7 Intro to International Taxation

7/21/2019 7 Intro to International Taxation

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Introduction to

International TaxationProf. Dr. von Wuntsch


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Avoidance of International

Double Taxation

DTCs


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Foreign subsidiary and double taxation:

Total revenue + 21,000,000

Expenses before depreciation 1!,000,000Depreciation 2,000,000

= Earnings before tax " #,000,000

- Host government tax (20 %) 1,000,000

= Earnings after tax " !,000,000

+ Depreciation (noncash expense) + 2,000,000

= Gross ash Flo! " $,000,000

Fund re"itted by subsidiary (#$$%) $,000,000

Withholding tax on dividends (5%) %00,000

= &e"itted funds after !ithholding tax " #,&00,000

Exchange rate ( $'$ )

= F to parent 2,'#0,000

(ra)e* Wie ird die Dividende bei der utter- steuerlich erfasst


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Non DTC countries

DTC countries

According to respective

national provisions -

Unilateral relief:

U.K.:

ICTA 1988, ss 788-81

U!A:

" 9#1 I$C

%er&an':

" ()c Inco&e Ta*

" 8+ 1, 1 Cor/. Ta*

According to

DTCs 0ilateral relief:

see 2CD-3o4el

see se5eral DTCs

Methods for avoiding international doubletaxation


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/tructure of a DTC (OECD-Model)

tructure of the *ED,odel:

#) Definition ofPersonal co!e"andTax #overed"(see

-rt' # und . *ED,odel)

.) General Definitions (see -rt' / bis *ED,odel):

- #om!an$"

- esidence"

- Permanent &sta'lishment"


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/tructure of a DTC (OECD-Model)

For the 0&elief fro" Double Taxation1

see -rt' ./- *ED,odel:

. ,ethods:

(a)redit "ethod

(b) Exe"ption "ethod


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/tructure of a DTC (OECD-Model)Taxes on Income

2nco"e fro" 2""ovable (&eal) 3roperty (-rt' 4) 5usiness 3rofits (-rt' 6)

hipping and -ir Transport (-rt' 7)

-ssociated Enterprises (-rt' 8)

Dividends (-rt' #$)

2nterest (-rt' ##)

&oyalties (-rt' #.)

Gains (-rt' #/)

2ndependent 3ersonal ervices (-rt' #9)

Dependent 3ersonal ervices (-rt' #)

DirectorsFees (-rt' #4)

-rtistes and -thletes (-rt' #6) 3ensions; -nuuities; -li"ony; and hild upport (-rt' #7)

Govern"ent ervice< ocial ecurity (-rt' #8)

isiting 3rofessors and teachers< tudents and Trainees (-rt' .$)

*ther 2nco"e (-rt' .#)


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3articipation

Dividends

#' Dividends shall be taxed

in dividendreceiving country

-rt' #$ (#)CDodel

#' >ithholding tax

= # %

-rt' #$ (.)CD

.' redit "ethod

-rt' ./ - (.)CDodel

.' orp' tax

2ndividual

countr$

o"p'

countr$ *

DT (*ED,odel):


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DT (*ED,odel):

?ead*ffice

countr$

3er"anent

Establish"entcountr$ *

Exe"pted fro" taxation #' 3rinciple of 3er"anent

Establish"ent-rt' 6 i''"' -rt' *ED

.' 3roble":

alculation of 3Eprofits

-rt' 6 (.); (/) *ED


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DT (*ED,odel):

o"p' #countr$ o"p' .countr$ *

3articipation

Dividends

#' Dividend shall be taxed in

dividendreceiving country

#' >ithholding tax

or # %

-rt' #$ (.)CD.' redit "ethod

-rt' ./ - (.) *ED

.' orporation tax


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pecial case: 2nterco"pany dividends

@or"al regulation in Ger"an DT (see +T# ,erm./)

o"p' .

countr$ *

o"p' #

#ountr$

3articipation

Dividends

#' Exe"pted fro" orporation tax*

(a) see -rt' ./ (.) DT: A-

for at least #$%holding of shares

(-ctivitylause possible B)

(b) see C 7b (#) Ger"an T

#' >ithholding tax

or # %

-rt' #$ (.) DT: A-

.' orporation tax

.' -dd % of exe"pted dividend:

C 7b () Ger"an T


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uroean Parent3/ubsidiar4 Directive

#' Goal of the Directive:

Intercom!an$-dividends shall 'e exem!ted rom

Withholding Tax

That means that the !arent com!an$ can receive dividends

rom the su'sidiar$ amounting to 100 %

.' onditions for applying the Directive:

1. 5 3arent and subsidiary co"pany are li"ited co"panies

2. 5 &esidence of both co"panies in the European Anion

%. 5 5oth co"panies are liable to orporation Tax


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uroean Parent3/ubsidiar4 Directive

Status of parent company:

