General evaluation of the exemption method

Only the exemption without tariff proviso follows to a capital neutral taxation. The exemption with tariff proviso connects under the condition of pure profit conditions aspects of capital export neutrality with aspects of capital import neutrality. Analog a taxation level, which is in the state of source not higher than in the state of residence, will be reached, which is between capital export and capital import neutrality in which no effective double taxation exists.
Is the tax level in the state of source higher than the tax level in the state of residence the exemption with tariff proviso and the limited crediting follow to the same solution and the neutralization of the effective double taxation is no longer given.

The exemption without tariff proviso follows however to an unwanted international splitting effect, which lowers the applicable tax rates. The progressive tariffs, which should regard a higher tax capability with the increasing income level, are based on a wrong, each time on the income of one state based capability. Thereof in the state-praxis regularly the exemption method with tariff proviso will be applied. Tariff proviso is regularly only provided in the state of residence and not in the state of source. At consequent application the tariff proviso must be however also provided in the state of source.

Impact of the crediting method in connection with loss constellations

If losses occur in the country of source or residence, the isolated considerations of the residence or foreign incomes follow to an adverse situation for the tax payer:

On domestically losses the isolated considerations of the residence or foreign incomes, no compensation between positive and negative incomes follows. Differentiate the domestically and foreign income only by the algebraic sign, at the same amount, the state of sources collect taxes although the worldwide income is zero. It follows a spectacular case of double taxation.

At foreign losses a comparable situation occurs, at least if the exemption without tariff proviso will be considerate. At the application of the exemption with tariff proviso follows however to a moderated situation of the isolated consideration, because the foreign losses will be at least considerate for the assessment of the tax rate. Therefor the total burden decreases by the tax rate lowering impact of the losses. Despite of the positive effect for the tax payer it can’t be spoken from a systematic solution. It is also denoted as negative tariff proviso.

Application in the German tax law

The exemption method is found as principle rule in the double taxation agreement of the German international tax law. Thereby applies always a tariff proviso. It can’t be defected on the –comprehensive- exemptions of the exemption method in the double taxation agreement (especially on the in the state of source imitated taxable incomes and on the so called passive incomes).