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Transcript of International taxation final job
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
1
International Taxation
Proposed exercises
Samson Alasia | Carlos Alonso | Ileana Guzmán | Victoria Martínez
Para Texto Completo contactar con Carlos Alonso Rodríguez
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
2
Facultad de Comercio
Máster en Comercio Exterior
2014-2015
International Taxation
José Ignacio Gobernado Rebaque
Samson Alasia Lidimani
Carlos Alonso Rodríguez
Ileana Isabel Guzmán Portillo
Victoria Adriana Martínez Cota
March 2015
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
3
1. Proposed exercise number 1
A Spanish resident company P has undertaken an Investment in country C through a
subsidiary S. P owns 100% of the share capital of S. Country C’s tax system’s main
features are:
Corporation tax rate: 20%
Withholding rate on dividends: 5%
Profit before tax made by S amounts to €1,000,000.
Assuming that the subsidiary distributes all of its profit after tax as dividends and
assuming also that company P made a profit before tax and dividends of €5,000,000.
a) Determine P’s tax liabilities in Spain in the absence of any method to avoid
double taxation.
i. Taxes due by the subsidiary S
TSC =tc * YS
C=€1,000,000 * 0.2 (20%) = €200,000.
Dividend distributed to Parent Company P amounts to €1,000,000 -
€200,000 = € 800,000.
ii. Taxes due by the Spanish Parent Company P
TPC= rc*YP
C= 0.05 (5%) * € 800,000 = € 40,000.
TPSP = tsp*YP
W =tsp* (YPSP + YP
C) =tsp*YPSP + tsp*YP
C= 0.25 (25%) * €5,000,000 +
0.25 (25%) * € 800,000 = €1,250,000 + €200,000 = €1,450,000.
Parent
Company
Subsidiary
S
Spain Country C
Investment:
100%
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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TPW = TP
C + TPSP = € 40,000 + €1,450,000 = € 1,490,000.
So, in this case, both international and economic double taxation occur. The Parent
Company is taxed twice on the dividends distributed by the subsidiary at a total
rate of 20% (International Double Taxation). As profit before tax made by the
subsidiary (€1,000,000) is also taxed on the Parent Company. Economics Double
Taxation also occurs in such a way that 30% (25% corresponding to the Spanish´s
corporate income rate plus 5% corresponding to withhold tax rate) of the original
profits are paid.
b) Determine P’s tax liabilities in Spain making use, alternatively, of both
unilateral methods to avoid double taxation as established in the IS Act.
Specify requirements to be met to be entitled to use them.
i. Exemption method
Under the Exemption Method in this case, we have: According with Article
21 from the IS Act, where it establishes the exemption for international
double taxation on dividends (investments made through a subsidiary
company); If a company has paid a similar tax on profits at a minimum
nominal tax rate of 10% (in our case, 20% is similar to 25% > 10%)
derived from activities carried out abroad; it may qualify for an exemption
to avoid international double taxation if the investment has been held for
at least one year.
Taxes due by subsidiary S:
TSC = tc * YS
C=€1,000,000 * 0.2 (20%) = €200,000.
Dividend distributed to Parent Company P amounts to €1,000,000 -
€200,000 = € 800,000
Taxes due by the Spanish Parent Company P:
TPC= rc*YP
C= 0.05 (5%) * € 800,000 = € 40,000.
TPSP = tsp*YP
W =tsp* YPSP = 0.25 (25%) * €5,000,000 = €1,250,000.
TPW = TP
C + TPSP = € 40,000 + €1,250,000 = € 1,290,000. € 1,290,000 ≠ €
1,490,000.
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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TPSP = tsp* YP
W - FTC = tsp* (YPSP + YP
C +TSC) – FTC = 0.25 (25%) * (€5,000,000+
€800,000 + €200,000) - €240,000 = 0.25 * €6,000,000 - €240,000 = €1,260,000.
TPW = TP
C + TPSP = € 40,000 + €1,260,000 = € 1,300,000. € 1,300,000 ≠ €
1,490,000.
Using this method we might pay €1,300,000 which is different for this case to
the previous method mentioned above where we had to pay €1,290,000.
c) Evaluate both alternatives in terms of eliminating double taxation.
