Question

5.Explain the different bases of international tax system.

Answer 1

International Tax system is the system of taxation applicable on an individual / organization which resides in two or more country / has its operations in more than one country respectively. Since, the operations are in different countries, hence, the individual / organization needs to follow the tax system of each country in which it operates.

Bases of International Tax system:

Tax on Residents of a country: It includes the taxation on income derived by residents of a country from foreign countries e.g. if a resident of UK derives income from USA, then the taxation by the UK government on the income generated from USA is the tax on resident. It is taxed in the return of income tax as foreign income at the rate specified which is generally the highest of the slab.

Tax on Non-Residents of a country: It includes the taxation on income derived by non-residents from domestic country e.g. if a resident of UK derives income from USA, then the taxation by the USA government on the income generated by UK resident is the tax on non-resident.

Further, for the avoidance of double taxation i.e. the tax paid in the originating country and the destination country on the same income, there is provision of DTAA (Double Taxation Avoidance Agreement) between some countries which avoids the double taxation of same income. Hence, the tax already paid on income generated in a country will be credited in the taxpayer's return of income and the tax payable will be set-off against the tax credit available.