International taxation explained

International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries, or the international aspects of an individual country's tax laws as the case may be. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residence-based, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more.

Many governments tax individuals and/or enterprises on income. Such systems of taxation vary widely, and there are no broad general rules. These variations create the potential for double taxation (where the same income is taxed by different countries) and no taxation (where income is not taxed by any country). Income tax systems may impose tax on local income only or on worldwide income. Generally, where worldwide income is taxed, reductions of tax or foreign credits are provided for taxes paid to other jurisdictions. Limits are almost universally imposed on such credits. Multinational corporations usually employ international tax specialists, a specialty among both lawyers and accountants, to decrease their worldwide tax liabilities.

With any system of taxation, it is possible to shift or recharacterize income in a manner that reduces taxation. Jurisdictions often impose rules relating to shifting income among commonly controlled parties, often referred to as transfer pricing rules. Residency-based systems are subject to taxpayer attempts to defer recognition of income through use of related parties. A few jurisdictions impose rules limiting such deferral ("anti-deferral" regimes). Deferral is also specifically authorized by some governments for particular social purposes or other grounds. Agreements among governments (treaties) often attempt to determine who should be entitled to tax what. Most tax treaties provide for at least a skeleton mechanism for resolution of disputes between the parties.

Introduction

Systems of taxation vary among governments, making generalization difficult. Specifics are intended as examples, and relate to particular governments and not broadly recognized multinational rules. Taxes may be levied on varying measures of income, including but not limited to net income under local accounting concepts (in many countries this is referred to as 'profit'), gross receipts, gross margins (sales less costs of sale), or specific categories of receipts less specific categories of reductions. Unless otherwise specified, the term "income" should be read broadly.

Jurisdictions often impose different income-based levies on enterprises than on individuals. Entities are often taxed in a unified manner on all types of income while individuals are taxed in differing manners depending on the nature or source of the income. Many jurisdictions impose tax at both an entity level and at the owner level on one or more types of enterprises.[1] These jurisdictions often rely on the company law of that jurisdiction or other jurisdictions in determining whether an entity's owners are to be taxed directly on the entity income. However, there are notable exceptions, including U.S. rules characterizing entities independently of legal form.[2]

In order to simplify administration or for other agendas, some governments have imposed "deemed" income regimes. These regimes tax some class of taxpayers according to tax system applicable to other taxpayers but based on a deemed level of income, as if received by the taxpayer. Disputes can arise regarding what levy is proper. Procedures for dispute resolution vary widely and enforcement issues are far more complicated in the international arena. The ultimate dispute resolution for a taxpayer is to leave the jurisdiction, taking all property that could be seized. For governments, the ultimate resolution may be confiscation of property, incarceration or dissolution of the entity.

Other major conceptual differences can exist between tax systems. These include, but are not limited to, assessment vs. self-assessment means of determining and collecting tax; methods of imposing sanctions for violation; sanctions unique to international aspects of the system; mechanisms for enforcement and collection of tax; and reporting mechanisms.

Taxation systems

Countries that tax income generally use one of two systems: territorial or residence-based. In the territorial system, only local income – income from a source inside the country – is taxed. In the residence-based system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. In addition, a small number of countries also tax the worldwide income of their nonresident citizens in some cases.

Countries with a residence-based system of taxation usually allow deductions or credits for the tax that residents already pay to other countries on their foreign income. Many countries also sign tax treaties with each other to eliminate or reduce double taxation. In the case of corporate income tax, some countries allow an exclusion or deferment of specific items of foreign income from the base of taxation.

Individuals

The following table summarizes the taxation of local and foreign income of individuals, depending on their residence or citizenship in the country. It includes all United Nations member states and observer states, their inhabited dependent territories (most of which have separate tax systems), and other countries with limited recognition. In the table, income includes any type of income received by individuals, such as work or investment income, and yes means that the country taxes at least one of these types. Resident means a person residing in the country, regardless of citizenship; non-resident citizen means a citizen of the country residing elsewhere, it does not mean non-citizen.

