Taxation at source on a gross basis is not just a form of double taxation but a tax obstacle to cross-border income flows in its own, and with even more detrimental consequences. Unlike double taxation, gross taxation can by itself render profitable transactions loss-making and remains unrelieved domestically.
Paradoxically, and while residence countries unilaterally relieve double taxation but increasingly limit their foreign tax credit by reference to the net income, the international tax framework remains focused on double taxation. Where taxpayers most require protection is where the international tax framework has less to offer, prompting taxpayers to adopt ‘defensive tax planning’ and gross-up clauses as their sole protection against what may be the main tax obstacle to international flows today.
Intertax