What Is a Dividend Tax Credit?

The credit method is one of the basic ways to avoid international double taxation. Refers to a method in which the government of the country of residence (country of nationality) allows its residents (citizens) to offset the income tax or general property tax already paid by the government of the non-resident country (non-nationality) against the amount of taxes it should pay to its government. The credit method can be divided into direct credit method and indirect credit method according to the applicable objects. ^[1]

The credit method is one of the basic ways to avoid international double taxation. Refers to a method in which the government of the country of residence (country of nationality) allows its residents (citizens) to offset the income tax or general property tax already paid by the government of the non-resident country (non-nationality) against the amount of taxes it should pay to its government. The credit method can be divided into direct credit method and indirect credit method according to the applicable objects. ^[1]

In practice, the credit method is divided into

A. By amount

Full credit (the income tax levied in the country of residence = the total income of the resident domestic and foreign countries X the country of residence tax rate-the amount of the source country tax that is allowed to be credited)

Ordinary credit (the amount of income tax payable in the country of residence = the total income of residents in the country and abroad X the rate of residence in the country of residence-the amount of source country tax that is allowed to be credited. "The amount of source country tax that is allowed to be credited" is from the "credit limit" It is determined by comparing with the two indicators of "tax income of the source country of the taxpayer's income," whichever is smaller.) The calculation method of the credit limit: the credit limit = the income of the country of the source of income X the applicable tax rate of the country of residence. Per country limitation The government of the country of residence calculates its own credit limit for the income of its residents from each non-resident country. Formula: PCL = (Total domestic and overseas income calculated according to the tax law of the country of residence) Total taxable amount X Income from a foreign country / Total domestic and overseas income. Comprehensive credit limit overall limitation The government of the country of residence adds up the income of residents from different countries and calculates a unified credit limit based on the tax rate of the country of residence. Formula: (Total domestic and overseas income calculated according to the tax law of the country of residence) Total taxable income X Total income from overseas sources / Total domestic and overseas income

B. According to the different forms of multinational taxpayers' multinational investment and management organizations and the forms of tax payment

Direct credit is applicable to the deduction of income tax paid by a multinational taxpayer of the same economic entity to the country of origin. Formula: Tax payable in the country of residence = (income in the country of residence + income in the country of origin) X tax rate in the country of residence-allowable credit (the smaller of the domestic allowable limit and the actual tax paid). Direct credit can be divided into full credit and limit credit.

Indirect credit is applicable to the parent company and subsidiaries of a multinational company, that is, the government of the country of residence of the parent company allows the parent company to bear the portion of the tax paid by the parent company in the income tax of the country of origin of the subsidiary. To offset the tax payable of the parent company. Foreign income tax included in the dividends received by the parent company from the subsidiary company = Dividends received by the parent company X Foreign income company has paid income tax / Foreign subsidiary income after tax. Applicable conditions: The government of the country of residence allows the credit to be levied by the government of the country of origin instead of fees or other payments; the allowable credit must be income tax; the subject of income tax for the allowable credit must be the net income of the taxpayer. The calculation of the example is as follows: the parent company of country A sets up a subsidiary in country B, the income of the subsidiary is 20 million yuan, the income tax rate of country B is 30%, the country A is 35%, and the subsidiary pays the income tax of country B 6 million (2 000 × 30%), and from its after-tax profit of 14 million yuan to the parent company of country A dividend of 2 million yuan. Calculate the amount of income tax payable by the parent company of Country A. 1) The foreign income tax included in the dividends received by the parent company (but has been deducted) is 85.714 million; 2) the actual income of the parent company: 2.58714 million; 3) the income tax payable by the parent company: total actual income X tax rate 35% = 1 million; 4) The tax paid is less than the tax payable, so the parent company still needs to pay 142,860.

International tax sparing credit The government of the country of residence shall treat the taxpayer in the country of residence (the country of source of income) with respect to the portion of the tax deducted by the country in which the taxpayer invests abroad as a paid tax. The fundamental difference from general credit: the forgiveness credit is as if paid, while the latter is an exemption from the income tax actually paid in the country of origin. Therefore, the allowance credit is also known as the shadow tax credit.