INTRODUCTION TO INTERNATIONAL TAX LAW Dr Roberto Bernales University of Deusto (Bilbao, Spain) Kaliningrad, September 2016 R&C BERNALES ABOGADOS
Introduction to International Tax Law Agenda ¡ Concept and goals ¡ Jurisdiction ¡ Double taxation relief l See “International Tax Primer”, B. J. Arnold and M. J. Mc. Intyre R&C BERNALES ABOGADOS 2
Introduction to International Tax Law CONCEPT AND GOALS R&C BERNALES ABOGADOS 3
CONCEPT AND GOALS ¡ “International Tax Law” = misnomer ¡ Scope l All tax issues arising under a country's tax laws that include a foreign element ¡ Mainly income tax laws ¡ Other taxes R&C BERNALES ABOGADOS 4
CONCEPT & GOALS ¡ International (Income) tax law: two dimensions: l Taxation of Resident individuals and corporations on income in foreign countries (taxation of foreign income) l Taxation of Nonresidents on income arising domestically (taxation of nonresidents) R&C BERNALES ABOGADOS 5
CONCEPT & GOALS ¡ Issues under income tax laws: l l Cross-border trade in goods and services Cross-border manufacturing by MNE Cross-border investment by individuals or investment funds Taxation of individuals who work or do business in a country other than their residence country R&C BERNALES ABOGADOS 6
CONCEPT & GOALS ¡ International tax law. Scope beyond income tax: l l l Estate taxes/ Inheritance taxes Gift taxes Wealth taxes Sales taxes Customs taxes R&C BERNALES ABOGADOS 7
CONCEPT & GOALS: ¡ Inter-nation equity ¡ Promoting fairness ¡ Enhancing the position of the country in the world economy ¡ Capital-export and capital-import neutrality R&C BERNALES ABOGADOS 8
CONCEPT & GOALS ¡ Practical issues faced by the professional: l Intersection domestic-foreign tax law l Differences in the legal systems: concepts, institutions, legal traditions, accounting principles, etc. R&C BERNALES ABOGADOS 9
Introduction to International Tax Law JURISDICTION TO TAX R&C BERNALES ABOGADOS 10
JURISDICTION TO TAX ¡ Residence – Source ¡ Residence l l l ¡ Individuals Legal entities Treaty issues Source l l Employment and Personal Services Business income Investment income Capital gains R&C BERNALES ABOGADOS 11
JURISDICTION TO TAX ¡ ¡ Nexus country - person obtaining the income: residence jurisdiction Nexus country – activities generating the income: source jurisdiction R&C BERNALES ABOGADOS 12
JURISDICTION TO TAX - Residence ¡ Residence of Individuals l Facts and circumstances. Objective manifestations of joining the economic and social life of a country: Dwelling ¡ Income producing activities ¡ Family ¡ Social ties ¡ l Arbitrary test: number of days of presence, e. g. 183 -day test R&C BERNALES ABOGADOS 13
JURISDICTION TO TAX ¡ Residence of Individuals (II) l Facts and circumstances + objective tests = presumptions to establish residence = certainty and fairness R&C BERNALES ABOGADOS 14
JURISDICTION TO TAX ¡ Residence of Individuals (III) l Presumptions: Individuals present in a country for 183 days in a taxable year unless they do not have a dwelling and are not citizens ¡ Individuals having a dwelling unless they also have a dwelling in another country ¡ Citizens unless they have a dwelling abroad and are outside more than 183 days ¡ Individuals cannot relinquish residence until residence in another country ¡ R&C BERNALES ABOGADOS 15
JURISDICTION TO TAX ¡ Residence of legal entities l Corporations: ¡ ¡ Place of (Effective) Management ¡ l Place of Incorporation Residence of the shareholders Other legal entities: ¡ Place of organization ¡ Place of management R&C BERNALES ABOGADOS 16
JURISDICTION TO TAX ¡ Treaty issues l Art. 4(1) OECD MC: l (…) the term resident of a Contracting state means any person who, under the laws of that State, is liable to tax therein by reasons of his domicile, residence, place of management or any other criterion of a similar nature (…) R&C BERNALES ABOGADOS 17
JURISDICTION TO TAX ¡ Treaty issues ¡ Art. 4(2) OECD MC Tie-breaker rules: ¡ Place of permanent home ¡ Centre of the vital interests ¡ Habitual abode ¡ Citizenship ¡ MAP R&C BERNALES ABOGADOS 18
JURISDICTION TO TAX ¡ Residence of legal entities l Art. 4(3) OECD MC: Legal entities residence: POEM. l Other tie-breaker rules: ¡ ¡ Place of Incorporation Dual resident = not resident in either country R&C BERNALES ABOGADOS 19