According to the results obtained using both methods above, it is notable that
using the Exemption Method happens to bring put better outcomes for the company,
since the fiscal amount to pay is lower. We will recommend then to use the Exemption
Method since using it we should pay €1,290,000 instead of €1,300,000. But in both cases
we are not able to avoid the Economic Double Taxation, so it still remains.
2. Proposed exercise number 2
Find out the main differences (if they exist) between the general taxation rules on
business profits, interest, royalties and dividends contained in the OECD model and
the rules of the real DTI signed by Spain with the countries of Mexico and Great
Britain.
It is important to take in consideration the following bases and term´s meanings:
The Organization for Economic Co-operation and Development (OECD) has
the mission to promote policies that will improve the economic and social well
being of people around the world. It also measures productivity and global flows of
trade and investment and set international standards of taxes.
The general taxation rules on business profits, interest, royalties and dividends
are immerse in the “Model Convention with respect to Taxes on Income and on
Capital -Convention between (State A) and (State B) with respect to Taxes on Income
and on Capital.”- issued on 28 January of 2008, by the OECD.
o This Convention shall apply to taxes on income and on capital imposed on
behalf of a Contracting State or of its political subdivisions or local
authorities, irrespective of the manner in which they are levied.
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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The “Convenio entre el Reino de España y el Reino Unido de Gran Bretaña e Irlanda
del Norte para evitar la Doble Imposición y prevenir la Evasión Fiscal en Materia de
Impuestos sobre la Renta y sobre el Patrimonio”, was subscribed in London, on
March 14th, 2013. And the “Instrumento de Ratificación del Convenio entre el Reino
de España y los Estados Unidos Mexicanos para evitar la Doble Imposición en
Materia de Impuestos sobre la Renta y el Patrimonio y prevenir el Fraude y la
Evasión Fiscal” was suscribed in Madrid, on July 24th, 1992.
Business profits refers to the surplus remaining after total costs are deducted
from total revenue and the basis on which tax is computed and dividend is paid.
Interests are the fees paid for the use of another party´s money. According to the
Article 11 of the “Model Convention with respect to Taxes on Income and on Capital”
(It also matches the regulations of the other analyzed legislations), interests mean
income from debt-claims of every kind, whether or not secured by mortgage and
whether or not carrying a right to participate in the debtor´s profits; this term also
refers to the income form government securities and income from bonds or
debentures.
Royalties stand for the compensation computed usually as a percentage of
revenue or profit of the company, while a dividend is a share of the after-tax profit
of a company, distributed to its shareholders according to the number and class of
shares held by each of them. The Article 12 of the “Model Convention with respect to
Taxes on Income and on Capital” (It also matches the regulations of the other
analyzed legislations) states that royalties mean payments of any kind received as
a consideration for the use of any copyright of literary, artistic or scientific work,
including cinematograph films, any patent, trade mark, design or model, plan
secret formula or process. And the Article 10 of the same legal regulation states
that a Dividend is the income from shares.
To clarify the differences it is shown the matching box presented at the end of this
document as Annex 1.
3. Proposed exercise number 3
A company established in Spain for VAT purposes has made the following
transactions during a taxable period:
i. Sales of goods to companies established in Spain: €1,000,000.
ii. Sales of goods to a company established in Austria: €50,000.
iii. Sales of goods to a company established in México: €80,000.
iv. Mail-ordered sales to non-accountable persons in Luxemburg: €60,000. No
mail-ordered sales to this country have been made before.
v. Supply of consultancy services to companies established in Spain: €500,000.
vi. Purchase of goods and services to companies established in Spain: €600,000.
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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vii. Purchase of goods to a company established in Poland: €200,000.
viii. Purchase of goods to a company established In Morocco: €150,000.
ix. Purchase of goods of €50,000 from a company established in Italy. These
goods are immediately sold to a company established in Portugal for
€60,000. The goods are delivered directly from Italy to Portugal.
x. Purchase of professional services to a company established in the United
Kingdom: €20,000.
a) Determine VAT payable by Company S in this period.
VAT charged
Corresponding to sales of goods to companies established in Spain
21% of €1,000,000 = €210,000.