Country or territoryTaxes local incomeTaxes foreign income ofNotes and sources
residents non-resident citizens
Antigua and BarbudaNo personal income tax.[3] [4]
BahamasNo personal income tax.[5]
BahrainNo personal income tax.
No personal income tax.
Cayman IslandsNo personal income tax.
KuwaitNo personal income tax.
MonacoNo personal income tax.[6]
OmanNo personal income tax.
No personal income tax.[7]
QatarNo personal income tax.
No personal income tax.[8]
Saint Kitts and NevisNo personal income tax.[9]
Turks and Caicos IslandsNo personal income tax.[10]
United Arab EmiratesNo personal income tax.
VanuatuNo personal income tax.[11]
No personal income tax.[12]
Wallis and FutunaNo personal income tax.[13]
Western SaharaNo personal income tax.[14]
No tax on income of resident citizens,[15] residence-based taxation of foreigners, territorial taxation of nonresident citizens.[16]
AngolaTerritorial taxation.
AnguillaTerritorial taxation.[17]
BelizeTerritorial taxation.[18]
BermudaTerritorial taxation.
BhutanTerritorial taxation.[19] [20]
Territorial taxation.[21] [22]
BotswanaTerritorial taxation.
Territorial taxation.
Costa RicaTerritorial taxation.
Territorial taxation.
DjiboutiTerritorial taxation.[23]
Territorial taxation.
GeorgiaTerritorial taxation.
[24]
GrenadaTerritorial Taxation.[25]
GuatemalaTerritorial taxation.
Guinea-BissauTerritorial taxation.[26] [27]
Hong KongTerritorial taxation.
LebanonTerritorial taxation.
LibyaTerritorial taxation.[28]
Territorial taxation.
MalawiTerritorial taxation.
Marshall IslandsTerritorial taxation.[29]
Territorial taxation.[30]
NamibiaTerritorial taxation.
NauruTerritorial taxation.[31]
NicaraguaTerritorial taxation.
PalauTerritorial taxation.[32]
Territorial taxation.
PanamaTerritorial taxation.
ParaguayTerritorial taxation.
Saint Helena, Ascension and Tristan da CunhaTerritorial taxation.[33] [34] [35]
SeychellesTerritorial taxation.
SingaporeTerritorial taxation.
SomaliaTerritorial taxation.[36]
Territorial taxation.[37]
TokelauTerritorial taxation.[38]
TuvaluTerritorial taxation.[39]
ZambiaTerritorial taxation.
Residence-based taxation of citizens, territorial taxation of foreigners.[40]
IraqResidence-based taxation of citizens, territorial taxation of foreigners.[41]
PhilippinesResidence-based taxation of citizens, territorial taxation of foreigners.
Saudi ArabiaResidence-based taxation of citizens, territorial taxation of foreigners.
Residence-based taxation.[42]
AfghanistanResidence-based taxation.
Residence-based taxation.[43]
AlbaniaResidence-based taxation.
AlgeriaResidence-based taxation.
American SamoaResidence-based taxation.[44]
AndorraResidence-based taxation.[45]
ArgentinaResidence-based taxation.
ArmeniaResidence-based taxation.
ArubaResidence-based taxation.
Australia (including Christmas Island, and Norfolk Island[46] [47])Residence-based taxation.
AustriaResidence-based taxation.
AzerbaijanResidence-based taxation.
BangladeshResidence-based taxation.[48]
BarbadosResidence-based taxation.
BelarusResidence-based taxation.
BelgiumResidence-based taxation.
BeninResidence-based taxation.[49]
Bosnia and HerzegovinaResidence-based taxation.[50] [51]
BrazilResidence-based taxation.
BulgariaResidence-based taxation.
Burkina FasoResidence-based taxation.[52]
BurundiResidence-based taxation.[53]
CambodiaResidence-based taxation.
CameroonResidence-based taxation.
CanadaResidence-based taxation.
Cape VerdeResidence-based taxation.
Central African RepublicResidence-based taxation.[54]
ChadResidence-based taxation.
ChileResidence-based taxation.
ChinaResidence-based taxation.[55] [56]
ColombiaResidence-based taxation.
ComorosResidence-based taxation.[57]
CongoResidence-based taxation.
Cook IslandsResidence-based taxation.[58]
CroatiaResidence-based taxation.
CubaResidence-based taxation.[59]
Residence-based taxation.
CyprusResidence-based taxation.
Czech RepublicResidence-based taxation.
DenmarkResidence-based taxation.
DominicaResidence-based taxation.[60]
Dominican RepublicResidence-based taxation.
Residence-based taxation.[61]
EcuadorResidence-based taxation.
EgyptResidence-based taxation.[62] [63]
El SalvadorResidence-based taxation.
Equatorial GuineaResidence-based taxation.
EstoniaResidence-based taxation.
EthiopiaResidence-based taxation.
Residence-based taxation.[64]
Faroe IslandsResidence-based taxation.[65]
FijiResidence-based taxation.
Finland (including [66])Residence-based taxation.
France (including overseas departments)Residence-based taxation.
French PolynesiaResidence-based taxation.[67]
GabonResidence-based taxation.
GambiaResidence-based taxation.[68]
GermanyResidence-based taxation.
GhanaResidence-based taxation.
GibraltarResidence-based taxation.
GreeceResidence-based taxation.
GreenlandResidence-based taxation.[69]
Residence-based taxation.
GuineaResidence-based taxation.
GuyanaResidence-based taxation.[70] [71]
HaitiResidence-based taxation.[72]
HondurasResidence-based taxation.
IcelandResidence-based taxation.
IndiaResidence-based taxation.
IndonesiaResidence-based taxation.
IrelandResidence-based taxation.
Residence-based taxation.
IsraelResidence-based taxation.
ItalyResidence-based taxation.
Residence-based taxation.
JamaicaResidence-based taxation.
JapanResidence-based taxation.
Residence-based taxation.
JordanResidence-based taxation.
KazakhstanResidence-based taxation.
KenyaResidence-based taxation.
KiribatiResidence-based taxation.[73]
Residence-based taxation.
KyrgyzstanResidence-based taxation.[74]
Residence-based taxation.
LatviaResidence-based taxation.
LesothoResidence-based taxation.
LiberiaResidence-based taxation.[75]
LiechtensteinResidence-based taxation.
LithuaniaResidence-based taxation.
LuxembourgResidence-based taxation.
MadagascarResidence-based taxation.
MalaysiaResidence-based taxation.[76]
MaldivesResidence-based taxation.[77]
MaliResidence-based taxation.[78]
MaltaResidence-based taxation.
MauritaniaResidence-based taxation.
MauritiusResidence-based taxation.
MexicoResidence-based taxation.
Residence-based taxation.
MongoliaResidence-based taxation.
MontenegroResidence-based taxation.
MontserratResidence-based taxation.[79]
MoroccoResidence-based taxation.
MozambiqueResidence-based taxation.
NepalResidence-based taxation.[80]
Netherlands (including the Caribbean Netherlands)Residence-based taxation.
New CaledoniaResidence-based taxation.[81]
New ZealandResidence-based taxation.
NigerResidence-based taxation.[82]
NigeriaResidence-based taxation.
NiueResidence-based taxation.[83]
Residence-based taxation.
Residence-based taxation.[84]
NorwayResidence-based taxation.
PakistanResidence-based taxation.
Papua New GuineaResidence-based taxation.
PeruResidence-based taxation.
PolandResidence-based taxation.
PortugalResidence-based taxation.
Puerto RicoResidence-based taxation.
RomaniaResidence-based taxation.
Residence-based taxation.
RwandaResidence-based taxation.
Saint LuciaResidence-based taxation.
Residence-based taxation.[85]
Saint Pierre and MiquelonResidence-based taxation.[86]
Saint Vincent and the GrenadinesResidence-based taxation.[87]
SamoaResidence-based taxation.[88]
San MarinoResidence-based taxation.[89]
Residence-based taxation.
SenegalResidence-based taxation.
SerbiaResidence-based taxation.
Sierra LeoneResidence-based taxation.[90]
Residence-based taxation.
SlovakiaResidence-based taxation.
SloveniaResidence-based taxation.
Solomon IslandsResidence-based taxation.[91]
Residence-based taxation.[92]
South AfricaResidence-based taxation.
Residence-based taxation.
Residence-based taxation.[93]
Residence-based taxation.
SpainResidence-based taxation.
Sri LankaResidence-based taxation.
SudanResidence-based taxation.[94]
SurinameResidence-based taxation.
Residence-based taxation.[95]
SwedenResidence-based taxation.
SwitzerlandResidence-based taxation.
Territorial taxation in general, but residence-based taxation under the alternative minimum tax.
Residence-based taxation.
ThailandResidence-based taxation.
TogoResidence-based taxation.[96]
TongaResidence-based taxation.[97]
Residence-based taxation.[98]
Trinidad and TobagoResidence-based taxation.
TunisiaResidence-based taxation.
TurkeyResidence-based taxation.
TurkmenistanResidence-based taxation.
UgandaResidence-based taxation.
UkraineResidence-based taxation.
United KingdomResidence-based taxation.
Residence-based taxation.
UruguayTerritorial taxation in general, but residence-based taxation for certain investment income.[99] [100] [101]
UzbekistanResidence-based taxation.
Residence-based taxation.
Residence-based taxation.
YemenResidence-based taxation.[102]
ZimbabweResidence-based taxation.
EritreaTerritorial and citizenship-based taxation.[103] Foreign income of nonresident citizens is taxed at a reduced flat rate.
HungaryResidence-based and citizenship-based taxation. Nonresident citizens not satisfying exceptions are taxed in the same manner as residents.
MyanmarResidence-based and citizenship-based taxation. Foreign income of nonresident citizens is taxed at a reduced flat rate.
TajikistanResidence-based and citizenship-based taxation. Nonresident citizens are taxed in the same manner as residents.[104] [105]
United States (including Guam and the Northern Mariana Islands)Residence-based and citizenship-based taxation. Nonresident citizens are taxed in the same manner as residents, but with a limited exemption for foreign income from work.

