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.
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:
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).