Question

2.     Bob lives in the UK, but works in both Germany and in the UK. In 2019 he earned 40,000 euros in Germany, and 30,000 euros in the UK. In Germany the income tax rate is 45%.

2.1.   How much tax would be due from Bob in the UK on his annual income for 2019 if the UK income tax rate was 20% and any double taxation would be eliminated using ordinary credit?

2.2.   How much tax would be due from Bob in the UK on his annual income for 2019 if the UK income tax rate was 50% and any double taxation would be eliminated using ordinary credit?

2.3.   How much tax would be due from Bob in the UK on his annual income for 2019 if the UK income tax rate was 20% for income up to 40,000 euros and 30% for income above 40,000 euros, and any double taxation would be eliminated using exemption with progression?

Answer 1

Bob has earned 40000 euros in Germany and 30000 euros in the UK and he will have to pay tax in Germany with 45% tax rate. The double taxation treaty allows the person or company to avoid paying double taxes on the income.
In the credit method, the home country allows credit for tax paid in the foreign country.

a) Tax paid in Germany
40000 * 0.45 = 18000

UK has 20% income tax rate
((40000 + 30000) * 0.20) - 18000
= 14000 - 18000
= -4000

b) Tax paid in Germany
40000 * 0.45 = 18000

If the tax rate in the UK is 50%
((40000 + 30000) * 0.5) - 18000
= 35000 - 18000
= 17000

c) Tax paid in Germany
40000 * 0.45 = 18000

Tax in the UK
(40000 * 0.2) + (30000 * 0.3)
8000 + 9000 = 17000

17000 - 18000 = -1000

The maximum allowance for credit differs with tax laws of each country.