JURISDICTION TO TAX – Source ¡ International custom: l A country has the primary right to tax income that has its source in that country l Country of residence expected to provide relief from double taxation if its residence jurisdiction overlaps the source jurisdiction of another country R&C BERNALES ABOGADOS 20
JURISDICTION TO TAX – Source ¡ ¡ What is “source”? Most countries: vague rules (especially for business income) Most tax treaties do not include explicit source rules for business income OECD MC vs UN MC: limitation of source jurisdiction R&C BERNALES ABOGADOS 21
JURISDICTION TO TAX – Source ¡ Employment Services l l and Personal Source country = where services are performed If several countries = allocation based on the time performing in each country R&C BERNALES ABOGADOS 22
JURISDICTION TO TAX - Source ¡ Employment Services (II) l and Personal Limit of source jurisdiction on dependent personal services income if (all requirements met): ¡ Employee present in SC ≤ 183 days ¡ Payment by a non-resident ¡ Payment not allocated to a PE in SC R&C BERNALES ABOGADOS 23
JURISDICTION TO TAX – Source ¡ Business l l Income OECD and UN MC: taxable only if attributable to a PE US MC: Source rule approach R&C BERNALES ABOGADOS 24
JURISDICTION TO TAX - Source ¡ Investment l l Income Investment income (dividends, interest, royalties) derived by non -residents usually taxable through WHT Capital gains are not usually subject to WHT R&C BERNALES ABOGADOS 25
JURISDICTION TO TAX - Source ¡ Investment Income (II). Source rules: l l Dividends and Interests: country of residence of the payer (Arts. 10 and 11 OECD and UN MC) Royalties: where royalties arise = typically the country providing legal protection OECD MC: exclusive rights to residence country. No source rules ¡ UN MC: shared taxing rights. SC = resident country of the payer (or PE) ¡ R&C BERNALES ABOGADOS 26
JURISDICTION TO TAX - Source Investment Income (III). ¡ Shared taxing rights between RC and SC = limited WHT in the SC ¡ ¡ DTTs with Zero WHT l Assumptions: Equal flow of investments ¡ Tax jurisdiction of SC will be exercised by RC ¡ l Advantages and Disadvantages R&C BERNALES ABOGADOS 27
JURISDICTION TO TAX - Source ¡ Capital gains l OECD MC: SC the residence country of the seller. Exception ¡ ¡ l Business property Immovable property UN MC: Gains for sales not specifically mentioned in the treaty maybe taxed in RC and in SC R&C BERNALES ABOGADOS 28
Introduction to International Tax Law DOUBLE TAXATION RELIEF R&C BERNALES ABOGADOS 29
DOUBLE TAXATION RELIEF – Concept & Types ¡ International (Juridical) Double Taxation: l l l The imposition of comparable direct taxes (income-wealth-inheritance) taxes by two or more sovereign countries on the same item (income-assets) of the same taxable person for the same taxable period R&C BERNALES ABOGADOS 30
DOUBLE TAXATION RELIEF ¡ (International) Economic Double Taxation: l Multiple taxation of the same items of economic income in different taxpayers, e. g. ¡ Company – Shareholder: l l Parent company Individual shareholder Partnership – Partner ¡ Trust - Beneficiary ¡ R&C BERNALES ABOGADOS 31
DOUBLE TAXATION RELIEF ¡ Three types of double taxation in relation to 3 types of conflicts: l Source – Source l Residence – Residence l Residence – Source R&C BERNALES ABOGADOS 32
DOUBLE TAXATION RELIEF ¡ Other types of conflicts: l Definitions of Income l Timing and tax accounting rules l Arm´s Length Prices l Rules to prevent tax avoidance R&C BERNALES ABOGADOS 33
DOUBLE TAXATION RELIEF ¡ Remedies to prevent double taxation: l l Bilateral l ¡ Unilateral Multilateral The methods for relieving international taxation refer both to juridical and economic double taxation R&C BERNALES ABOGADOS 34
DOUBLE TAXATION RELIEF METHODS ¡ Relief mechanisms (Methods): l Deduction l Exemption l Credit (Imputation) R&C BERNALES ABOGADOS 35
DOUBLE TAXATION RELIEF ¡ DEDUCTION l Method Taxation on the worldwide income of residents and deduction of the foreign taxes paid from the taxable income R&C BERNALES ABOGADOS 36
DOUBLE TAXATION RELIEF ¡ DEDUCTION Method (II) l Effect: Residents earning foreign income and paying foreign income taxes are taxed at a higher combined tax rate than the rate applied to domestic-source income l Favourable for domestic investment R&C BERNALES ABOGADOS 37