Corresponding to purchase of goods to a company established in Poland
21% of €200,000 = €42,000. There is an Intra-community Acquisition. The trader
makes an intra-Community acquisition of the goods in Spain and therefore, must
charge itself VAT at 21%. Since the Spanish Company qualifies for full
deductibility, VAT charged on the intra-community acquisition has no effect on the
VAT payable.
Corresponding to purchase of professional services to a company established in
the United Kingdom. We apply the reverse charge mechanism. The company is
deemed to have supplied the services to itself.
21% of €20,000 = €4,200. In this case, the reverse charge mechanism is basically
the same as the intra-community acquisitions procedure although based on
different rules.
Corresponding to supply of consultancy services to companies established in Spain
21% of €500,000 = €105,000.
Corresponding to Mail-ordered sales to non-accountable persons in Luxemburg.
No mail-ordered sales to this country have been made before. So, since sales have
not exceeded the threshold, sales will be taxed in Spain up to €100,000, which is
the Luxembourg´s threshold. Beyond that amount, sales will begin to be taxed in
Luxembourg.
So, the Spanish Company S will charge: 0.21 (21%) * €60,000= €12,600.
Note: Since the threshold of 100.000 with Luxemburg has not been reached yet,
the entire amount is taxed in Spain.
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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exempt intra-community supply. In addition, Spanish company sells the
goods to Company established in Portugal, but no VAT is charged. Finally,
company established in Portugal must charge itself VAT on this purchase
and it will have the right to deduct it according to the general rules.
Thus, this transaction will not appear in the VAT return of the Spanish
company.
• Sales of goods to a company established in Austria: €50,000.
For the sales of goods to a company established in Austria, The Spanish
company invoices the trader for €50,000 and does not charge Spanish VAT
if it gets the trader´s Austrian VAT number (so it is an intra-community
supply).
Total VAT charged
€210,000 + €42,000 + €4,200 + €105,000 + €12,600 = €373,800.
Total VAT paid deductible
€126,000 + €42,000 + €31,500 + €4,200 = €203,700.
VAT payable
€373,800 – €203.700 = €170,100.
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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ANNEX 1
COMPARISSION BOX OF MAIN DIFFERENCES BETWEEN THE GENERAL TAXATION RULES ON BUSINESS PROFITS, INTEREST, ROYALTIES AND
DIVIDENDS CONTAINED IN THE OECD MODEL AND THE RULES OF THE REAL DTI SIGNED BY SPAIN WITH THE COUNTRIES OF MEXICO AND
GREAT BRITAIN
Model Convention with respect to Taxes
on Income and on Capital -OECD-
INSTRUMENTO de Ratificación del
Convenio entre el Reino de España y los
Estados Unidos Mexicanos para evitar la
Doble Imposición en Materia de
Impuestos sobre la Renta y el Patrimonio
y prevenir el Fraude y la Evasión Fiscal
Convenio entre el Reino de España y el
Reino Unido de Gran Bretaña e Irlanda
del Norte para evitar la Doble Imposición
y prevenir la Evasión Fiscal en Materia de
Impuestos sobre la Renta y sobre el
Patrimonio
Business Profits
Rule: The profits of an enterprise of a
Contracting State shall be taxable in that
State.
Rule: The profits of a company of a
Contracting State shall be taxed only in
that State.
Rule: The profits of a company of a
Contracting State shall be taxed only in
that State.
Exception: The profits of a company
obtained through a permanent
establishment situated in the other
contracting State may be taxed in this
other State.
Exception: The profits of a company
obtained through a permanent
establishment situated in the other
Contracting State may be taxed in this
other State.
Exception: The profits of a company
obtained through a permanent
establishment situated in the other
Contracting State may be taxed in this
other State.
Determination of the profits of a
permanent establishment: The expenses
which are incurred for the purposes of it,
including executive and administrative
ones are deductible, whether the
expenses are incurred in that State or
elsewhere.
Determination of the profits of a
permanent establishment: The expenses
which are incurred for the purposes of it,
including executive and administrative
ones are deductible, whether the expenses
are incurred in that State or elsewhere.