Residency

Taxing regimes are generally classified as either residence-based or territorial. Most jurisdictions tax income on a residency basis. They need to define "resident" and characterize the income of nonresidents. Such definitions vary by country and type of taxpayer, but usually involve the location of the person's main home and number of days the person is physically present in the country. Examples include:

Territorial systems usually tax local income regardless of the residence of the taxpayer. The key problem argued for this type of system is the ability to avoid taxation on portable income by moving it outside of the country. This has led governments to enact hybrid systems to recover lost revenue.

Citizenship

In the vast majority of countries, citizenship is completely irrelevant for taxation. Very few countries tax the foreign income of nonresident citizens in general:

Like Eritrea, enforcement tactics used by the U.S. government to facilitate tax compliance include the denial of U.S. passports to nonresident U.S. citizens deemed to be delinquent taxpayers and the potential seizure of any U.S. accounts and/or U.S.-based assets. The IRS can also exert substantial compliance pressure on nonresident citizens as a result of the FATCA legislation passed in 2010, which compels foreign banks to disclose U.S. account holders or face crippling fines on U.S.-related financial transactions. Unlike Eritrea, the U.S. has faced little international backlash related to its global enforcement tactics. For example, unlike their response to Eritrea's collection efforts, Canada and all EU member states have ratified intergovernmental agreements (IGAs) facilitating FATCA compliance and supporting the U.S. global tax regime in place for U.S. citizens (including dual nationals). The implementation of these IGAs has led to a substantial increase in U.S. citizenship renunciations, hitting a record 6,707 renunciations in 2020, up 237% from the year before.[131] Increasingly, numerous organizations representing Americans abroad including American Citizens Abroad, the Association of Accidental Americans, the Association of Americans Resident Overseas, Democrats Abroad, Republicans Overseas, Stop Extraterritorial American Taxation and Tax Fairness for Americans Abroad are lobbying Congress to switch to residence-based taxation in order to free Americans abroad from what they call discriminatory and unfair rules.[132] [133] [134] [135] [136] [137] [138]

Several countries tax based on citizenship in specific situations:

A few other countries used to tax the foreign income of nonresident citizens, but have abolished this practice:

In Iran, Iraq, North Korea, the Philippines and Saudi Arabia, citizenship is relevant for the taxation of residents but not for nonresidents.

