1. Villegas vs.
Hui Chiong Tsai Pao Ho
Facts: The Municipal Board of Manila enacted Ordinance
6537 requiring aliens (except those employed in the
diplomatic and consular missions of foreign countries, in
technical assistance programs of the government and
another country, and members of religious orders or
congregations) to procure the requisite mayor’s permit so
as to be employed or engage in trade in the City of Manila.
The permit fee is P50, and the penalty for the violation of
the ordinance is 3 to 6 months imprisonment or a fine of
P100 to P200, or both.
Issue: Whether the ordinance imposes a regulatory fee or
a tax.
Held: The ordinance’s purpose is clearly to raise money
under the guise of regulation by exacting P50 from aliens
who have been cleared for employment. The amount is
unreasonable and excessive because it fails to consider
difference in situation among aliens required to pay it, i.e.
being casual, permanent, part-time, rank-and-file or
executive.
[ The Ordinance was declared invalid as it is arbitrary,
oppressive and unreasonable, being applied only to aliens
who are thus deprived of their rights to life, liberty and
property and therefore violates the due process and equal
protection clauses of the Constitution. Further, the
ordinance does not lay down any criterion or standard to
guide the Mayor in the exercise of his discretion, thus
conferring upon the mayor arbitrary and unrestricted
powers. ]
2. Commissioner v Lingayen Gulf Electric GR No L-
23771, August 4, 1988
FACTS:
Lingayen Gulf Electric Power operates an electric power
plant serving the municipalities of Lingayen and Binmaley,
Pangasinan, pursuant to municipal franchise granted it by
the respective municipal councils. The franchises provided
that the grantee shall pay quarterly to the provincial
treasury of Pangasinan 1% of the gross earnings obtained
through the privilege for the first 20 years (from 1946) and
2% during the remaining 15 years of the life of the
franchise. In 1955, the BIR assessed and demanded
against the company deficiency franchise taxes and
surcharges from the years 1946 to 1954 applying the
franchise tax rate of 5% on gross receipts from 1948 to
1954. The company asked for a reinvestigation, which was
denied. CTA, however, ruled for Lingayen. Hence, this
petition.
ISSUES:
1. Whether the Court can inquire into the wisdom of the
franchise
2. Whether a rate below 5% is violative of the uniformity
clause in the Constitution
RULING:
No, the Court does not have the authority to inquire into
the wisdom of the Act. Charters or special laws granted
and enacted by the legislature are in the nature of private
contracts. They do not constitute a part of the machinery
of the general government. Also, the Court ought not to
disturb the ruling of the Court of Tax Appeals on the
constitutionality of the law in question.
No. The legislature has the inherent power not only to
select the subjects of taxation but to grant exemptions.
Tax exemptions have never been deemed violative of the
equal protection clause. Herein, the 5% franchise tax rate
provided in Section 259 of the Tax Code was never
intended to have universal application. Section 259
expressly allows the payment of taxes at rates lower than
5% when the charter granting the franchise precludes the
imposition of a higher tax. RA 3843, the law granting the
franchise, did not only fix and specify a franchise tax of 2%
on its gross receipts but made it in lieu of any and all
taxes, all laws to the contrary notwithstanding. The
company, hence, is not liable for deficiency taxes.
3. The Province of Misamis Oriental vs Cagayan
Electric Power and Light Company, 181 SCRA 38 [GR
No. L-45355 January 12, 1990]
Facts: Cagayan Electric Power and Light Company Inc.
was granted a franchise on June 17, 1961 under Republic
Act No. 3247 to install, operate and maintain an electric
light, heat and power system in the City of Cagayan de
Oro and its suburbs. Said franchise was amended on June
21, 1963 by RA 3570 which added the municipalities of
Tagoloan and Opol to CEPALCO’s sphere of operation,
and was further amended on August 4, 1969, by RA 6020
which extended its field of operation to the municipalities
of Villanueva and Jasaan.
R.A. Nos. 3247, 3570 and 6020 uniformly provide that:
Sec. 3. In consideration of the franchise and rights hereby
granted, the grantee shall pay a franchise tax equal to
three per centum of the gross earnings for electric current
sold under this franchise, of which two per centum goes
into the National Treasury and one per centum goes into
the treasury of the Municipalities of Tagoloan, Opol,
Villanueva and Jasaan and Cagayan de Oro City, as the
case may be: Provided, That the said franchise tax of
three per centum of the gross earnings shall be in lieu of
all taxes and assessments of whatever authority upon
privileges earnings, income, franchise, and
poles,wires, transformers, and insulators of the
grantee from which taxes and assessments the
grantee is hereby expressly exempted. (Emphasis
supplied.)
On June 28, 1973, the Local Tax Code (P.D. No. 231) was
promulgated, Section 9 of which provides:
Sec. 9. Franchise Tax.—Any provision of special laws to
the contrary notwithstanding, the province may impose a
tax on businesses enjoying franchise, based on the gross
receipts realized within its territorial jurisdiction, at the rate
of not exceeding one-half of one per cent of the gross
annual receipts for the preceding calendar year.
In the case of newly started business, the rate shall not
