International Taxation Methods and Economy - Alternative Media Forum


Post Top Ad

Post Top Ad


Monday, 6 June 2016

International Taxation Methods and Economy

In this essay we will discuss about international taxation. After reading this essay you will learn about:-
1. Meaning of International Taxation
2. International Tax Conflicts and Double Taxation
3. Double Tax Treaties
4. Domestic Tax Systems
5. International Offshore Financial Centres
6. Anti-Avoidance Measures
7. International Tax Planning.

List of Essays on International Taxation


Essay on the Meaning of International Taxation
Essay on the International Tax Conflicts and Double Taxation
Essay on the Double Tax Treaties
Essay on the Domestic Tax Systems
Essay on International Offshore Financial Centres
Essay on the Anti-Avoidance Measures
Essay on International Tax Planning

1. the Meaning of International Taxation:

International taxation refers to the global tax rules that apply to transactions between two or more countries (also called States) in the world. It encompasses all tax issues arising under a country’s income tax laws that include some foreign element.

Taxes are not international. There is no separate global tax law that governs cross-border transactions. Moreover, there is no international tax court or administrative body for international tax issues. All taxes are levied under their domestic law by federal, national or local governments.

These tax laws have an impact on cross-border transactions. International taxation governs these domestic tax rules under customary international law and treaties. International taxation also supports other objectives of domestic tax systems.

These objectives normally include measures:

1. To promote fairness by imposing equal tax burdens on domestic and foreign taxpayers with equal income and ability to pay, regardless of the source of the income;

2. To enhance domestic competitiveness through fiscal measures and to promote economic growth;

3. To obtain a fair share of the revenues from cross-border transactions; and

4. To ensure an equitable balance between capital export and capital import neutrality.

The principles of international taxation are influenced by tax equity and tax neutrality within the national economic sovereignty of each nation. Tax equity requires that the tax revenues from international economic activities be shared equitably by nations. It also requires that taxpayers involved in cross-border activities be neither discriminated against nor given undue preference in their tax burdens.

Tax systems are neutral when they do not influence the economic choices of taxpayers. They may be tax neutral either on capital export or on capital import. Developed countries tend to favour capital export or domestic neutrality, under which the taxpayer’s choices between investing at home or abroad remain unaffected (i.e. world efficiency).

On the other hand, developing countries generally prefer capital import or competitive neutrality to ensure that the investment decisions of domestic and foreign investors in their country are on par (i.e. national efficiency).

The fairness and efficiency of tax systems depend not on the tax laws of any one country, but on the cumulative effects of the tax laws of all countries. As there is little global tax harmonization, domestic tax systems often conflict on cross-border transactions and lead to excessive taxation.

Countries are at differing levels of social and economic growth with varying fiscal needs. Each country applies its own taxing rules to transactions connected with its jurisdiction. The lack of a common view on international tax principles creates economic distortions and also encourages international tax competition.

International taxation attempts to resolve these conflicts through the principles of enforceability and reciprocity. Countries may have unlimited rights of taxation over a person or object but they cannot normally enforce them outside their own jurisdiction. Therefore, they must respect the reciprocal taxing rights of other countries and co-operate with them to evolve rules of taxation that meet their mutual fiscal objectives.

2. Essay on the International Tax Conflicts and Double Taxation:

Each country exercises its own taxing rights under its domestic tax law. Where a taxpayer is subject to taxation on cross-border transactions in more than one jurisdiction he generally ends up with a higher tax liability than he would incur on similar transactions carried out wholly at home. In many cases, he is liable to double (or even multiple) taxation as a result of conflicting taxing rights.

This double taxation may be economic or juridical. Economic double taxation arises in international taxation when the same economic transaction, item or income is taxed in two or more States during the same period, but in the hands of different taxpayers. In juridical double taxation, two or more States levy their respective taxes on the same entity or person on the same income and for identical periods.

Double taxation is generally accepted as an impediment to international trade and investment, and an objective of international tax is that it should be avoided. It is initially addressed through appropriate domestic tax legislation. Many countries provide unilateral relief to avoid or minimize double taxation under their domestic laws.

This relief could be a tax exemption or a tax credit or, as a minimum, an expense deduction for the foreign taxes paid. However, double taxation could still arise as a result of a difference of opinion between countries on basic taxing principles and taxing rights.

Therefore, domestic measures are useful but may be inflexible and insufficient. These international tax conflicts are usually addressed through tax treaties (also called double taxation avoidance agreements or DTAAs).