Other

There are some arrangements for international taxation that are not based on residency or citizenship:

Corporations

Countries do not necessarily use the same system of taxation for individuals and corporations. For example, France uses a residence-based system for individuals but a territorial system for corporations,[159] while Singapore does the opposite,[160] and Brunei and Monaco taxes corporate but not personal income.[161] [162]

Exclusion

Many systems provide for specific exclusions from taxable (chargeable) income. For example, several countries, notably the United States, Cyprus, Luxembourg, Netherlands and Spain, have enacted holding company regimes that exclude from income dividends from certain foreign subsidiaries of corporations. These systems generally impose tax on other sorts of income, such as interest or royalties, from the same subsidiaries. They also typically have requirements for portion and time of ownership in order to qualify for exclusion. The United States excludes dividends received by U.S. corporations from non-U.S. subsidiaries, as well as 50% of the deemed remittance of aggregate income of non-U.S. subsidiaries in excess of an aggregate 10% return on tangible depreciable assets. The Netherlands offers a "participation exemption" for dividends from subsidiaries of Netherlands companies. Dividends from all Dutch subsidiaries automatically qualify. For other dividends to qualify, the Dutch shareholder or affiliates must own at least 5% and the subsidiary must be subject to a certain level of income tax locally.[163]

Some countries, such as Singapore,[164] allow deferment of tax on foreign income of resident corporations until it is remitted to the country.

Individuals versus enterprises

Many tax systems tax individuals in one manner and entities that are not considered fiscally transparent in another. The differences may be as simple as differences in tax rates,[165] and are often motivated by concerns unique to either individuals or corporations. For example, many systems allow taxable income of an individual to be reduced by a fixed amount allowance for other persons supported by the individual (dependents). Such a concept is not relevant for enterprises.

Many systems allow for fiscal transparency of certain forms of enterprise. For example, most countries tax partners of a partnership, rather than the partnership itself, on income of the partnership.[166] A common feature of income taxation is imposition of a levy on certain enterprises in certain forms followed by an additional levy on owners of the enterprise upon distribution of such income. For example, the U.S. imposes two levels of tax on foreign individuals or foreign corporations who own a U.S. corporation. First, the U.S. corporation is subject to the regular income tax on its profits, then subject to an additional 30% tax on the dividends paid to foreign shareholders (the branch profits tax). The foreign corporation will be subject to U.S. income tax on its effectively connected income, and will also be subject to the branch profits tax on any of its profits not reinvested in the U.S. Thus, many countries tax corporations under company tax rules and tax individual shareholders upon corporate distributions. Various countries have tried (and some still maintain) attempts at partial or full "integration" of the enterprise and owner taxation. Where a two level system is present but allows for fiscal transparency of some entities, definitional issues become very important.

Source of income

Determining the source of income is of critical importance in a territorial system, as source often determines whether or not the income is taxed. For example, Hong Kong does not tax residents on dividend income received from a non-Hong Kong corporation.[167] Source of income is also important in residency systems that grant credits for taxes of other jurisdictions. Such credit is often limited either by jurisdiction or to the local tax on overall income from other jurisdictions.

Source of income is where the income is considered to arise under the relevant tax system. The manner of determining the source of income is generally dependent on the nature of income. Income from the performance of services (e.g., wages) is generally treated as arising where the services are performed.[168] Financing income (e.g., interest, dividends) is generally treated as arising where the user of the financing resides.[169] Income related to use of tangible property (e.g., rents) is generally treated as arising where the property is situated.[170] Income related to use of intangible property (e.g., royalties) is generally treated as arising where the property is used. Gains on sale of realty are generally treated as arising where the property is situated.

Gains from sale of tangible personal property are sourced differently in different jurisdictions. The U.S. treats such gains in three distinct manners: a) gain from sale of purchased inventory is sourced based on where title to the goods passes;[171] b) gain from sale of inventory produced by the person (or certain related persons) is sourced 50% based on title passage and 50% based on location of production and certain assets;[172] c) other gains are sourced based on the residence of the seller.[173]

In specific cases, the tax system may diverge for different categories of individuals. U.S. citizen and resident alien decedents are subject to estate tax on all of their assets, wherever situated. The nonresident aliens are subject to estate tax only on that part of the gross estate which at the time of death is situated in the U.S. Another significant distinction between U.S. citizens/RAs and NRAs is in the exemptions allowed in computing the tax liability.[174]

Where differing characterizations of an item of income can result in differing tax results, it is necessary to determine the characterization. Some systems have rules for resolving characterization issues, but in many cases resolution requires judicial intervention.[175] Note that some systems which allow a credit for foreign taxes source income by reference to foreign law.[176]

Definitions of income

Some jurisdictions tax net income as determined under financial accounting concepts of that jurisdiction, with few, if any, modifications. Other jurisdictions determine taxable income without regard to income reported in financial statements.[177] Some jurisdictions compute taxable income by reference to financial statement income with specific categories of adjustments, which can be significant.[178]

A jurisdiction relying on financial statement income tends to place reliance on the judgment of local accountants for determinations of income under locally accepted accounting principles. Often such jurisdictions have a requirement that financial statements be audited by registered accountants who must opine thereon.[179] Some jurisdictions extend the audit requirements to include opining on such tax issues as transfer pricing. Jurisdictions not relying on financial statement income must attempt to define principles of income and expense recognition, asset cost recovery, matching, and other concepts within the tax law. These definitional issues can become very complex. Some jurisdictions following this approach also require business taxpayers to provide a reconciliation of financial statement and taxable incomes.[180]

Deductions

Systems that allow a tax deduction of expenses in computing taxable income must provide for rules for allocating such expenses between classes of income. Such classes may be taxable versus non-taxable, or may relate to computations of credits for taxes of other systems (foreign taxes). A system which does not provide such rules is subject to manipulation by potential taxpayers. The manner of allocation of expenses varies. U.S. rules provide for allocation of an expense to a class of income if the expense directly relates to such class, and apportionment of an expense related to multiple classes. Specific rules are provided for certain categories of more fungible expenses, such as interest.[181] By their nature, rules for allocation and apportionment of expenses may become complex. They may incorporate cost accounting or branch accounting principles, or may define new principles.

