What is the difference between the credit method and the exemption method?
Both are ways of relieving double taxation, but they work at different points. Under the exemption method the residence country leaves the foreign income out of its base altogether. Under the credit method it does the opposite: the foreign income goes into the residence country's tax base, that country works out its own tax on it, and the foreign tax already paid is then set against that liability. The practical consequence is that the credit method leaves the residence country's rate in charge. If its rate is the higher of the two, you end up paying the difference at home. Exemption does not produce that result.
Why is my foreign tax credit less than the tax I paid abroad?
Because the credit is capped. The residence country will relieve foreign tax only up to the amount of its own tax on the same income, so where the foreign charge is heavier than the domestic charge on that slice of income, the excess is not relieved by the credit at all. The cap is also usually worked out income by income or country by country rather than on your return as a whole, which means a surplus on one type of income cannot always soak up a shortfall on another. What happens to the unrelieved amount depends on the residence country's own rules, and sometimes on whether the foreign tax was compulsory in the first place.
Does the credit method mean I never pay tax twice?
It means you should not pay full tax twice on the same income, which is not the same promise. The credit removes duplication up to the residence country's own tax on that income; anything above that ceiling stays with you. Relief also has to be claimed, in the right year, with the foreign tax evidenced. A payment that was voluntary, refundable, or not really a tax on income may not qualify as creditable at all, in which case the duplication is real and has to be addressed some other way, often by reclaiming the money in the country that took it rather than by claiming credit at home.
Which country's rules decide how much credit I get?
The residence country's. A treaty may oblige it to give credit, and may say which country has the first claim on the income, but the mechanics come from the residence country's own law: the ceiling, how income is grouped, what counts as a creditable tax, and what evidence is needed. That is why the same pair of payments can produce different relief depending on where you were resident for the year. It also means the foreign authority's view of its own tax is not the last word. Your home authority decides whether that tax was creditable and how much of it it will allow.
Can I use foreign tax I could not claim this year?
Sometimes, and it depends entirely on the residence country's own rules rather than on the treaty. Some systems allow unused foreign tax to be carried to another year, some allow a deduction instead of a credit, and some simply leave the excess unrelieved. Because the answer is domestic, the first thing to establish is which country you were resident in for the year in question and what its law permits. Keep the foreign assessments and the withholding evidence even where no credit is available now, since a carry-forward claim made later will be tested against that paperwork and not against your recollection.
Is a foreign tax refund still creditable after I claimed it?
No. Credit is relief for tax you actually bore, so tax that comes back to you was never a final cost. If a refund arrives after the residence return has been filed, the credit claimed on that return is too high and the return generally has to be corrected. This matters most where a payer withheld at its domestic rate and a treaty claim later reduced it: the reclaim abroad and the credit at home are two halves of one position, and taking both in full leaves an overstatement sitting on the file. Track pending reclaims so the residence return can be adjusted when they settle.
How do I actually stop being taxed twice?
In this order. Fix your residence under each country's own rules, and if both claim you, apply the treaty tie-breaker. Identify where each type of income is sourced. Read the article that covers that income type, because it decides who taxes and at what maximum rate. Then claim the relief on the residence-country return, with proof of the foreign tax. Most of the tax people lose to double taxation is lost at the last step, not the first. See how double taxation is relieved.
What is double taxation?
Double taxation means the same income being taxed by two authorities. It comes in two forms: juridical, where two countries each tax one person on one amount, and economic, where two different people are taxed on the same underlying profit — a company on its earnings and a shareholder on the dividend paid out of them. Relief comes from a treaty, a foreign tax credit, or an exemption, and which one applies depends on the income type. How to avoid double taxation sets out the routes.