exceed three thousand pesos per year. Sixty per cent of
the proceeds of the tax shall accrue to the general fund of
the province and forty per cent to the general fund of the
municipalities serviced by the business on the basis of the
gross annual receipts derived therefrom by the franchise
holder. In the case of a newly started business, forty per
cent of the proceeds of the tax shall be divided equally
among the municipalities serviced by the business.
(Emphasis supplied.)
Pursuant thereto, the province of Misamis Oriental
enacted provincial revenue ordinance no. 9 whose section
12 reads:
Sec 12 Franchise tax – There shall be levied, collected
and paid on businesses enjoying franchise tax of 1/2 of
1% of their gross annual receipts for the preceding
calendar year realized within the territorial jurisdiction of
the province of Misamis Oriental.
The provincial treasurer of Misamis Oriental demanded
payment of the provincial franchise tax from CEPALCO.
The company refused to pay, alleging that it is exempt
from all taxes except the franchise tax required by RA
6020. Nevertheless, in view of the opinion rendered by the
provincial fiscal, upon CEPALCO’s request, upholding the
legality of the revenue ordinance, CEPALCO paid under
protest on May 27, 1974 the sum of Php4,276.28 and
appealed the fiscal’s ruling to the secretary of justice who
reversed it and ruled in favor of CEPALCO.
Issue: Whether or not CEPALCO is exempt from the
payment of franchise tax.
Held: Yes. RA 3247, 3570 and 6020 are special laws
applicable only to CEPALCO, while PD 231 is a general
tax law. The presumption is that the special statutes are
exceptions to the general law because they pertain to a
special charter granted to meet a particular set of
conditions and circumstances. The franchise of
respondent CEPALCO expressly exempts it from payment
of “all taxes of whatever authority” except the 3% tax on its
gross income.
This court pointed out that such exemption is part of the
inducement for the acceptance of the franchise and the
rendition of public service by the grantee. As a charter is in
the nature of a private contract, the imposition of another
franchise tax on the corporation by the local authority
would constitute an impairment of the contract between
the government and the corporation.
Local tax regulation no. 3-75 issued by the secretary of
finance on June 26, 1976, has made it crystal clear that
the franchise tax provided in the local tax code may only
be imposed on companies with franchises that do not
contain the exempting clause. Thus it provides:
The franchise tax imposed under local tax ordinance
pursuant to section 9 of the local tax code, as amended
shall be collected from businesses holding franchise but
not from business establishments whose franchise contain
the “in lieu of all taxes proviso.”
4. LLadoc vs CIR 14 SCRA 292
Topic: gift tax is not property but excise tax. Parish is
liable.
FACTS: M.B. Estate, Inc. donated P10,000.00 in cash to
the parish priest of Victorias, Negros Occidental, for the
construction of a new Catholic Church in the locality. The
total amount was actually spent for the purpose intended.
A year later, M.B. Estate, Inc., filed the donor's gift tax
return. CIR issued an assessment for donee's gift tax
against the parish, of which petitioner was the priest.
Petitioner filed a protest which was denied by the CIR. He
then filed an appeal with the CTA citing that he was not
the parish priest at the time of donation, that there is no
legal entity or juridical person known as the "Catholic
Parish Priest of Victorias," and, therefore, he should not
be liable for the donee's gift tax and that assessment of
the gift tax is unconstitutional. The CTA denied the appeal
thus this case.
ISSUE: Whether petitioner and the parish are liable for the
donee's gift tax.
RULING:
Yes for the parish. The Constitution only made mention of
property tax and not of excise tax as stated in Section 22,
par 3. The assessment of the CIR did not rest upon
general ownership; it was an excise upon the use made of
the properties, upon the exercise of the privilege of
receiving the properties. A gift tax is not a property tax, but
an excise tax imposed on the transfer of property by way
of gift inter vivos, the imposition of which on property used
exclusively for religious purposes, does not constitute an
impairment of the Constitution.
No for the petitioner. The Court ordered petitioner to be
substituted by the Head of Diocese to pay the said gift tax
after the CIR and Solicitor General did not object to such
substitution.
5. Commissioner of Internal Revenue v. The Estate of
Benigno P. Toda, Jr
Facts: Cibeles Insurance Corporation (CIC) authorized
Benigno P. Toda, Jr., President and owner of 99.991% of
its issued and outstanding capital stock, to sell the Cibeles
Building and the two parcels of land on which the building
stands for an amount of not less than P90 million. Toda
purportedly sold the property to Rafael A. Altonaga, who,
in turn, sold the same property on the same day to Royal
Match Inc. (RMI). For the sale of the property to RMI,
Altonaga paid capital gains tax in the amount of P10
million.CIC filed its corporate annual income tax return for
the year 1989, declaring, among other things, its gain from
the sale of real property in the amount of P75,728.021.
Toda then sold his entire shares of stocks in CIC to Le
Hun T. Choa, as evidenced by a Deed of Sale of Shares
of Stocks. Three and a half years later Toda died.
The Bureau of Internal Revenue (BIR) sent an