Thin capitalization

See main article: Thin capitalization. Most jurisdictions provide that taxable income may be reduced by amounts expended as interest on loans. By contrast, most do not provide tax relief for distributions to owners.[182] Thus, an enterprise is motivated to finance its subsidiary enterprises through loans rather than capital. Many jurisdictions have adopted "thin capitalization" rules to limit such charges. Various approaches include limiting deductibility of interest expense to a portion of cash flow,[183] disallowing interest expense on debt in excess of a certain ratio, and other mechanisms.

Enterprise restructure

The organization or reorganization of portions of a multinational enterprise often gives rise to events that, absent rules to the contrary, may be taxable in a particular system. Most systems contain rules preventing recognition of income or loss from certain types of such events. In the simplest form, contribution of business assets to a subsidiary enterprise may, in certain circumstances, be treated as a nontaxable event.[184] Rules on structuring and restructuring tend to be highly complex.

Credits for taxes of other jurisdictions

Systems that tax income from outside the system's jurisdiction tend to provide for a unilateral credit or offset for taxes paid to other jurisdictions. Such other jurisdiction taxes are generally referred to within the system as "foreign" taxes. Tax treaties often require this credit. A credit for foreign taxes is subject to manipulation by planners if there are no limits, or weak limits, on such credit. Generally, the credit is at least limited to the tax within the system that the taxpayer would pay on income from outside the jurisdiction.[185] The credit may be limited by category of income,[186] by other jurisdiction or country, based on an effective tax rate, or otherwise. Where the foreign tax credit is limited, such limitation may involve computation of taxable income from other jurisdictions. Such computations tend to rely heavily on the source of income and allocation of expense rules of the system.[187]

Withholding tax

Many jurisdictions require persons paying amounts to nonresidents to collect tax due from a nonresident with respect to certain income by withholding such tax from such payments and remitting the tax to the government.[188] Such levies are generally referred to as withholding taxes. These requirements are induced because of potential difficulties in collection of the tax from nonresidents. Withholding taxes are often imposed at rates differing from the prevailing income tax rates.[189] Further, the rate of withholding may vary by type of income or type of recipient.[190] [191] Generally, withholding taxes are reduced or eliminated under income tax treaties (see below). Generally, withholding taxes are imposed on the gross amount of income, unreduced by expenses.[192] Such taxation provides for great simplicity of administration but can also reduce the taxpayer's awareness of the amount of tax being collected.[193]

Treaties

See main article: Tax treaty.

Tax treaties exist between many countries on a bilateral basis to prevent double taxation (taxes levied twice on the same income, profit, capital gain, inheritance or other item). In some countries they are also known as double taxation agreements, double tax treaties, or tax information exchange agreements (TIEA).

Most developed countries have a large number of tax treaties, while developing countries are less well represented in the worldwide tax treaty network.[194] The United Kingdom has treaties with more than 110 countries and territories. The United States has treaties with 56 countries (as of February 2007). Tax treaties tend not to exist, or to be of limited application, when either party regards the other as a tax haven. There are a number of model tax treaties published by various national and international bodies, such as the United Nations and the OECD.[195]

Treaties tend to provide reduced rates of taxation on dividends, interest, and royalties. They tend to impose limits on each treaty country in taxing business profits, permitting taxation only in the presence of a permanent establishment in the country.[196] Treaties tend to impose limits on taxation of salaries and other income for performance of services. They also tend to have "tie breaker" clauses for resolving conflicts between residency rules. Nearly all treaties have at least skeletal mechanisms for resolving disputes, generally negotiated between the "competent authority" section of each country's taxing authority.

Anti-deferral measures

Residency systems may provide that residents are not subject to tax on income outside the jurisdiction until that income is remitted to the jurisdiction.[197] Taxpayers in such systems have significant incentives to shift income outside its borders. Depending on the rules of the system, the shifting may occur by changing the location of activities generating income or by shifting income to separate enterprises owned by the taxpayer. Most residency systems have avoided rules which permit deferring income from outside its borders without shifting it to a subsidiary enterprise due to the potential for manipulation of such rules. Where owners of an enterprise are taxed separately from the enterprise, portable income may be shifted from a taxpayer to a subsidiary enterprise to accomplish deferral or elimination of tax. Such systems tend to have rules to limit such deferral through controlled foreign corporations. Several different approaches have been used by countries for their anti-deferral rules.[198]

In the United States, rules provides that U.S. shareholders of a Controlled Foreign Corporation (CFC) must include their shares of income or investment of E&P by the CFC in U.S. property.[199] U.S. shareholders are U.S. persons owning 10% or more (after the application of complex attribution of ownership rules) of a foreign corporation. Such persons may include individuals, corporations, partnerships, trusts, estates, and other juridical persons. A CFC is a foreign corporation more than 50% owned by U.S. shareholders. This income includes several categories of portable income, including most investment income, certain resale income, and certain services income. Certain exceptions apply, including the exclusion from Subpart F income of CFC income subject to an effective foreign tax rate of 90% or more of the top U.S. tax rate.

