Analysis of operations and effects of the method of elimination of double taxation.


In our previous post, we had an overview of the two principles used for eliminating double taxation. For understanding the policies adopted in Article 23A and 23B of the OECD Model Tax Convention, we need to have a better understanding of the principles and classifications involved.

Today we will understand in detail the functioning of the principles with illustrations.

Throughout the explanation, we will be considering an illustration with standard amounts and rates for the ease of understanding and comparison.

So here it is:

When the USA and Germany do not have the double taxation avoidance agreement, taxes paid by Mr. A in the USA for 100000$ will be 35000$ and in Germany 4000$ (@20%) or 8000$ (40%).

The principle of exemption

The principle of exemption income for removing the effects of double taxation is also known as ‘look at income’ approach.  Here the State of Residence taxes only the income taxable by the State of Residence.

Two methods are used for implementing this principle:

Full Exemption method

In this method, the income taxed in the State of Source or the State of Permanent Establishment is ignored for the tax.


Exemption with Progression

This methodology also excludes the income taxable in the State of Source or the State of Permanent Establishment. The State of Residence considers said income  in identification of applicable tax rate.

Illustration :

Observation on the workings:

  1. The relief provided by the State of Residence, i.e the USA, is not impacted by the taxes paid in the State of Germany.
  2. The tax relief received in the Full exemption method is higher than the exemption with the Progression method.

Credit Method

The principle of Credit method is also known as ‘look at Tax’ approach. State of Residence taxes the global income and computes the tax based on its domestic law. Taxes paid in the State of Source is deducted from the tax computed under domestic law.

This principle is applied by two methods

Full credit method

State of Residence provides credit for the taxes paid in the other States.


Ordinary Credit method

The deduction given by State of Residence for the tax paid in the other State is restricted to that part of its own tax which is appropriate to the income which may be taxed in the Other State; this method is called  ‘ordinary credit’.



  1. State of Residence is not obliged to allow a deduction of more than the tax due in State of Source

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