CHAP 1
INTRODUCTION TO
INTERNATIONAL TAXATION
LECTURER: Dang Thi Bach Van(MA)
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OBJECTIVE
After finishing this chapter, students have ability to:
(i) Define key concepts in international taxation;
(ii) Analyse goals of international tax rules
(iii) Identify emerging issues in tax administration
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CONTENT
— Essential concepts in international taxation
— Tax planning in multinational enterprises
— Tax administration
— Role of supranational organizations
— Cross-border enforcement of taxes
— BEPS project
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INTRODUCTION *
—
Increasingly integrated economies.
— MNEs as well as individuals – cross border transactions
>< international tax issues
— Foreign investment è national governments è tax
revenue
è most national governments must care about international
tax, both to present a hospitable environment for foreign
investment and to protect their revenue base
Questions
— Think about tax in the context of a single
jurisdiction è tax in a global context
è Domestic taxation law >< international tax law
— Is there any international “ tax system”?
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CONCEPTS
International taxation refers to tax levied on the cross
border transactions. The transactions may take place
between two or more persons or entities in two or more
countries or tax jurisdictions.
è Such a transaction may involve a person in one country
with property and income flows in another
INTERNATIONAL TAXATION
DEFINE
— International tax (international tax law) refers to the
international aspects of the income tax laws of particular
countries.
è Các nguyên tắc đánh thuế áp dụng cho những giao
dịch giữa hai hoặc nhiều quốc gia.
— Thuế luôn mang tính chất quốc gia, không mang tính quốc tế.
— Không có tòa án thuế quốc tế hoặc các cơ quan quản lý các
vấn đề riêng về thuế quốc tế.
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International tax refers:
All tax issues arising under a country’s income tax
law that include some foreign element:
- cross-border trade in goods and services;
- Cross-border manufacturing, production, and
resource development by a multinational
enterprises,
- Cross-border
investment by individuals or
investment funds,
- Individuals working outside the country where
they usually reside.
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The international tax law of a country
has two broad dimensions
The taxation of resident individuals and legal
entities on income arising in foreign countries;
(ii) The taxation of nonresident on domestic
income (i.e, income arising or sourced in the
country)
(i)
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Questions
— What determines the right of a country to levy
tax on a person or company?
— What connection, if any, need there be between
taxpayer and the tax authority?
è Most countries use the principles of source
and residence
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Essential concepts
in international taxation
Home and Host Country
+ In Business Context:
— Home Country refers to the country where the
headquarters is located.
— Host Country refers to the foreign countries where
the company invests.
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Essential concepts
in international taxation
— Resident; nonresident
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Essential concepts
in international taxation
— Outward-bound
(outbound)
&
inward-bound
(inbound) transaction
Outbound transaction: a transaction involving the
export of capital or other resources to a counstry è
rules for taxing the foreign income of resident
taxpayer
Inbound transaction: a transaction involving the
import of capital or other resources from a foreign
country è rules for taxing nonresidents on domestic
income.
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International tax extends beyond
income tax
— Estate taxes
— Gift taxes
— Inheritance taxes
— General wealth taxes
— Value-added taxes
— Customs duties
— A variety of special levies
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Essential concepts
in international taxation
— Tax jurisdiction: the extent of a country’s right
to tax
— Two principles
are therefore in common use
around the world to determine the extent of a
country’s tax jurisdiction: RESIDENCE & SOURCE
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Tax jurisdiction
— Under the resident jurisdiction: A country
may reserve the right to tax its residents on their
worldwide income and gains.
— Under the source jurisdiction: a country
reserves the right to tax not only the worldwide
income and gains of its tax residents, but also the
income and gains of non-residents arising within
its border.
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Tax jurisdiction
è A country’s tax base may therefore be defined in terms of:
— The persons who are liable to pay tax (eg individuals only,
individuals plus corporations, individuals plus trustees plus
corporations, etc).