615 The parent co"pany holds at least . % of subsidiary

shares

6-er7an4 alied the Directive fixin) a loest articiation

of 10 8.5

625 ?olding period of shares: at least . years

6-er7an4 alied the Directive fixin) a one 4ear eriod.5


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3rovisions on double taxation:

2' 2"putation redit "ethod

Foreign taxes are ofset againstdomestic taxes on oreign source income

The oreign tax credits are limited to theamount o tax that would have been paid

domestically


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#onditions o a!!l$ing the credit method

The person applying the i"putation

"ethod has to be identical !ith the

foreign tax payer

- certain a"ount of inco"e is double

taxed

The foreign country has to i"pose taxessi"ilar to Ger"an 2nco"e Tax


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redit "ethod (in Ger"any):

2"putation redit "ethod: ect' /9c (#) EtG = Ger"an 2nco"e Tax a!

ect' .4 (#) HtG = Ger"an orporation Tax a!

Example:Foreign tax rate: 50 % erman tax rate:!" %

#$ erman &ncome Tax on worldwide income: Foreign pro'ts $00 (omestic pro'ts )00

!00 &ncome Tax: $$*


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(2) #redit limit to the amount o tax that ould have'een !aid domesticall$

113 4 100.00 6 7

#!#! Tax creditTax credit::

&ncome Tax&ncome Tax $$*$$*

Tax creditTax credit ++ !"!"payablepayable ,-,-

Total tax load: ,- . 50 / $)-Total tax load: ,- . 50 / $)-


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3rovisions on double taxation:

22' Exe"ption "ethod:

I a ,erman limited com!an$ holds shares in

another (domestic or oreign) limitedcom!an$the dividends distri'uted to it areexem!ted rom taxation in ,erman$

see Ger"an DTs

and

ect' 7b (#) HtG = Ger"an orporation Tax a!This !rovision is not relevant or the exam 8


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C 7b para' HtG

9ot relevant or exam 8

9 % of the exe"pted dividendsdistributed b4 forei)n cororations to-er7an cororations 7ust be added to the taxable profits, if forei)ndividends are exe"pted fro" taxationin -er7an4

ac1ground o this regulation:

For the purpose o taxation expenses that are connected with tax+ree+income are not considered to be deducted rom net pro'ts2This also applies to tax+exempt+dividends in the case o inter+

company participation2

3ccording to erman law it is assumed that 5% o these tax+ree+dividends are related with special expenses4 such as 'nancial andadministrative costs2 This means that the total pro't has to beincreased by this amount2


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*bIectiv to set up neutral tax rules that donJt

distort the allocation of capital 9ot relevant or exam

Two principles o neutrality:

Capital import neutrality (CIN):oal: The marginal efective tax rate onsuppliers o

capital in any country should be thesame2Eet: !oreign and domesti inome frominvestment are taxed dierently"Capital export neutrality (CEN):

oal: &nvestors pay the same taxes no matterwhere their investments are located2Eet: #eisions of business are not aeted bytax poliy


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,ethods that achieve 2@ or E@:Not relevant for exam !

2@

&xem!tion method Income rom investment a'road is

exem!t rom taxation in the ca!ital ex!orting countr$

Effect: apital "obility !ill eKualiLe aftertax returnson invest"ents

CEN redit method: Foreign taxes are #partially orcompletely

ofset against domestic taxes on oreign sourceincome

Eet: Capital mobility $ill e%uali&e pre'tax rates ofreturn


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&uro!ean Taxation-eneral /tate7ents


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Taxation in the uroean :nion

rt" EC'*reaty: 6rinciple o7ubsidiarity

*he Community shall ta+e ation only if theob,etives of the ommon mar+et annot besu-iently ahieved by the Member .tates"

rt" /0 EC'*reaty:

*he Counil shall adopt provisions for theharmonisation of legislation onerning turnovertaxes"


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rt" /1 EC'*reaty:

#ierenes amoung Member .tates shall not

distort the onditions of ompetition in theommon mar+et"

*he Counil an issue the neessarydiretives if onsultation does not lead to theelimination of distortions"


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EU commission wants to initiate a single tax basefor all EU taxes

jungle of tax systems hinders competitiveness ofEU industries through

compliance costs

double taxation

protectionist regulationsharmonized tax system should improve fairness,eciency, simplicity and transparency

-oal


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Current /ituation

; Tax olic4 in )eneral is a basic of national soverei)nt4

; Cororate taxes can be seen as benefit taxes cororations a4 for theublic services the4 use 6e.). infrastructure5

