB, and erect a perpendicular from Bj^
intersecting the curve at point K. Now draw a horizontal
line KG. The deduction provided in paragraph (a) is
represented by BG. The country of domicile will collect
CG instead of BC. The country of origin will collect the tax
on income AB at its own rate, i.e., BD. There will accordingly
be double taxation DG if the tax BD collected by the
country of origin is greater than BG.
Tins'deduction was also recommended, as the maximum
relief, by the four economists in connection with succession
duties (Document F.19, p. 44).
In paragraph (b) the technical experts revert to
Method I described above, under which the relief given is equal to the tax actually paid abioad,
but they are in favour of fixing a maximum which is, in point of fact, calculated by applying
the same rule as in paragraph (a), i.e., BG. ^4,
It is interesting (omitting all consideration of questions relating to the previous classifica¬
tion of income, a classification not carried out under the American system) to compare the
method of calculation described above as No. V with the present method (No. VI).
If the tax is not graduated, the deductions under the two systems will be the same (Fig. 13);
for an income OBi = AB, under the rate applied by the country of domicile, the tax will be B^,
which is equal to the maximum relief BP. ...
The tax, however, is frequently graduated. If we combine in Fig. 14 the features
of Figs. 12 and 11, we shall see where the difference arises.
C