The United Kingdom provides that a UK company is taxed currently on the income of its controlled subsidiary companies managed and controlled outside the UK which are subject to "low" foreign taxes.[200] Low tax is determined as actual tax of less than three-fourths of the corresponding UK tax that would be due on the income determined under UK principles. Complexities arise in computing the corresponding UK tax. Further, there are certain exceptions which may permit deferral, including a "white list" of permitted countries and a 90% earnings distribution policy of the controlled company. Further, anti-deferral does not apply where there is no tax avoidance motive.[201]

Rules in Germany provide that a German individual or company shareholder of a foreign corporation may be subject to current German tax on certain passive income received by the foreign corporation. This provision applies if the foreign corporation is taxed at less than 25% of the passive income, as defined. Japan and some other countries have followed a "black list" approach, where income of subsidiaries in countries identified as tax havens is subject to current tax to the shareholder. Sweden has adopted a "white list" of countries in which subsidiaries may be organized so that the shareholder is not subject to current tax.

Transfer pricing

See main article: Transfer pricing. The setting of the amount of related party charges is commonly referred to as transfer pricing. Many jurisdictions have become sensitive to the potential for shifting profits with transfer pricing, and have adopted rules regulating setting or testing of prices or allowance of deductions or inclusion of income for related party transactions. Many jurisdictions have adopted broadly similar transfer pricing rules. The OECD has adopted (subject to specific country reservations) fairly comprehensive guidelines.[202] These guidelines have been adopted with little modification by many countries.[203] Notably, the U.S. and Canada have adopted rules which depart in some material respects from OECD guidelines, generally by providing more detailed rules.

Arm's length principle

It is a key concept of most transfer pricing rules, that prices charged between related enterprises should be those which would be charged between unrelated parties dealing at arm's length. Most sets of rules prescribe methods for testing whether prices charged should be considered to meet this standard. Such rules generally involve comparison of related party transactions to similar transactions of unrelated parties (comparable prices or transactions). Various surrogates for such transactions may be allowed. Most guidelines allow the following methods for testing prices: Comparable uncontrolled transaction prices, resale prices based on comparable markups, cost plus a markup, and an enterprise profitability method.

Tax avoidance and evasion

Tax avoidance schemes, which are the legal use of rules to reduce taxes, may take advantage of jurisdictions with low or no taxes, known as tax havens. For example, individuals may move their investments or their residence, and corporations may move their headquarters, to jurisdictions with more favorable tax environments. In jurisdictions where corporate movement has been restricted by legislation, it might be necessary to reincorporate into a low-tax company through reversing a merger with a foreign corporation ("inversion" similar to a reverse merger). In addition, transfer pricing may allow for "earnings stripping" as profits are attributed to subsidiaries in low-tax jurisdictions.[204]

The Organisation for Economic Co-operation and Development (OECD) has proposed a two-pillar solution to address tax avoidance schemes used by multinational corporations. The first pillar is mostly focused on reallocating profits to where they have been generated, and would only apply to a few hundred of the world's largest companies. As a result, it is estimated that taxing rights on more than 125 billion euros would be reallocated to market jurisdictions.[205] The second pillar is the global minimum tax, which would introduce a minimum tax rate of 15% on the global income of multinational corporations, including their subsidiaries. It would apply to all multinational corporations with consolidated annual revenue of at least 750 million euros and is expected to bring in around 150 billion euros in taxes.[206] As of 2024, the OECD's two-pillar solution was accepted by 140 jurisdictions, but only 33 would be implementing it immediately.[206] One of the biggest abstentions from implementation is the United States, which is opposed to some aspects of the global minimum tax and favors its proposal of the Global Intangible Low-Taxed Income (GILTI) tax. GILTI involves a minimum tax rate of around 10%, and is targeted more at intangible assets such as patents and intellectual property.[207]

Tax evasion schemes, which are the illegal attempt to reduce taxes, usually through deliberate omission or incorrect reporting, may also take advantage of tax havens with little or no financial reporting. Such schemes became a major issue for governments worldwide during the 2008 recession. Responses to this issue began when the United States introduced the Foreign Account Tax Compliance Act (FATCA) in 2010, and were greatly expanded by the OECD's Common Reporting Standard (CRS), a new international system for the automatic exchange of tax information, to which around 100 jurisdictions have committed. For some taxpayers, CRS is already "live"; for others it is imminent. The goal of this worldwide exchange of tax information is tax transparency, and has aroused concerns about privacy and data breaches due to the sheer volume of information to be exchanged.[208] [209]

Expanded Worldwide Planning is an element of international taxation created in the wake of tax directives from government tax authorities after the worldwide recession beginning in 2008. At its heart is a properly constructed Private placement life insurance policy that allows taxpayers to use the regulatory framework of life insurance to structure their assets. These assets can be located anywhere in the world and at the same time can be brought into compliance with tax authorities worldwide. Expanded Worldwide Planning also brings asset protection and privacy benefits that are set forward in the six principals of Expanded Worldwide Planning.