Won´t be deductible the payments of the
permanent establishment to the central
Determination of the profits of a
permanent establishment: The expenses
which are incurred for the purposes of it,
including executive and administrative
ones are deductible, whether the
expenses are incurred in that State or
elsewhere.
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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company as royalties, fees to use patents
or commissions; unless is a bank by way of
interests for the lend money to the
permanent establishment.
No profits: The mere purchase by the
permanent establishment of goods or
merchandise for the enterprise shall not
be attributed as profits of it.
No profits: The mere purchase by the
permanent establishment of goods or
merchandise for the enterprise shall not
be attributed as profits of it.
No profits: The mere purchase by the
permanent establishment of goods or
merchandise for the enterprise shall not
be attributed as profits of it.
Comments COMMENT: From the comparison of the
OECD model and that of the Double
Taxation Convention of the two countries
SPAIN and MEXICO. There is not much
difference between them, Basically in
both of the cases the rules are the same.
However to a certain extent with the
Spain-Mexico convention on the 3rd
paragraph which states that deductions
and non-deductions expenses which
allows calculation of the tax payable for
assessment of tax.
COMMENT: It is quite similar with the
OECD model; nevertheless, it is missing
the clause 4 that appears on said model.
Interests
Rule: The interests arising in a Contracting
State and paid to a resident of the other
Contracting State may be taxed in that
other State. They may also be taxed in that
State, but if the beneficial owner of them
is a resident of the other Contracting
State, the tax charged shall not exceed 10
per cent of the gross amount of the
interest.
Rule: The interests arising in a Contracting
State and paid to a resident of the other
Contracting State may be taxed in that
other State. They may also be taxed in that
State, but if the beneficial owner of them
is a resident of the other Contracting State,
the tax charged shall not exceed 10 per
cent of the gross amount of the interest, if
the beneficial owner is a bank or 15 per
cent in other cases.
Rule: The interests arising in a Contracting
State and paid to a resident of the other
Contracting State may be taxed in that
other State.
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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Requirements to tax the interests in the
Contract State of which the beneficial
owner is resident: a) The beneficial owner
should be one of the Contract State,
political party or entity. b) The payment of
the interests should be paid by one of the
above. c) The interests should be paid by
loans for 3 years or more, guaranteed by
public institutions of the Contract State, to
exportation uses.
Exception: The rule provisions do not
apply if the beneficial owner of the
interest, being a resident of a Contracting
State, carries on business in the other
Contracting State in which the interest
arises through a permanent establishment
and the debt-claim in respect of the
interest is paid is effectively connected
with it.
Exception: The rule provisions do not
apply if the beneficial owner of the
interest, being a resident of a Contracting
State, carries on business in the other
Contracting State in which the interest
arises through a permanent establishment
and the debt-claim in respect of the
interest is paid is effectively connected
with it. In this case would apply the -Profit
Rule-.
Exception: The rule provisions do not
apply if the beneficial owner of the
interest, being a resident of a Contracting
State, carries on business in the other
Contracting State in which the interest
arises through a permanent establishment
and the debt-claim in respect of the
interest is paid is effectively connected
with it.
Interests arise in a Contracting State:
Interest shall be deemed to arise in a
Contracting State when the payer is a
resident of that State.
Interest arised in a Contracting State:
Interest shall be deemed to arise in a
Contracting State when the payer is a
resident of that State.
Special Relations: When the payer and the
beneficial owner or between them and a
third person, the amount of the interest
paid, exceeds the agreed amount between
the debtor and the creditor without the
special relation, this applies to the last
amount and the excess is taxed according
Special Relations: When the payer and the
beneficial owner or between them and a
third person, the amount of the interest
paid, exceeds the agreed amount between
the debtor and the creditor without the
special relation, this applies to the last
amount and the excess is taxed according
Special Relations: When the payer and the
beneficial owner or between them and a
third person, the amount of the interest
paid, exceeds the agreed amount between
the debtor and the creditor without the
special relation, this applies to the last
amount and the excess is taxed according
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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Comments COMMENT: In this said convention there is
shared taxation in both countries, residence
country and source country.
However in the Spanish-Mexico Convention
on the last paragraph of the article it states
“this article shall not apply only to the latter
amount. In such case, the excess amount may
taxable according to the laws of each
Contracting State, taking into account the
other provisions of this Convention".