— The types of income and capital on which tax must be paid. For
instance, a typical tax base might include:
- Income taxes on earnings
- Income taxes on investment income
- Income/corporation taxes on profits of corporations
- Capital taxes on capital profits
- Capital taxes on inheritances
- Indirect taxes on purchases of goods and services
- Taxes on holdings of property and wealth
è Tax base can be eroded through tax planning, tax avoidance
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Federal systems and local-level taxes
— Some countries have multi-tier tax systems where
the federal government collects taxes and the
internal divisions of the country also have their
own tax systems.
— Tax policy makers can learn much from the
operation of these sub-national tax systems.
Issues which the supra-national tax policy makers
grapple with, such as artificial shifting of profits
to low-level tax countries and which country has
the right to tax a particular company have often
been dealt with successfully in state-level tax
system.
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Federal systems and local-level taxes
In our study of double tax relief we are not usually
concerned with sub-national taxes because:
— Sub-national taxes are normally tax deductible when
computing tax at the federal (national) level, thus any
potential double taxation to which they give rise has
already been dealt with;
— Double taxation treaties (mainly bilateral agreements
under which two countries decide how double
taxation arising from the interface of their tax systems
is to be relieved) normally exclude sub-national taxes
from their provisions. In any case, double tax treaties
normally only deal with the taxation of income, gains
and capital, not sales or other indirect taxes.
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GOALS OF INTERNATIONAL TAX RULES
— Revenue considerations
— Fairness
— Competitiveness considerations
— Capital-export and capital_import neutrality
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Revenue considerations
— Every country wants to maximize its tax revenue
èa country must protect its domestic tax base:
è develop a good domestic tax system & an
effective tax administration to enforce its tax
rules; and
è avoid
entering
into
tax
treaties
that
inappropriately limit its rights to tax the domestic
source income of residents and nonresidents.
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Fairness
Fairness is achieved by:
— Imposing equal tax burdens on individuals with
equal income, without reference to the source or
type of the income – horizontal equity,
— Making those burdens commensurate with the
ability to pay of individuals – vertical equity – the
more you earn, the more you pay.
Note: no country has the power to impose a fairness standard on
nonresidents earning domestic source income b/c no country can
tax all the income of nonresidents arising outside its borders.
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Competitiveness considerations
— Tax incentives è attract jobs and investment
— “Race to the bottom”: detrimental to all countries
b/c such policies erode the ability of all
governments to impose fair and effective taxes on
income from movable capital.
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Capital-export and capital-import
neutrality
— Capital-export neutrality: a country’s international
tax rules should neither encourage nor discourage
outflows of capital. For ex: residence source
— Capital-import
neutrality:
taxpayers
doing
business in a country should be subject to the
same tax burden irrespective of where they are
residents, for ex: most countries do not tax foreign source
income earned by foreign corporations that are controlled by
resident (except from some circumstances) or the tax is deferred
until that income is repatriated (usually in the form of dividends)
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Tax principles
in an international environment
— How should tax revenues be divided between the
various countries in which taxpayers do business
or otherwise earn taxable profits?
è what gives it jurisdiction to tax, residence of a
taxpayer or the source of the taxable income or
profits, or both?
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Tax principles
in an international environment
— A neutral tax is one which leaves
a pre-tax
decision unchanged post - tax, so that taxes do
not impinge on choices about savings and
investment
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Tax principles
in an international environment
— National neutrality (NN)
— Capital export neutrality (CEN)
— Capital import neutrality (CIN)
(Peggy Musgrave, 1960s)
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Tax principles
in an international environment
— National ownership neutrality (NON)
— Capital ownership neutrality (CON)
(Desai and Hines, 2003)
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Tax principles
in an international environment
— National neutrality is insular, in that it focuses on
ensuring that the domestic fiscal does not lose
when residents invest overseas.
— It is concerned with equalizing the after-tax rate
of return on foreign investments with the pre-tax
return on domestic investments by treating
foreign taxes paid in the same way as other
business expenses.
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Tax principles
in an international environment
— CEN is concerned with neutrality in the location of
investment.
— Under this principle, a tax system should be
designed so that it is neutral regarding outflows
of capital, so that the total of domestic and
foreign taxes does not leave a capital exporter
worse off than if the investment had all been in
the home country.