DOUBLE TAXATION RELIEF ¡ EXEMPTION l Method Taxation of residents on their domestic income and exemption of their foreign-source income R&C BERNALES ABOGADOS 38
DOUBLE TAXATION RELIEF ¡ EXEMPTION Method (II). Effects: l Elimination of Residence – Source DT l Exemption of all foreign-source income = Taxation on territorial basis l Exemption of certain kinds of income (e. g. business income, investment income) R&C BERNALES ABOGADOS 39
DOUBLE TAXATION RELIEF ¡ EXEMPTION Method (III). Types: l Ordinary Exemption l Exemption with progression l Full Exemption l Partial Exemption ¡ Participation exemption R&C BERNALES ABOGADOS 40
DOUBLE TAXATION RELIEF ¡ EXEMPTION Method (IV): l Ordinary Exemption l Exemption with progression ¡ Foreign source income included to determine average tax rate on taxable (domestic) income R&C BERNALES ABOGADOS 41
DOUBLE TAXATION RELIEF ¡ EXEMPTION l l Method (V): Full Exemption Partial Exemption: exemption of foreign-source income taxed at rates comparable to the country of residence rate R&C BERNALES ABOGADOS 42
DOUBLE TAXATION RELIEF ¡ EXEMPTION l Method (VI) Partial exemption. Requirements of the method: ¡ Source income and expenses rules ¡ Anti-avoidance ¡ Expense rules allocation rules R&C BERNALES ABOGADOS 43
DOUBLE TAXATION RELIEF ¡ EXEMPTION l Method (VII) Participation exemption Exemption of dividends derived from foreign companies in which the resident shareholder have a minimum ownership interest R&C BERNALES ABOGADOS 44
DOUBLE TAXATION RELIEF ¡ EXEMPTION Method (VIII). Drawback ¡ Shifting of tax burden from the income earner to the income payer in some circumstances R&C BERNALES ABOGADOS 45
DOUBLE TAXATION RELIEF ¡ CREDIT l Method Foreign taxes paid by residents on foreign source income reduce the domestic taxes payable on the same income R&C BERNALES ABOGADOS 46
DOUBLE TAXATION RELIEF ¡ CREDIT l l Method (II). Effects. Eliminate residence – source double taxation Usually limited to the amount of the domestic tax payable on the foreign source income (ordinary tax credit) R&C BERNALES ABOGADOS 47
DOUBLE TAXATION RELIEF ¡ CREDIT Method (III). Effects (II) Resident taxpayers are treated equally from the perspective of the total (domestic and foreign) tax burden, except if foreign tax > domestic tax l Neutral respect to place of investment (domestic – abroad) l R&C BERNALES ABOGADOS 48
DOUBLE TAXATION RELIEF ¡ CREDIT Method (IV). Limitations l Overall (worldwide) l Country-by-country l Item-by-item R&C BERNALES ABOGADOS 49
DOUBLE TAXATION RELIEF ¡ CREDIT Method (V). Indirect (foreign) tax credit = Credit granted l l l To a domestic corporation for the foreign income taxes paid by a foreign affiliated company When the domestic corporation receives the dividend distributed by its foreign affiliate Equal to the underlying foreign tax paid by the foreign affiliate on the income out of which the dividend was paid R&C BERNALES ABOGADOS 50
DOUBLE TAXATION RELIEF ¡ CREDIT l Method (VI). Possible effect: discouraging repatriate benefits. Solution? : ¡ Taxation on accrual basis: l CFC rules l Offshore investment fund rules R&C BERNALES ABOGADOS 51
DOUBLE TAXATION RELIEF ¡ EXEMPTION vs CREDIT Methods l Both authorized by OECD and UN MC l Equal results if the foreign taxes paid by the foreign company (plus WHT) are at least equal to domestic taxes. l Even if foreign taxes < domestic tax, deferment until dividends are paid R&C BERNALES ABOGADOS 52
DOUBLE TAXATION RELIEF ¡ EXEMPTION vs CREDIT Methods (II) l Both systems require rules: ¡ Resident qualified taxpayers ¡ Type of qualified income ¡ Source of income ¡ Allocation of expenses ¡ CFC (current or accrual taxation) ¡ Foreign losses ¡ Computation of foreign Co income R&C BERNALES ABOGADOS 53
DOUBLE TAXATION RELIEF ¡ EXEMPTION vs CREDIT Methods (III) l Most important difference: requirement of different rules ¡ Credit: definition of creditable foreign taxes ¡ Exemption: determination when foreign source income is subject to a level of foreign tax comparable to domestic tax R&C BERNALES ABOGADOS 54
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