Tax treaties are governed by the principles laid down under the Vienna Convention on the Law of Treaties (VCLT). They are negotiated under international law as legally binding State to State agreements signed by two or more countries (called “Contracting States” under the treaty).

It is estimated that there are more than 2,500 bilateral treaties and protocols that modify or supplement them, in existence today. Due to their complexity, multilateral treaties are not common.

3. Essay on the Double Tax Treaties:

Double tax treaties generally avoid and reduce the burden of juridical double taxation “in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods”. They confer rights and impose obligations on the Contracting States.

Their primary objective is to limit the taxes that can be levied by the Contracting States under their domestic tax law. The Contracting States allocate the taxing rights under a contractual agreement and then require that the residence State grants double tax relief if it arises.

Tax treaties contain special provisions to enable the “competent authorities” of the States involved to resolve international tax differences. These disputes could arise from differing interpretations of tax terms, inconsistent tax positions on transactions or the status of the taxpayer, or an attempt by a Contracting State to recover an excessive share of tax revenue.

Tax treaties also protect taxpayers from unfair tax discrimination on cross-border trade and investments. Moreover, they allow the exchange of information on tax matters between the national revenue authorities to curb international tax evasion.

Essentially, tax treaties involve a negotiated sharing of the tax revenues by two States. In developed countries with comparable tax systems, the treaty rules usually lead to a balanced sharing of tax revenues. In developing countries, however, these negotiations may be governed by economic and social factors as well as revenue considerations.

Many of them promote capital, labour and technology flows through fiscal measures, such as tax exemptions and allowances. The tax due in the home country may be “spared” under a treaty as a special concession for them to retain the tax benefit of these incentives.

Diamond and Diamond list over 20 different types of tax treaty. As well as comprehensive DTAAs on income and capital, the list includes treaties on inheritance, estates and gifts, and treaties on administrative assistance in tax matters.

In addition, several countries have separate limited bilateral treaties for shipping and aircraft activities. Many groups of countries have also signed multilateral treaties to coordinate their tax policies and promote regional economic development.

This book deals only with comprehensive bilateral double tax treaties on income and capital. Nearly all of them today follow the internationally accepted format prescribed either by the Committee on Fiscal Affairs of the Organisation for Economic Co-operation and Development (OECD Model), or the version recommended by an Ad Hoc Group of Experts on International Co-operation in Tax Matters appointed by the United Nations (UN Model). These Model Conventions contain standard Articles with detailed Commentaries to assist both in the bilateral negotiations and in their subsequent application and interpretation.

4. Essay on the Domestic Tax Systems:

The starting point for any study of international taxation is a broad knowledge and understanding of the domestic tax rules in various countries. Domestic tax law governs the tax rate, what is taxable, how the taxable income is computed and the tax compliance rules. It is essential to know the tax rules and how the rules are applied on cross-border transactions in a given country.

Under domestic tax laws, a tax liability arises in a country only if there is a connection between the tax jurisdiction and either the taxpayer (“tax subject”) or the taxable event (“tax object”).

These connections include factors such as the tax residence of the taxpayer, the source of income, the place where the income is earned or derived, or the location of the asset. The definitions of residence and source are contained in the domestic law and often differ among countries.

As national tax systems, laws and practices are not harmonized, they can and do often conflict. Moreover, they may not be clearly expressed and may be subject to differing interpretations. For example, the meaning of the same terms and expressions may differ from one country to another. These conflicts lead to double taxation and normally require tax treaties both to avoid them and to provide relief, if needed.

Double tax treaties generally override domestic law. They are internationally binding obligations between sovereign States (not taxpayers) under public international law. However, once accepted as “the law of the land”, they are enforceable as part of domestic law. Many tax jurisdictions allow taxpayers to choose between the treaty and the domestic law provisions, whichever is the more advantageous to them.

5. Essay on International Offshore Financial Centres:

International finance centres provide a wide range of global financial services (tax and non­tax). Although tax mitigation is not the prime objective in many cases, international financial centres provide tax benefits in offshore transactions (i.e. transactions undertaken outside the country of an individual or an organisation).

For example, they permit international investors to form tax-beneficial intermediary entities in their tax jurisdiction for various business objectives. These entities may act as holding companies managing the overseas investments and activities of a multinational enterprise, or they may only accumulate capital lawfully for reinvestment abroad.

