The overriding issue in international taxation is the problem of double taxation. Under the tax laws of most countries, income may be taxed on the basis of either residence or source. That is, a country may tax residents of the country on worldwide income and may tax nonresidents on income from sources within the country. Thus, if a resident of one country has income from a business activity or investment in another country, the person may be taxed on the income on a residence basis by its home country and on a source basis in the other country. Most countries observe an international consensus on two points: First, relief from double taxation is essential to a healthy flow of international investment and business activity, and second, a taxpayer's country of residence should assume the burden of alleviating double taxation of the taxpayer's cross-border income. Under this consensus, a country may generally tax nonresidents on income from sources within the country, without regard to the possibility of double taxation, but a country should relieve double taxation for its residents. This article explores how an exemption system might work in the United States by applying both U.S. law and Japanese law, as recently amended, to three hypothetical cases. Each of the cases involves a domestic corporation (Japanese or American) with one or more subsidiaries organized, managed, and doing business in other countries.
Lawrence Lokken and Yoshimi Kitamura,
Credit vs. Exemption: A Comparative Study of Double Tax Relief in the United States and Japan,
Nw. J. Int'l L. & Bus.