assessment notice and demand letter to the CIC for
deficiency income tax for the year 1989.
The new CIC asked for a reconsideration, asserting that
the assessment should be directed against the old CIC,
and not against the new CIC, which is owned by an
entirely different set of stockholders; moreover, Toda had
undertaken to hold the buyer of his stockholdings and the
CIC free from all tax liabilities for the fiscal years 1987-
1989. The Estate of Benigno P. Toda, Jr., represented by
special co-administrators Lorna Kapunan and Mario Luza
Bautista, received a Notice of Assessment from the
Commissioner of Internal Revenue for deficiency income
tax for the year 1989.
The Estate thereafter filed a letter of protest. The
Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the
CIC wholly owned and controlled by Toda by covering up
the additional gain of P100 million, which resulted in the
change in the income structure of the proceeds of the sale
of the two parcels of land and the building thereon to an
individual capital gains, thus evading the higher corporate
income tax rate of 35%. The Estate filed a petition for
review with the CTA alleging that the Commissioner erred
in holding the Estate liable for income tax deficiency.
In its decision, the CTA held that the Commissioner failed
to prove that CIC committed fraud to deprive the
government of the taxes due it. It ruled that even
assuming that a pre-conceived scheme was adopted by
CIC, the same constituted mere tax avoidance, and not
tax evasion. Hence, the CTA declared that the Estate is
not liable for deficiency income tax and, accordingly,
cancelled and set aside the assessment issued by the
Commissioner. Court of Appeals affirmed the decision of
the CTA.
Issue:
1) WON respondent Estate is liable for the 1989 deficiency
income tax of Cibeles Insurance Corporation.
2) WON the scheme employed by Cibelis Insurance
Company constitutes tax evasion.
Held:
1) Yes. The decision of the Court of Appeals is reversed
and respondent Estate of Benigno P. Toda Jr. was
ordered to pay P79,099,999.22 as deficiency income tax
of Cibeles Insurance Corporation for the year 1989.
It is worth noting that when the late Toda sold his shares
of stock to Le Hun T. Choa, he knowingly and voluntarily
held himself personally liable for all the tax liabilities of CIC
and the buyer for the years 1987, 1988, and 1989.
Paragraph g of the Deed of Sale of Shares of Stocks
specifically provides:
“xxx SELLER undertakes and agrees to hold the buyer
and Cibeles free from any and all income tax liabilities of
Cibeles for the fiscal years 1987, 1988 and 1989.”
When the late Toda undertook and agreed “to hold the
buyer and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989,” he
thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for
CIC’s deficiency income tax for the year 1989 by invoking
the separate corporate personality of CIC, since its
obligation arose from Toda’s contractual undertaking, as
contained in the Deed of Sale of Shares of Stock.
2) Yes. The scheme, explained the Court, resorted to by
CIC in making it appear that there were two sales of the
subject properties, i.e., from CIC to Altonaga, and then
from Altonaga to RMI cannot be considered a legitimate
tax planning.
Fraud in its general sense, “is deemed to comprise
anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or
equitable duty, trust or confidence justly reposed, resulting
in the damage to another, or by which an undue and
unconscionable advantage is taken of another.”
It is obvious that the objective of the sale to Altonaga was
to reduce the amount of tax to be paid especially that the
transfer from him to RMI would then subject the income to
only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonaga’s sole purpose of
acquiring and transferring title of the subject properties on
the same day was to create a tax shelter. Altonaga never
controlled the property and did not enjoy the normal
benefits and burdens of ownership. The sale to him was
merely a tax ploy, a sham, and without business purpose
and economic substance. Doubtless, the execution of the
two sales was calculated to mislead the BIR with the end
in view of reducing the consequent income tax liability.
 In a nutshell, the intermediary transaction, i.e., the
sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business
purposes constitutes one of tax evasion.
Generally, a sale or exchange of assets will have an
income tax incidence only when it is consummated. The
incidence of taxation depends upon the substance of a
transaction. The tax consequences arising from gains
from a sale of property are not finally to be determined
solely by the means employed to transfer legal title.
Rather, the transaction must be viewed as a whole, and
each step from the commencement of negotiations to the
consummation of the sale is relevant. A sale by one
person cannot be transformed for tax purposes into a sale
by another by using the latter as a conduit through which
to pass title. To permit the true nature of the transaction to
be disguised by mere formalisms, which exist solely to
alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.
To allow a taxpayer to deny tax liability on the ground
that the sale was made through another and distinct entity
when it is proved that the latter was merely a conduit is to
sanction a circumvention of our tax laws. Hence, the sale
to Altonaga should be disregarded for income tax
purposes. The two sale transactions should be treated as
a single direct sale by CIC to RMI.