; : 7e7ber states< total tax revenues as a ercenta)e of -DP at

around !08 6Cororation tax onl45

; =ational cororation tax la has to be in ali)n7ent ith the

various >freedo7s? of the C Treat4


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Current /ituation

;All 7e7ber states in the : tax co7an4 rofits

;Tax rates var4 enor7ousl4

;Differences in the a4 taxable rofits are calculated and

the level of cororation taxation


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;%%.%%;%%.%%;%$.$;%$.$;Fr

;%$;%&;!1.2;#%.2;2t

;2#;!0;!#3%0;!#3%0;De

;%0;%2;%!;%!;DH

;%@;%@;!0;!1;5E

;.$$#;#888;#887;#886;ountry

Cororation Tax ates


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orporation TaxCountries

Switzerland

USAIrland

Belgium

Germany (from 01

!enmar"

#u$em%urg

&et'erlands

Austria

Sweden

Greece

inland

&orway

rance

)apan

*anada(+ntario

,ortugal

Spain

U

Italy

Germany (till .000

!'ste&s

*lassical System

(wit'out ta$ relieffor s'are'older

*lassical System

(wit' ta$ relief for

s'are'older

/$emption system

a$ e$emption for

s'are'older

,artial Imputation system

partial ta$ credit

Imputation system

full ta$ credit

Ta* rates 6

12 3 40

5067 (.0001.89

45

.:85 (478: ;

40

..

4189

.9

.7

.9


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Tax havens in Europe:

.$it&erland8olding+ and domicile companies:02* 9 !25 % apital Tax

2uxembourg8olding companies:02) 9 $ % o the value o the shares #taxdabonnementoordination enters:Taxable base / 5 % o the calculated cost+price#without cost o personnel and 'nancial cost


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NetherlandsFinancial ompanies:

;nly )0 % o the pro'ts arising rom 'nancialactivities are allowed to be taxed with the normalrate o !5 % T2

Ireland

T rate / $)25 %T rate in enter or international 'nancial servicesin (ublin: / $0 % #till year )005

tax avoidance and anti+abuserules

(C!C 2egislation and *ransfer 3riing4uidelines)


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ffects of tax co7etition

; /tates co7ete a7on) the7selves to attract econo7ic activit4

; Tax co7etition could lead to a >race to the botto7? in tax

rates or revenues

; an4 econo7ists tend to re)ard tax co7etition as beneficial


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Do differences in taxation cause "aIor

distortions in the internal "arMet of the

European Anion N

onclusions and reco""endations of the &AD2@G

o""ittee (#88.):

&limination o ithholding tax levied '$ source ondividends !aid '$ su'sidiaries to !arent com!anies

( "Parent . u'sidiar$ +irective: )

uniorm ithholding tax o 0 % or other

dividends

rules concerning transer-!ricing ad;ustments

( r'itration #onvention )


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Prescri!tion o a minimum and maximum

cor!oration tax rate ( 0 - 30 % )

Harmoniem'er tates


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ation o taxation in

the ?ember 7tates @


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*eneits rom glo'ali


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9egative as!ects rom glo'ali


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&?>P@&

,ultinational co"panies establish integrated

production processes !ith an incentive to lo!er

!orld!ide tax liabilities

Transfer pricing and the risM of tax "igration

3ortfolioinvestors and the proble" of under

reporting interest flo!s

risM of capital flight


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The uture o tax s$stems

o"petition

can reduce the ability of govern"ents financing the

!elfare state

"ight reduce the rates of the -TPs as the "obility

of population raises

is liMely to induce countries to reduce their effectivtax rates on corporate inco"e to attract capital

inflo!s

is liMely to change the general concept of inco"e tax

fro" the concept of global inco"e tax to a

schedular approach to taxation

3rogressive and lo! tax rates on capital inco"es;!ages salaries and rentals according to their

degree of "obility 1Dual Tax yste"O


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Transfer 3ricing

CD -uidelines

not relevant for exam !

>ethods to determine reasona'le . armAs


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>ethods to determine reasona'le . arm s

length !rices(see B+ Transer Prices,uidelines or multinational enter!rises):

5 omparable Ancontrolled 6rice ?ethod

#deriving prices directly rom comparable other transactions

5Cesale 6rice ?ethod #going bac1 to the original price on the basis o urthersellings o

comparable goods or services

5 ost 6lus ?ethod #cost price . normal pro't rate

5 other methods: 6ro't 7plit ?ethod

#not recogni>ed by all countries


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Advanta)es for oldin)s

o"plexity of the decision "aMing process can be reduced by

splitting up a big co"pany into several independent co"panies

oncentration on the core business

ettle"ent of subsidiaries near the regional "arMets

&eduction of ?ierarchy and increase in flexibility

trategic -lliances bet!een subsidiaries and foreign co"panies

Transfer of profits to countries !ith favorable tax rates


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Transfer Pricin) a7oun) =Cs

!oreign subsidiaries an be used to generate

pro6ts in the ountry $ith a lo$er tax load

*ax administrations try to orret manipulated

transfer pries

*ax administrations have the po$er tosubstitute

undervalued pries7 they an establish

reasonable mar+et pries 8 arm9s lengthpries

7 Intro to International Taxation

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