Tax management is a crucial aspect of tax administration at both national and international level. In the area of international double taxation, the choice between exemption or deduction plays a fundamental role in optimising the taxes paid by taxpayers. However, it is important to note that this choice cannot be changed after the voluntary deadline, which underlines the importance of making informed and strategic choices from the outset.
International double taxation occurs when a taxpayer is taxed on the same income in two or more countries. To avoid this scenario, many countries have established double taxation agreements that allow taxpayers to choose between two options: exemption or deduction.
Exemption means that income earned abroad will not be taxed in the country of residence, while deduction allows taxes paid abroad to be deducted from the tax payable in the country of residence. Both options have significant tax planning implications and can greatly impact the taxpayer’s final tax burden.
It is crucial to understand that the choice between exemption or deduction is a strategic decision that must be made in an informed and conscientious manner.
Recently, the High Court of Justice of the Balearic Islands in a ruling of 4 December 2023 concluded that these are two different and incompatible tax regimes, so the taxpayer must opt for the application of one of them at the time of filing his self-assessment and that the taxpayer must opt for the application of one of them at the time of filing his self-assessment.
As we have mentioned throughout this article, the choice between exemption or deduction to avoid international double taxation is a crucial process in the tax management of taxpayers with international income. The impossibility of changing this choice after the voluntary deadline highlights the importance of careful consideration and tax planning. By understanding the implications of each option and seeking professional advice, taxpayers can optimise their tax situation and meet tax obligations effectively.
Carmen Moya López