See also

Further reading

External links

Notes and References

  1. E.g., the U.S. taxes corporations on their income and their shareholders on dividends distributed from the corporation. See U.S. IRC sections 11, 1, and 61.
  2. U.S. Internal Revenue Service (U.S. IRS) Reg. (hereafter 26 CFR) §§301.7701-2 and -3 .
  3. http://www.jamaicaobserver.com/news/Antigua-abolishes-personal-income-tax_49425 Antigua abolishes personal income tax
  4. https://iglobal.net/2021/07/30/antigua-tax-residency/ Antigua Tax Residency: Here's Everything You Need To Know
  5. https://www.ey.com/en_gl/tax-guides/worldwide-personal-tax-and-immigration-guide Worldwide Personal Tax and Immigration Guide
  6. http://www.praxity.com/client-service/Tax%20Guides/Tax%20Guide%20-%20Monaco.pdf Business and Taxation Guide to Monaco
  7. http://www.onlinepitcairn.com/pitcairn_today.htm Pitcairn Today
  8. http://www.monde-diplomatique.fr/2006/01/CHAUVIN/13141 A French island without taxes
  9. https://iglobal.net/2021/07/20/st-kitts-tax-residency/ St Kitts Tax Residency: Here's Everything You Need To Know
  10. http://www.lowtax.net/information/turks-and-caicos/turks-and-caicos-personal-taxation.html Turks and Caicos Islands Personal Taxation
  11. https://iglobal.net/2021/10/23/vanuatu-tax-haven/ Vanuatu Tax Residency: Here's Everything You Need To Know
  12. http://www.history.com/news/10-things-you-may-not-know-about-the-vatican 10 Things You May Not Know About the Vatican
  13. http://forum.actufinance.fr/l-arnaque-du-siecle-wallis-et-futuna-P194776/ The rip-off of the century in Wallis and Futuna
  14. http://www.elhyani.net/sahara-marocain-ce-paradis-fiscal/ Moroccan Sahara, that tax haven
  15. http://www.dailynk.com/english/read.php?cataId=nk02900&num=6203 Tax? What Tax? The North Korean Taxation Farce
  16. http://www.wipo.int/wipolex/en/text.jsp?file_id=228855 Enforcement Regulations for Foreign-Invested Business and Foreign Individual Tax Law
  17. http://www.gov.ai/documents/Vol%2038%20Monday%207th%20March%202010%20No4.pdf Interim Stabilisation Levy Act
  18. http://www.oas.org/juridico/english/mesicic3_blz_resp.pdf Response by Belize
  19. http://www.nab.gov.bt/assets/uploads/docs/acts/2014/Income_tax_Act_2001_Eng.pdf Income Tax Act of the Kingdom of Bhutan 2001
  20. http://www.ipajournal.com/uploads/2011/finance_ministry/manuals/Personal_Income_Tax_Guide_book.pdf Personal Income Tax Guide Book
  21. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-boliviahighlights-2017.pdf Bolivia Highlights 2017
  22. http://www.impuestos.gob.bo/images/comunicacion/varios/LEY%20843_v1.0.pdf Law 843
  23. http://www.ministere-finances.dj/TVA/CGI%20%202010.pdf General Code of Taxes 2011
  24. Web site: Foreign Source Income in Georgia • Forbes Georgia . 24 November 2021 .
  25. https://iglobal.net/2021/07/23/grenada-tax-residency/ Grenada Tax Residency: Here's Everything You Need To Know
  26. http://www.dgci.gw/doc/fiscal/C%C3%B3digo%20do%20Imposto%20Profissional%20.pdf Professional Tax Code
  27. http://www.dgci.gw/doc/fiscal/CIC%20Capital%20.pdf Capital Tax Code
  28. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-libyahighlights-2019.pdf Libya Highlights 2019
  29. http://www.paclii.org/mh/legis/consol_act/ita1989116/ Income Tax Act 1989
  30. http://www.fsmlaw.org/fsm/code/title54/T54_Ch01.htm Code of the Federated States of Micronesia
  31. http://ronlaw.gov.nr/nauru_lpms/files/acts/6e8177de78c8306fd99edfff51f96ce7.pdf Employment and Services Tax Act 2014
  32. http://www.paclii.org/pw/legis/consol_act/ratt40256/ Revenue and Taxation
  33. http://www.sainthelena.gov.sh/wp-content/uploads/2019/04/Income-Tax-Ord-Updated-010419.pdf Income Tax Ordinance
  34. http://www.sainthelena.gov.sh/wp-content/uploads/2017/12/Income-Tax-Ordinance.pdf Income Tax Ordinance
  35. http://www.sainthelena.gov.sh/wp-content/uploads/2017/12/Island-Council-TdaC-Ordinance.pdf Island Council (Tristan da Cunha) Ordinance
  36. http://mof.gov.so/sites/default/files/2018-10/Budget%20Appropriation%20Act%202018.pdf Appropriation act for the 2018 budget
  37. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-syriahighlights-2017.pdf Syria Highlights 2017
  38. http://www.paclii.org/tk/legis/num_act/itr1997165/ Income Tax Rules 1997
  39. http://www.paclii.org/tv/legis/num_act/ita1992116/ Income Tax Act 1992
  40. http://www.robimaxglobal.com/images/files/me/Direct_Tax_Act.pdf Direct Taxes Act
  41. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-iraqhighlights-2020.pdf Iraq Highlights 2020
  42. http://www.tppra.org/ru/документы/zakon-respubliki-abhaziya-o-podohodnom-naloge-s-fizicheskih-lic Law on the income tax on individuals
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  44. https://www.irs.gov/publications/p570/ch03.html Filing Information for Individuals in Certain U.S. Possessions
  45. http://www.impostos.ad/impost-sobre-la-renda-de-les-persones-fisiques Individual income tax
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  49. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-beninhighlights-2015.pdf Benin Highlights 2015
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  56. http://isaacbrocksociety.ca/2015/01/08/no-china-does-not-have-citizenship-based-taxation/ No, China does not have citizenship-based taxation
  57. https://docs.google.com/file/d/0BxPnyjzCDTlARWhheVdKY0tjUW8/edit General tax code
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  59. http://www3.icex.es/icex/cma/contentTypes/common/records/mostrarDocumento/?doc=4713303 Tax System of Cuba
