How Does Foreign Income Affect My Taxes?

The international tax credit refers to the deduction of the income tax paid in the foreign country when the enterprise, citizen or resident of the country pays the income tax in the foreign country and returns to the country to pay the income tax. It is a major way to avoid double taxation between countries in the modern tax system. Countries that use tax credits exercise their tax jurisdiction based on where the taxpayer resides, not on the source of income. Therefore, the income tax laws of these countries provide for the taxation of all income of domestic residents, both domestically and abroad. . However, it also stipulates that if income from foreign countries has been paid income tax in the country of source of income, it is allowed to be deducted from the amount of income payable to the government of the country.

International tax credit

Right!

The international tax credit refers to the deduction of the income tax paid in the foreign country when the enterprise, citizen or resident of the country pays the income tax in the foreign country and returns to the country to pay the income tax. It is a major way to avoid double taxation between countries in the modern tax system. Countries that use tax credits exercise their tax jurisdiction based on where the taxpayer resides, not on the source of income. Therefore, the income tax laws of these countries provide for the taxation of all income of domestic residents, both domestically and abroad. . However, it also stipulates that if income from foreign countries has been paid income tax in the country of source of income, it is allowed to be deducted from the amount of income payable to the government of the country.

Chinese name

International tax credit

Foreign name

International tax credits

Content

Credits and deductions for international taxes

Features

Exempt from double taxation

According to the experience of international practice, the credit should generally meet the following principles or conditions: First, only tax can be used for credit, and fees cannot be used for credit. Regarding the difference between taxes and fees, many countries have express regulations, and the United States has stricter and more detailed regulations. Second, only income tax can be deducted, non-income tax cannot be deducted. In addition, the income tax must be double levied in order to deduct it, and the non-double levied income tax does not matter. Third, only paid income tax can be deducted, and unpaid or to be paid income tax cannot be deducted. Fourth, credits must be given to each other, and unilaterally, credits are rare. Tak means implementing the principle of reciprocity. Fifth, implement a credit limit. That is, the amount of credit for foreign tax payments cannot exceed the amount of tax payable at the tax rate stipulated in the national tax law. If the domestic income tax rate is exceeded, the country applies a limit credit.

There are often three situations in the actual credit: one is that the tax rate of the source country of residence and the country of residence are the same and there is a "full credit". Second, the tax rate of the country of source of income is lower than the tax rate of the country of residence, and the difference is levied. Third, the tax rate of the country of source of income is higher than the tax rate of the country of residence. The government of the country of residence can only allow the foreign income tax payable calculated according to the tax rate of the country as a possible credit limit. People bear the higher tax burden of foreign governments.

Practice and form of tax credit. As tax credits involve tax relations between countries, in terms of implementation, in addition to the principles and policies of tax credits and their specific regulations clearly stipulated by governments in their own tax laws (domestic law), revenues are generally passed. Negotiations between the country of origin and the country of residence to conclude bilateral or multilateral agreements on the avoidance of double taxation (international law). Taxation shall be handled in accordance with the provisions or agreements of the tax law. Tax credits are a large number of corporate and corporate income tax credits. Due to the different affiliations of enterprises and companies, the forms of credit for taxes paid in foreign countries are different. Generally, they can be divided into direct credit, indirect credit, and multi-level credit.

Double taxation is a tax collection relationship between the taxpayer and the governments of more than two countries, and it involves the economic interest relationship between the government and the taxpayer. After the implementation of tax credits to avoid double taxation, the original tax relationship has become the fiscal relationship between countries, which involves the distribution of international income between countries. The result of taking a tax credit is:

It is recognized that the exercise of tax jurisdiction according to the country of source of income takes precedence over the jurisdiction of the country of residence, but it does not recognize that the country of source of income enjoys tax exclusivity. This is consistent with the principle of national sovereignty. It has a direct impact on the fiscal revenue between the source country and the country of residence. If the amount of tax credits in a country is too large, especially if only unilateral tax credits are implemented, it will inevitably affect the fiscal revenue of the country and lead to fiscal outflows.

Therefore, in some modern countries (such as the United States), the implementation of tax credits is stricter than in the past, and the tax laws of many countries have made some relatively complicated regulations on tax credits. Nevertheless, the positive effects of implementing tax credits are clear.

First, it avoids double taxation, which helps to remove a major obstacle in international investment and economic trade, and relieves foreign investors and international investors from worrying about double taxation due to outward investment and capital export, which is conducive to the development of foreign economic relations among countries. .

A total of two times, not only avoid double taxation of the same income, but also prevent international tax evasion, and ensure that one income must be taxed once.

Third, it is conducive to safeguarding the tax jurisdiction and fiscal and economic interests of various countries, so that the economic lever of taxation can better serve as a tool for participating in the distribution of rights and interests in the international economy.

Because of these positive effects, more and more countries now have tax credits in the world. In addition to the United States, which is a more typical country for credit, there are also the United Kingdom, the Federal Republic of Germany, Sweden, and Japan. China is also one of the countries adopting the credit law. On September 10, 1980, the Third Session of the Fifth National People's Congress passed the "Sino-Foreign Joint Venture Enterprise Income Tax Law" stipulating: "The income tax paid by joint ventures and joint branches abroad can be paid at the head office. Internal credit. "How to make a credit? The implementation rules of the law also stipulate:" The income tax already paid in the country can be deducted from the amount of income tax payable by the head office with the tax certificate; when the credit cannot exceed the foreign income The taxable amount calculated at the tax rate stipulated in Chinese tax law. "