Besides traditional “offshore” centres (also called tax havens) based in small islands, international financial centres for use by foreign taxpayers are also found in major “onshore” countries with highly developed economies.

Since they provide similar services, they are sometimes termed “non-traditional offshore centres” or “preferential tax regimes”. These countries have special tax incentives for non-residents. Today, the difference between onshore and offshore financial centres has become blurred.

The range of offshore centres available makes their selection difficult. Besides tax, it entails several practical and commercial considerations. An ideal location should provide for no tax on capital gains and corporate income and nil withholding taxes on outgoing payments.

In addition, there must be favourable tax treaties to reduce withholding taxes on the receipt of income from host countries. However, international financial centres should also possess certain non-tax advantages, such as freedom from exchange controls and a safe business infrastructure. Unfortunately, no country in the world meets all these requirements.

The global flow of capital, investment and trade in a fast changing world today requires businesses to respond quickly to meet international competition and exploit emerging opportunities.

Onshore governments have various limitations that restrict their ability to react quickly to these international market changes. The offshore industry fulfils this international business need. Over half the world’s financial transactions today take place offshore and this upward trend is likely to continue.

6. Essay on the Anti-Avoidance Measures:

Tax authorities are increasingly concerned with the loss of their share of domestic and global tax revenues to other countries through unacceptable tax avoidance schemes. Most countries have anti-avoidance rules under their domestic law or judicial practices, and sometimes also in their tax treaties.

These measures under domestic law include “substance over form” doctrine to prevent sham transactions, and the commercial justification rule under the “business purpose test”. In particular, they require that transactions should not have tax saving as their only or dominant purpose.

Some of the other anti-avoidance measures affecting cross-border transactions include:

a. Transfer pricing rules:

Several countries have established detailed regulations to ensure that the transfer pricing on cross-border transactions between related entities is acceptable. Many of them follow the guidelines provided by the OECD. These rules require that transactions are bona fide and undertaken on an arm’s length basis.

b. Anti-haven or anti-deferral measures:

Many OECD countries today have controlled foreign corporation or “CFC” rules in their domestic law. These measures prevent companies from avoiding current taxation in the Residence State through the accumulation of taxable income abroad, particularly in low tax jurisdictions.

Since domestic law cannot tax foreign income until it is received or remitted, they effectively extend the residence rules to tax passive income retained overseas by their residents, on a current basis.

c. Thin capitalisation rules:

These rules prevent financing structures with high debt-equity ratios. Interest expense is tax deductible, whereas dividend payments are not. Therefore, high debt-equity ratios can reduce taxation on business profits. Under these rules, interest payments in thinly capitalized companies is disallowed and even taxed as constructive dividends.

d. Anti-treaty shopping provisions:

Treaty shopping allows the unintended use of tax treaties by third-country residents. It makes bilateral treaties effectively “treaties with the world”, and leads to a loss of tax revenues in the source State. Some countries have specific anti-treaty shopping provisions in their domestic law, and sometimes contain Limitation on Benefits provision in their treaties to counter unintended treaty shopping.

e. Exchange of information:

Tax treaties provide for the exchange of information between the tax authorities of Contracting States. They allow tax information to be shared in suspected cases of tax avoidance and evasion. This exchange may be on request or spontaneous.

7. Essay on International Tax Planning:

The International taxation deals with the rules applicable to cross- border transactions in various tax jurisdictions. International tax planning combines these transactions in the most tax-efficient structure within the law through the knowledge of international taxation.

The primary objective of international tax planning is to minimise or defer global taxes lawfully to meet the desired business and other objectives of such transactions. Tax planning may be defensive or offensive. As cross-border transactions entail taxation in more than one country, the former attempts to minimise the risks of paying excessive tax due to double or multiple taxation on the same income and taxpayer.

Offensive tax planning deals with tax planning strategies that lawfully optimize the after-tax income and capital flows of a transaction as it travels from the overseas source State (“host country”) to the residence State (“home country”) of the taxpayer. These plans consider the transaction costs, the management structure, business risks as well as the relevant anti-avoidance measures.

The best tax schemes may not necessarily result in a low fiscal burden in absolute terms, but they should help to reduce the global incidence of taxation, as compared to the taxes levied separately by the countries involved.

Therefore, the role of the international tax advisor varies widely depending on the nature of the cross-border transaction and how it is affected by the domestic laws (including tax law) and tax treaties of the countries involved.

Judge Learned Hand in a famous tax case in the United States commented:

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands”.

No comments:

Post a Comment

Post Top Ad