International Juridical Double Taxation

            International juridical double taxation refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods (Commissioner v. SC Johnson and Sons, Inc., G.R. No. 127105, June 25, 1999)
 
Using a U.S. citizen who owns a business here in the Philippines as an example, international juridical double taxation refers to a case where said citizen is required to pay taxes for his business income both here in the Philippines and the United States (U.S.). 

The U.S. like Japan, Germany, and the Philippines impose taxes on all income derived by their residents, both within and outside their country.

With this, how can the effects of international juridical double taxation be minimized?

In order to eliminate said double taxation, a tax treaty is the solution. Said treaty usually uses two methods. The first method delineates the rights to tax of both the Philippines and the U.S. with respect to agreed upon classes of income; or in some cases, an exclusive right to tax is given to either country. For other items of income not agreed upon, both states are still given the right to tax, although the amount of tax that is allowed to be imposed by the Philippines becomes limited.

On the other hand, the second method allows the Philippines either a limited or a full right to tax alongside with the U.S. In this case, the treaty gives U.S. the discretion to allow relief in order to avoid double taxation.

There are also two methods of relief: 1) the exemption method and 2) the credit method. In the exemption method, the income which is taxable in the Philippines is exempted in the U.S. In some instances, however, said income is still taken into account in determining the rate of tax applicable to the taxpayer’s remaining income.

In the credit method, the income remains taxable in both countries. Nevertheless, the tax paid in the Philippines is credited against the tax imposed by the U.S.

The basic difference between the two methods is that the exemption method focuses on the income itself, while the credit method focuses on the tax. 

Indeed, international juridical double taxation affects investments made by foreigners outside their countries; thus, tax treaties play important roles in balancing the situation.