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Tax principles
in an international environment
— CIN is concerned with neutrality in the source of
investment and from a government’s point of
view means that domestic companies should be
protected from a higher tax burden in a foreign
market than taxpayers from other countries
operating in that same market (ie all firms of all
nations pay the same rate of tax)
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Tax principles
in an international environment
èFor CEN, it is the domestic tax rate that is most
important;
èFor CIN, it is the foreign tax rate.
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Tax principles
in an international environment
— National ownership neutrality (NON) suggests
that the amount of tax paid by a business should
not depend on the identity, or location, of its
owners. Therefore, decisions such as how to
structure foreign investment (eg as foreign direct
investment or otherwise), should not be
influenced by tax considerations.
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Tax principles
in an international environment
— Capital ownership neutrality (CON) suggests that
tax systems should not distort asset ownership on
a worldwide basis; which should be such that
productivity is maximized.
èNON and CON, in emphasizing ownership
patterns, are based on a transaction cost
economics approach.
èNON and CON highlight the distortion of
international ownership patterns leading to
inefficiencies.#
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Tax planning in multinational
enterprises (MNEs)
MNEs usually:
— consist of groups of companies or other business
entities which are resident in a number of
different countries, but which are under common
control;
— Consist of partnership and other business forms
where the partners are resident in different
countries;
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Tax planning in multinational
enterprises (MNEs)
MNEs usually:
— Seek to exploit differences in the tax systems in
the various countries within which they operate
è minimize the global tax bill, maximize global
after-tax profits.
— May also seek to exploit differences not only in
the tax rates but also in the way tax profits
are computed – for example, by claiming a tax
deduction in one country for an item of
expenditure which is being paid to a fellow group
member in another country, whose tax system
does not count the receipt as taxable income.
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Tax planning in multinational
enterprises (MNEs)
— MNEs spend huge amounts of money on tax-
planning activities and on complying with the tax
rules and regulations
—
EX: they can save o average $4 for every $1 spend on taxplanning activities (Mills, Erikson & Maydew, 1998).
— Planning
techniques include the use of tax
havens, the use of specially targeted tax regimes
by countries which are not obviously tax havens
and the manipulation of internal transfer prices to
transfer profits into low-tax jurisdictions away
from higher tax ones.#
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WAYS OF STRUCTURING FOREIGN
INVESTMENTS
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A manufacturing enterprise might sell its
goods in a foreign country in one or more
of the following ways:
— Selling its manufactured goods directly
to customers in the foreign country
through, for ex, mail-order sales, sale
over the internet, or sales by itinerant
sales agent,
— Selling its goods to an unrelated foreign
for resale to customers; 02/08/19
Dangdistributor
Thi Bach Van
— Establishing a branch in the foreign
country consisting of a warehouse and
sales employees or agents to sell its
goods there;
— Establishing a foreign sales subsidiary
in the foreign country to sell the goods
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— Establishing a foreign holding company, which
establishes a foreign sales subsidiary in the
country to sell the goods; or
— Licensing an unrelated foreign corporation to
manufacture and sell its goods in the foreign
country
Note: the tax consequences of these various
alternatives may vary considerably under the
tax laws of a particular country (and from
country to country)
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SOME TYPES OF INTERNATIONAL TAX
PLANNING
— Double-dip leases
— Tax haven entities
— Treaty shopping
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Tax administration
— Increased globalization puts considerable pressure on
tax administration;
— Factors that threaten the integrity of tax systems:
1. Electronic commerce and transactions
2. Electronic money;
3. Intra-company trade;
4. Offshore financial centers and tax havens;
5. Derivatives and hedge funds;
6. Inability to tax financial capital;
7. Growing foreign activities;
8. Foreign shopping.
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Tax administration
— The economic crisis led to increased pressure on tax
administrations to ensure the maximum amount of
revenue is collected è need to close the tax gap;
— Recent developments in the area of co-operation
between the tax authorities in combating aggressive
tax avoidance include the formation of the Joint
International Tax Shelter Information Centre, based
in Washington and London and entailing information
sharing between the US, UK, Australia, Canada and
Japan.#
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ROLE OF SUPRANATIONAL
ORGANIZATIONS
— Several
supranational
organizations
have
emerged and developed in the last century with
the aim of encouraging international trade whilst
providing a level playing field for their member
countries in terms of their ability to attract MNEs
to invest in their countries.