COMMENT: No differences are found
between UK-Spain convention and the
OECD model.
Dividends
Rule: Dividends paid by a company which
is a resident of a Contracting State to a
resident of the other Contracting State
may be taxed in that other State.
Rule: Dividends paid by a company which
is a resident of a Contracting State to a
resident of the other Contracting State
may be taxed in that other State.
Rule: Dividends paid by a company which
is a resident of a Contracting State to a
resident of the other Contracting State
may be taxed in that other State.
Taxation in Contracting State: Dividends
paid by a company which is a resident of a
Contracting State may also be taxed in
that State, but if the beneficial owner of
them is a resident of the other Contracting
State, the tax charged shall not exceed 5
per cent of the gross amount of the
dividends if the beneficial owner holds at
least 25 per cent of the capital; for the
other cases, shall not exceed 15 per cent.
Taxation in Contracting State: Dividends
paid by a company which is a resident of a
Contracting State may also be taxed in that
State, but if the beneficial owner of them
is a resident of the other Contracting State,
the tax charged shall not exceed 5 per cent
of the gross amount of the dividends if the
beneficial owner holds at least 25 per cent
of the capital; for the other cases, shall not
exceed 15 per cent.
Taxation in Contracting State: Dividends
paid by a company which is a resident of a
Contracting State may also be taxed in
that State, but if the beneficial owner of
them is a resident of the other Contracting
State, the tax charged shall not exceed 10
per cent of the gross dividends and 15 per
cent of the gross dividends, when they are
paid for rents of real estate.
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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Exemptions: There are exemptions in the
Contracting State of residence of the
company that pays the dividends, when
the beneficial owner is a society resident
in the other Contracting State that owns at
least 10 per cent of the capital or a
pension contributions resident in the
other Contracting State.
Exception: If the beneficial owner of the
dividends, being a resident of a
Contracting State, carries on business in
the other Contracting State of which the
company paying the dividends is a
resident through a permanent
establishment, the regulation to apply is
the one for profits.
Exception: If the beneficial owner of the
dividends, being a resident of a
Contracting State, carries on business in
the other Contracting State of which the
company paying the dividends is a resident
through a permanent establishment, the
regulation to apply is the one for profits.
Exception: If the beneficial owner of the
dividends, being a resident of a
Contracting State, carries on business in
the other Contracting State of which the
company paying the dividends is a
resident through a permanent
establishment, the regulation to apply is
the one for profits.
Profits in the other Contracting State:
When a resident company of a Contracting
State obtains profits from the other
Contracting State, this other State cannot
charge taxes to the dividends paid by the
company. If and when, the dividends are
paid to a resident of the other Contracting
State, or these are linked to a permanent
establishment.
Profits in the other Contracting State:
When a resident company of a Contracting
State obtains profits from the other
Contracting State, this other State cannot
charge taxes to the dividends paid by the
company. If and when, the dividends are
paid to a resident of the other Contracting
State, or these are linked to a permanent
establishment.
Profits in the other Contracting State:
When a resident company of a Contracting
State obtains profits from the other
Contracting State, this other State cannot
charge taxes to the dividends paid by the
company. If and when, the dividends are
paid to a resident of the other Contracting
State, or these are linked to a permanent
establishment.
Comments COMMENT: As such with the OECD model
this part (dividend) of the Spain-Mexico
convention basically illustrates the same
standards as that of OECD.
COMMENTS: As for this article 10 on the
OECD model and the convention between
the UK-Spain there is difference in the
rate of the gross amount of dividend
whereby Spain may be taxed in Spain.
International Taxation
Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid
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Such dividends may also be taxed in the
United Kingdom and according to the
laws of the United Kingdom, but where
such dividends are beneficially owned by
a resident of Spain the tax so charged
shall not exceed:
(a) 10 per cent of the gross amount of the
dividends if the beneficial owner is a
company which controls directly or
indirectly at least 10 per cent of the
voting power in the company paying the
dividends; however the OECD model sets
the gross amount to just 5%, 5 lesser than
that of Spain-UK convention
Para Texto Completo contactar con Carlos Alonso Rodríguez