The
Deduction Method provides only
partial resolution of the residence-source conflict. Under the deduction method, the individual pays the full tax to the source country, and is only allowed to
deduct the amount of taxes paid to the source country in calculating total world-wide income.
The Credit Method provides complete resolution of the residence-source conflict. Under the credit method the residence country allows the individual to take a tax credit for taxes paid to a source country. The tax rate paid by the resident on the foreign source income is the greater of the domestic and source tax rates.
The Exemption Method also provides complete resolution of the residence-source conflict. Under the exemption method, the country of residence charges no income tax on income generated in a foreign country that enforces source jurisdiction (i.e., that income is exempt from domestic taxation). This effectively eliminates the residence-source conflict, because foreign-generated income is taxed by the source country, only.