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EXAMPLES OF SUPRANATIONAL
ORGANIZATIONS
— OECD_adoption
—
—
—
—
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of double tax treaties; establishing
principles for the taxation of international money flows
resulting from electronic commerce;
EU-Promoting harmonization of the tax systems of its
member countries;
The UN_ promoting measures to ensure that developing
countries get their fair share of the tax on profits of MNEs
operating within their borders;
The IMF_providing technical assistance to countries in
developing their tax policy and practice, mainly to low and
middle income countries;
The G20 (&G8) provide a forum for international
cooperation on economic and financial issues facing the
member countries,…#
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CROSS- BORDER ENFORCEMENT OF
TAXES
— Historically, the general principle in international law
has been that a country will not assist in the
collection of taxes charged by another country;
— However, cooperation in the collection of taxes of
other countries is now widespread:
—
—
—
—
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Exchange
information
automatically
(eg lists of interest payments by banks),
spontaneously;
The right to permit tax officials from one country to
visit the other country to carry out investigations;
Recovery of tax claims;
Measures of conservancy#
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BEPS – base erosion and profit shifting
Base erosion refers to:
— A reduction of the amount of profits which a country
can tax;
— The reduction of the number of companies and
amount of profits that a country can tax
Ex: if a company moves its residence to a different
country or causes its profits to arise in a different
country (eg by transferring its intellectual property IP to
another country so that the royalties go there) then the
ability of the original country to collect corporation tax
will be diminished. If payment is made to a nonresident, but the government has to grant a tax
deduction for it è that payment is a “base eroding
payment”.
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BEPS – base erosion and profit shifting
— Base erosion and profit shifting activity frequently
overlap: shifting tax profits to a lower tax country
will erode the tax base of a country from which the
profits are being shifted.
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BEPS – base erosion and profit shifting
In its communique, the G20 finance ministers made the
following statements:
— Effective taxation of mobile income is a key challenge;
— Profits should be taxed where functions driving the
profits are performed and where value is created;
— G20 member countries should ensure that international
and domestic laws do not permit or encourage artificial
profit shifting to low-tax jurisdictions;
— There should be a new single global standard for
automatic exchange of information; and
— All countries should join the Multilateral Convention on
Mutual Administrative Assistance in Tax Matters
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Summary
— Since
individual countries define their tax
jurisdictions in slightly different terms, these
jurisdictions often overlap. Potentially, this can result
in taxpayers being liable for tax in two or more
countries on the same income or profits.
— International law, usually in the form of bilateral
double tax treaties, seeks to alleviate this problem.
The form and content of international law is strongly
influenced by supra-national bodies such as OECD
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Summary
— One of the key issues in international tax is the question
of jurisdiction, which arises through residence and
source. The way in which these concepts interact causes
potential problems and there is much debate about which
one is more important in terms of the allocation of taxing
rights between nation states.
— Principles guiding the development of international tax
policy include CEN and CIN. Much of the focus of current
international tax policy development stems from the need
to control the tax-planning activities of multinational
groups of companies, who have considerable choice
available to them as to where to locate their activities so
as to potentially achieve tax savings.
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Summary
— The OECD BEPS project represents a bold attempt to
correct perceived problems in the current
international tax system.
— The speed with which decisions are being taken in
terms of defining the problems, and recommending
solutions is alarming, and threatens to cause
considerable disruption in the next few years.###
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REVIEW
— Tại sao phải quan tâm
đến thuế quốc tế?
— Có phải thuế quốc tế
chỉ chi phối trong
phạm vi thu nhập hay
không?
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REVIEW
— Các hình thức đầu tư ra
nước ngoài khác nhau có
tạo nên các hệ quả về thuế
tương ứng khác nhau
không?
— Các chủ đề trọng tâm của
thuế quốc tế là gì?
— Việc xác định tình trạng cư
trú có ý nghĩa về thuế như
thế nào?
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