International Taxation
Dr Phyllis Alexander
Bournemouth University
palexander@[Link]
1: Introduction
Issues:
• Which country gets to tax?
• Can two countries tax the same income?
• Is some income not taxed in any country?
• How to calculate profits for tax purposes
• The use and abuse of tax havens
1: Video links
• Obama
[Link]
• European Commission:
[Link]
• John Christianssen v Richard Rahn:
[Link]
• Al Jazeera
[Link]
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1: Introduction
Main points:
• Basic principles of international tax law
• Tax jurisdiction
• International double taxation
• Relief from international double taxation
• International law and taxation
• History of international tax law
• Tax competition
1: Introduction
Jurisdiction:
• What gives a State the power to tax?
• Tax resident:
– physical presence (individual);
– place of incorporation;
– place of central management
• Citizenship (USA)
• Source of income
1: Introduction
Residence v source:
• Residence-based tax:
– residents taxed on worldwide income / capital
• Source-based tax:
– only tax income or capital arising in the country –
“territorial” system
• Both?
– Tax residents on their worldwide income and
– non-residents on their local sources of income
1: Introduction
Residence basis:
• Duty / allegiance to the State:
– residents taxed on worldwide income / capital
• Practical ability to tax:
– Can be difficult if ‘resident’ is widely defined
• Equal treatment between investing abroad
and investing at home
– Known as Capital Export Neutrality
• Country’s companies can be disadvantaged
in international business
1: Introduction
Source basis:
• Business benefits from the country:
– Laws, security, infrastructure, education, access
• Practical ability to tax:
– Business activities and assets
– Withholding taxes
• How much activity is needed?
• Equal treatment of locally-owned and foreign
businesses – Capital Import Neutrality
• Needs higher tax rate?
1: Introduction
Withholding taxes:
• Convenient way to collect taxes from foreigners
• Tax recipient, but collected from payer
• Usually used for source-based taxation:
– Have jurisdiction over the payer, not the recipient
• Can be final or interim (possible refund if
recipient completes tax return)
• Who bears the tax? Gross-up clauses
1: Introduction
Current trends:
• Shifting towards territorial system:
– Helps the country’s exporters
– Encourages Headquarters companies
• Depends on taxpayer?
– Source-based for companies
– Residence-based for individuals
• Mixed system but with exemptions
• UK shifted towards territorial (ECJ losses)
• USA – Trump – encouraging repatriation?
1: Introduction
Double taxation:
• Juridical:
– The same taxpayer taxed twice on the same
income
• Economic:
– Effectively the same income is taxed twice, but in
different forms or different people
1: Introduction
Juridical double taxation:
• Source – Residence conflict
• Residence – Residence conflict
• Source – Source conflict
1: Introduction
Economic double taxation:
• Company profits and dividends
• Mis-match of categorising entities
1: Introduction
Double tax relief:
• Legal basis:
– Bilateral / multilateral
– Unilateral
• Method:
– Deduction method
– Credit method (withholding or underlying?)
– Exemption method (encourages avoidance?)
• Compromise (exemption if qualify)
• Easier to deal with juridical than economic
1: Introduction
Credit method:
• Which taxes:
– Withholding taxes only?
– Underlying taxes?
• Underlying taxes:
– Complex identification rules
• Pooling:
– Full pooling
– Strict source-by-source
– Offshore pooling
1: Introduction
Exemption method:
• Full or restricted:
– Minimum foreign tax?
– Active vs passive income?
– Participation requirement?
– Progression (uses up tax bands)
• Not as simple as it seems
• Encourages tax haven use
Summary of common methods of
giving double tax relief
Exemption Credit
With With Normal Full
participation progression credit credit
Limited
Strict source Offshore Onshore
Onshore
-by-source pooling pooling
pooling
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1: Introduction
Tax base:
• What is being taxed:
– Rules for calculating, e.g. business profits
• Can be ‘eroded’:
– Profits ‘shifted’ to low-tax jurisdictions
– Mis-matched classifications
1: Introduction
Competing for business:
• Tax rate
• Effective tax rate:
– Actual tax paid compared to actual profits
– Tax base
– Deductions, allowances, exemptions, holidays
• Double taxation relief
• Tax treaty network
• Connections with tax havens
1: Introduction
Example 1 – double tax relief
A dividend is paid by a Slokavian company to its Ruritanian
shareholder
•Dividend paid (cash) 9,000
•Slokavian tax withheld 1,000
•Ruritanian tax rate = 30%
•Credit method
•Exemption method
•Deduction method
Example 2 – Underlying Tax
Rubic Inc (resident in
Slokavia) Pugh Inc (resident in Inistania)
Profit before tax 1000 Dividend entitlement 750
Slokavia CT -250 Slokavia WHT at 10% -75
750 Dividend received (cash) 675
Dividend -750
0
Type of tax taxpayer amount
Corporation tax Rubic Inc 250
=underlying tax
Withholding tax on foreign Pugh Inc 75
shareholder
Question: which tax will Inistania take into account when granting double
tax relief? Assume Inistanian tax rat is 30%
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Example 3 – Exemption with
participation
Orville Ltd has the following foreign income:
Interest on Cayman Is. Bank account 10,000
Royalties from purchased intellectual property 5,000
Dividend from wholly owned subsid, Wright Co 50,000
Dividend from 9% holding in Emerald Co 50,000
Profits of US branch (not remitted) 30,000
Which income will be exempt?
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Example 3 – Continued
Further info regarding Wright Co
Net income from trading 80,000
Dividends from trading subsidiaries 30,000
Dividends from portfolio holdings 30,000
Interest receivable 20,000
Profits before tax 160,000
Tax -40,000
Profits after tax 120,000
Dividend paid -50,000
Profit retained 80,000
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Example 4 - Exemption with
progression
Commonly provided for in double tax treaties
• Burbot Inc is tax resident in Poissonia which operates
exemption with progression. The corporation tax rates in
Poissonia are:
– Profits 0-50,000: 10%
– Profits 50,000 – 200,000 20%
– Profits 200000+ 25%
• Burbot Inc has the following income for the year
– Poissonia trading income (excludes sub div) 150,000
– Dividends from 100% sub in Piscatan (net) 49,000
(Piscatan tax is at 30%)
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