Which method provides relief by allowing tax paid in one country to be used as a credit in another, with relief limited to the lower of the two countries' taxes?

Which method provides relief by allowing tax paid in one country to be used as a credit in another, with relief limited to the lower of the two countries' taxes?

• A. Exemption
• B. Tax Credit
• C. Deduction
• D. Deferral

Answer: (B)

Relief through a tax credit is when the country taxing the income abroad allows the foreign tax paid to be credited against its own tax on that income, with the credit capped at the tax that would have been charged domestically on that same income. This prevents double taxation while ensuring the relief doesn’t exceed the home-country tax on the income. For example, if the foreign tax paid is 20 and the domestic tax on the same income would be 15, the credit is limited to 15, so domestic tax on that income becomes zero, and any excess foreign tax isn’t recovered through the domestic system. The other methods work differently: exemption would exclude the foreign income from domestic taxation, deduction would reduce taxable income (and thus domestic tax) rather than provide an immediate offset, and deferral would postpone the tax to a later period.

Relief through a tax credit is when the country taxing the income abroad allows the foreign tax paid to be credited against its own tax on that income, with the credit capped at the tax that would have been charged domestically on that same income. This prevents double taxation while ensuring the relief doesn’t exceed the home-country tax on the income. For example, if the foreign tax paid is 20 and the domestic tax on the same income would be 15, the credit is limited to 15, so domestic tax on that income becomes zero, and any excess foreign tax isn’t recovered through the domestic system. The other methods work differently: exemption would exclude the foreign income from domestic taxation, deduction would reduce taxable income (and thus domestic tax) rather than provide an immediate offset, and deferral would postpone the tax to a later period.