6. American Bible Society vs City of Manila
Facts: In the course of its ministry, American Bible
Society’s Philippine agency has been distributing and
selling bibles and/or gospel portions thereof (since 1898,
but except during the Japanese occupation) throughout
the Philippines and translating the same into several
Philippine dialects.
On 29 May 1953, the acting City Treasurer of the City of
Manila informed the Society that it was conducting the
business of general merchandise since November 1945,
without providing itself with the necessary Mayor’s permit
and municipal license, in violation of Ordinance 3000, as
amended, and Ordinances 2529, 3028 and 3364, and
required the Society to secure, within 3 days, the
corresponding permit and license fees, together with
compromise covering the period from the 4th quarter of
1945 to the 2nd quarter of 1953, in the total sum of
P5,821.45. On 24 October 1953, the Society paid to the
City
Treasurer under protest the said permit and license fees,
giving at the same time notice to the City Treasurer that
suitwould be taken in court to question the legality of the
ordinances under which the said fees were being
collected, which was done on the same date by filing the
complaint that gave rise to this action. After hearing, the
lower court dismissed the complaint for lack of merit. the
Society appealed to the Court of Appeals, which in turn
certified the case to the Supreme Court for the reason that
the errors assigned involved only questions of law.
Issue: Whether the Society is required to secure municipal
permit to allow it to sell and distribute bibles and religious
literature, and to pay taxes from the sales thereof.
Held: No. Section 27 (e) of Commonwealth Act 466
(NIRC) exempts corporations or associations organized
and operated exclusively for religious, charitable, or
educational purposes, Provided however, That the income
of whatever kind and character from any of its properties,
real or personal, or from any activity conducted for profit,
regardless of the disposition made of such income, shall
be liable to the tax imposed under the Code. Herein, the
act of distributing and selling bibles, etc. is purely religious
and cannot be made liable for taxes or fees therein.
Further, Ordinance 2529, as amended, cannot be applied
to the Society, for in doing so it would impair its free
exercise and enjoyment of its religious profession and
worship as well as its rights of dissemination of religious
beliefs. The fact that the price of the bibles and other
religious pamphlets are little higher than the actual cost of
the same does not necessarily mean that it is already
engaged in the business or occupation of selling said
“merchandise” for profit. Furthermore, Ordinance 3000 of
the City of Manila is of general application and it does not
contain any provisions whatsoever prescribing religious
censorship nor restraining the free exercise and
enjoyment of any religious profession. The ordinance is
not applicable to the Society, as its business, trade or
occupation is not particularly mentioned in Section 3 of the
Ordinance, and the record does not show that a permit is
required therefor under existing laws and ordinances for
the proper supervision and enforcement of their provisions
governing the sanitation, security and welfare of the public
and the health of the employees engaged in the business
of the Society.
7. CIR VS SC JOHNSON & SON, INCS AND CA [G.R.
No. 127105. June 25, 1999]
FACTS: JOHNSON AND SON, INC a domestic
corporation organized and operating under the Philippine
laws, entered into a license agreement with SC Johnson
and Son, United States of America(USA), a non-resident
foreign corporation based in the U.S.A. pursuant to which
the [respondent] was granted the right to use the
trademark, patents and technology owned by the latter
including the right to manufacture, package and distribute
the products covered by the Agreement and secure
assistance in management, marketing and production
from SC Johnson and Son, U. S. A. The said License
Agreement was duly registered with the Technology
Transfer Board of the Bureau of Patents, Trade Marks and
Technology Transfer under Certificate of Registration No.
8064 . For the use of the trademark or technology, SC
JOHNSON AND SON, INC was obliged to pay SC
Johnson and Son, USA royalties based on a percentage
of net sales and subjected the same to 25% withholding
tax on royalty payments which respondent paid for the
period covering July 1992 to May 1993.00 On October
29,1993, SC JOHNSON AND SON, USA filed with the
International Tax Affairs Division (ITAD) of the BIR a claim
for refund of overpaid withholding tax on royalties arguing
that, since the agreement was approved by the
Technology Transfer Board, the preferential tax rate of
10% should apply to the respondent. Respondent submits
that royalties paid to SC Johnson and Son, USA is only
subject to 10%withholding tax pursuant to the most-
favored nation clause of the RP-US Tax Treaty in relation
to the RP-West Germany Tax Treaty. The Internal Tax
Affairs Division of the BIR ruled against SC Johnson and
Son, Inc. and an appeal was filed by the former to the
Court of tax appeals. The CTA ruled against CIR and
ordered that a tax credit be issued in favor of SC Johnson
and Son, Inc. Unpleased with the decision, the CIR filed
an appeal to the CA which subsequently affirmed in toto
the decision of the CTA. Hence, an appeal on certiorari
was filed to the SC.
THE MAIN ISSUE:
WON SC JOHNSON AND SON, USA IS ENTITLED TO
