What is the Difference Between a Tax Credit and a Tax Deduction?

Tax credit refers to permitting taxpayers to deduct some of their special special expenses from their taxable amount in proportion or in full to reduce their tax burden. There are two common types of tax credits, investment credits and foreign tax credits. Investment credit refers to allowing taxpayers to deduct a certain percentage of equipment purchase fees from their company income tax payable for the year. This is equivalent to government subsidies for private investment, so investment credits are also called "investment subsidies." The purpose of investment credit is to stimulate private investment, promote capital formation, and increase the potential for economic growth.

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Tax credits have the following characteristics:

1. The tax credit is only applicable to the country of residence (ie the exporting country)

China's current tax law has stipulated correspondingly to avoid double taxation of income. Its main contents include:

1. The taxpayer's income derived from outside China is allowed to be deducted from the taxable amount of corporate income tax and personal income tax paid outside China. However, the deduction amount shall not exceed the taxable amount of the taxpayer's overseas income calculated in accordance with Chinese tax laws.

2. The actual corporate income tax and personal income tax paid by taxpayers from overseas income that are lower than the deduction limit calculated in accordance with the Chinese tax law may be deducted from the taxable amount. This year's tax deduction is deductible, but can be deducted from the balance of tax deductions in subsequent years. The maximum deduction period cannot exceed 5 years.

3. The deduction of the tax paid by the taxpayer abroad is generally based on the method of deducting the tax paid abroad without division by country. The deduction amount is: the taxable amount of domestic and overseas income calculated according to the Chinese tax law × (income derived from a country or region / total domestic and overseas income). For certain domestic-funded enterprises that cannot fully provide overseas tax payment certificates, with the approval of the State Administration of Taxation, they can also take the method of fixed rate deduction. No distinction is made between tax-exempt or non-tax-exempt items, and a uniform rate of 16.5% of overseas taxable income Calculate the tax credit.