THE MOST FAVORED NATION TAX RATE OF 10%ON
ROYALTIES AS PROVIDED IN THE RP-US TAX
TREATY IN RELATION TO THE RP-WEST GERMANY
TAX TREATY.
HELD:
The concessional tax rate of 10 percent provided for in the
RP-Germany Tax Treaty could not apply to taxes imposed
upon royalties in the RP-US Tax Treaty since the two
taxes imposed under the two tax treaties are not paid
under similar circumstances, they are not containing
similar provisions on tax crediting.
The United States is the state of residence since the
taxpayer, S. C. Johnson and Son, U. S. A., is based there.
Under the RP-US Tax Treaty, the state of residence and
the state of source are both permitted to tax the royalties,
with a restraint on the tax that may be collected by the
state of source. Furthermore, the method employed to
give relief from double taxation is the allowance of a tax
credit to citizens or residents of the United States against
the United States tax, but such amount shall not exceed
the limitations provided by United States law for the
taxable year. The Philippines may impose one of three
rates- 25 percent of the gross amount of the royalties; 15
percent when the royalties are paid by a corporation
registered with the Philippine Board of Investments and
engaged in preferred areas of activities; or the lowest rate
of Philippine tax that may be imposed on royalties of the
same kind paid under similar circumstances to a resident
of a third state.
Given the purpose underlying tax treaties and the rationale
for the most favored nation clause, the Tax Treaty should
apply only if the taxes imposed upon royalties in the RP-
US Tax Treaty and in the RP-Germany Tax Treaty are
paid under similar circumstances. This would mean that
private respondent must prove that the RP-US Tax Treaty
grants similar tax reliefs to residents of the United States
in respect of the taxes imposable upon royalties earned
from sources within the Philippines as those allowed to
their German counterparts under the RP Germany Tax
Treaty. The RP-US and the RP-West Germany Tax
Treaties do not contain similar provisions on tax crediting.
Article 24 of the RP-Germany Tax Treaty, supra, expressly
allows crediting against German income and corporation
tax of 20% of the gross amount of royalties paid under the
law of the Philippines. On the other hand, Article 23 of the
RP-US Tax Treaty, which is the counterpart provision with
respect to relief for double taxation, does not provide for
similar crediting of 20% of the gross amount of royalties
paid. At the same time, the intention behind the adoption
of the provision on relief from double taxation in the two
tax treaties in question should be considered in light of the
purpose behind the most favored nation clause.
Other topics:
Most favored nation clause
The purpose of a most favored nation clause is to grant to
the contracting party treatment not less favorable than that
which has been or may be granted to the “most favored”
among other countries. It is intended to establish the
principle of equality of international treatment by providing
that the citizens or subjects of the contracting nations may
enjoy the privileges accorded by either party to those of
the most favored nation. The essence of the principle is to
allow the taxpayer in one state to avail of more liberal
provisions granted in another tax treaty to which the
country of residence of such taxpayer is also a party
provided that the subject matter of taxation, in this case
royalty income, is the same as that in the tax treaty under
which the taxpayer is liable. The RP-US Tax Treaty does
not give a matching tax credit of 20 percent for the taxes
paid to the Philippines on royalties as allowed under the
RP-West Germany Tax Treaty, private respondent cannot
be deemed entitled to the 10 percent rate granted under
the latter treaty for the reason that there is no payment of
taxes on royalties under similar circumstances.
Purpose of a Tax Treaty
The purpose of these international agreements is to
reconcile the national fiscal legislations of the contracting
parties in order to help the taxpayer avoid simultaneous
taxation in two different jurisdictions. The goal of double
taxation conventions would be thwarted if such treaties did
not provide for effective measures to minimize, if not
completely eliminate, the tax burden laid upon the income
or capital of the investor. Thus, if the rates of tax are
lowered by the state of source, in this case, by the
Philippines, there should be a concomitant commitment on
the part of the state of residence to grant some form of tax
relief, whether this be in the form of a tax credit or
exemption. Otherwise, the tax which could have been
collected by the Philippine government will simply be
collected by another state, defeating the object of the tax
treaty since the tax burden imposed upon the investor
would remain unrelieved. If the state of residence does not
grant some form of tax relief to the investor, no benefit
would redound to the Philippines, i.e., increased
investment resulting from a favorable tax regime, should it
impose a lower tax rate on the royalty earnings of the
investor, and it would be better to impose the regular rate
rather than lose much-needed revenues to another
country.
Rationale of reducing tax rates in negotiating tax
treaties
In negotiating tax treaties, the underlying rationale for
reducing the tax rate is that the Philippines will give up a
part of the tax in the expectation that the tax given up for
this particular investment is not taxed by the other country.

International Double Taxation and Rationale Tax refunds

International juridical double taxation is defined as the Tax refunds are in the nature of tax exemptions, and as
imposition of comparable taxes in two or more states on such they are regarded as in derogation of sovereign
the same taxpayer in respect of the same subject matter authority and to be construed strictissimi juris against the
and for identical periods; The apparent rationale for doing person or entity claiming the exemption.
away with double taxation is to encourage the free flow of
goods and services and the movement of capital, Burden of proof in tax exemption
technology and persons between countries, conditions The burden of proof is upon him who claims the exemption
deemed vital in creating robust and dynamic economies. in his favor and he must be able to justify his claim by the
clearest grant of organic or statute law.
When is there double taxation?
Double taxation usually takes place when a person is
resident of a contracting state and derives income from, or
owns capital in, the other contracting state and both states
impose tax on that income or capital.

Methods of eliminating double taxation

First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to
certain classes of income or capital. In some cases, an
exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both
states are given the right to tax, although the amount of
tax that may be imposed by the state of source is limited.
The second method for the elimination of double taxation
applies whenever the state of source is given a full or
limited right to tax together with the state of residence. In
this case, the treaties make it incumbent upon the state of
residence to allow relief in order to avoid double taxation.
In this case, the treaties make it incumbent upon the state
of residence to allow relief in order to avoid double
taxation.

Methods of relief on 2nd method

There are two methods of relief, the exemption method
and the credit method.

Exemption method, the income or capital which is taxable

in the state of source or situs is exempted in the state of
residence, although in some instances it may be taken into
account in determining the rate of tax applicable to the
taxpayer’s remaining income or capital.

Credit method, although the income or capital which is

taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the
tax levied in the latter.

The basic difference between the two methods is that in

the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon the
tax.