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  61. http://www.mof.gov.tl/wp-content/uploads/2010/07/G5_Iincome_Tax_Guide_2008_Final_Eng.pdf A guide for income taxpayers
  62. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-egypthighlights-2019.pdf Egypt Highlights 2019
  63. https://oxfordbusinessgroup.com/overview/marginal-gains-summary-current-tax-laws-and-regulations Summary of Egypt's tax laws and regulations
  64. http://fig.gov.fk/agriculture/jdownloads/Misc/fmh_finance.pdf A General Guide to Falkland Islands Taxation for Individuals for the Tax Year 2013
  65. http://taks.fo/00674/00680/ General information about income tax in the Faroe Islands
  66. http://www.formin.finland.fi/public/default.aspx?nodeid=49889&culture=en-US&contentlan=2 The special status of the Åland Islands
  67. http://www.impot-polynesie.gov.pf/sites/default/files/documents-telechargeables/cst-m.pdf Territorial solidarity contribution on multiple revenues
  68. https://www.pwc.com/gh/en/assets/pdf/a-quick-guide-to-taxation-in-gambia-september-2013.pdf A quick guide to taxation in Gambia
  69. https://www.nordisketax.net/country.asp?url=/files/gre/eng.asp General information about income tax in Greenland
  70. http://taxsummaries.pwc.com/ID/Guyana-Individual-Taxes-on-personal-income Taxes on personal income
  71. http://taxsummaries.pwc.com/ID/Guyana-Individual-Residence Residence
  72. http://www.mef.gouv.ht/upload/doc/SommairePolFiscale%20(22juillet2014%20RT).pdf Summary of fiscal policy
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  75. http://www.devincorp.net/docs/Revenue%20Code%20of%20Liberia%20Act%20of%202000%20-%20Phase%20One.pdf Revenue Code of Liberia Act of 2000
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  81. http://www.juridoc.gouv.nc/juridoc/jdcodes.nsf/CIPlan/93B45BDBA4186BEF4B2575670074B761?OpenDocument Tax code of New Caledonia
  82. http://www.impots.gouv.ne/images/Stories/telechargements/CGI2013_%20MAJ_%20LFrec_%202015_et%20_LF_%202016.pdf General Tax Code
  83. http://www.paclii.org/nu/legis/consol_act/ita1961116/ Income Tax Act 1961
  84. http://www.kktcgelirvergi.net/i/mozka/vergi/24-1982.doc Income Tax Act
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  86. http://www.services-fiscaux975.fr/files/file/Telechargements/Formulaires%202011/NOTICE%20FISCAUX_2011WEB.pdf Instructions to fill in your tax return
  87. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-stvincenthighlights-2017.pdf St. Vincent and the Grenadines Highlights 2017
  88. http://www.paclii.org/ws/legis/consol_act_2010/ita1974116/ Income Tax Act 1974
  89. http://www.consigliograndeegenerale.sm/on-line/home/archivio-leggi-decreti-e-regolamenti/documento17062620.html General income tax
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  160. http://www.fullermoney.com/content/2012-07-17/dttl_tax_highlight_2012_Singapore.pdf International tax - Singapore Highlights 2012
  161. Web site: International tax - Brunei Darussalam Highlights 2012. Deloitte. deloitte.com. 2012-09-09. 2012-10-25. https://web.archive.org/web/20121025173846/http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Guides/2012/dttl_tax_highlight_2012_Brunei.pdf. dead.
  162. https://www.telegraph.co.uk/finance/globalbusiness/7243401/Monaco-might-not-charge-residents-income-tax-but-its-no-tax-haven.html Monaco might not charge residents income tax, but it's no tax haven
  163. The rules have changed over the years. For a good explanation of the 2006 changes by a major UK law firm, see http://www.freshfields.com/publications/pdfs/2006/corp-tax-reform.pdf .
  164. "What is taxable income", Inland Revenue Authority of Singapore.
  165. The U.S. taxes businesses generally at rates from 15% to 35%. However, the graduated rates for individuals are different from those for corporations. United States Code Title 26 sections 1 and 11, hereafter 26 USC 1 and 11
  166. E.g., 26 USC 701, et seq.
  167. Web site: GovHK: How to Report Income in Your Tax Return. www.gov.hk. 8 March 2023.
  168. Supra. 26 USC 861(a)(3)
  169. 26 USC 861(a)(1) and (2) and 862(a)(1) and (2), supra.
  170. U.S. IRC sections 861(a)(4) and 862(a)(4), supra.
  171. 26 USC 861(a)(6) and 862(a)(6), supra.)
  172. https://www.law.cornell.edu/uscode/text/26/863- 26 USC 863(b)
  173. https://www.law.cornell.edu/uscode/text/26/865- 26 USC 865(a)
  174. Web site: Overview of International Estate Planning . Robert F. Klueger . Valley Lawyer . 2012 . June 26, 2014 . dead . https://web.archive.org/web/20140726190534/http://ksilaw.com/uploads/general/Bob-Valley-Lawyer-Article-Oct-2012.pdf . July 26, 2014 .
  175. See, e.g., Pierre Boulez, in which a U.S. court determined that income received by a performer relating to sale of recordings of a musical performance was sourced to where such recordings were purchased by consumers.
  176. See, e.g., India’s rules
  177. The U.S. and many of its states define taxable income independently of financial statement income, but require reconciliation of the two. See, e.g., California Revenue and Taxation Code sections 17071 et seq.
  178. Web site: www.cra-arc.gc.ca/E/pbg/tf/t2sch1/t2sch1-08e.pdf. 27 November 2019 .
  179. Web site: Auditors - GBA4. 8 March 2023. 6 October 2014. https://web.archive.org/web/20141006174137/http://www.companieshouse.gov.uk/about/gbhtml/gba4.shtml#c1q1. dead.
  180. Web site: U.S. IRS Form 1120 Schedule M-3 . irs.gov.
  181. http://edocket.access.gpo.gov/cfr_2008/aprqtr/26cfr1.861-8.htm U.S. regulations under 26 CFR 1.861-8
  182. Contrast to "integrated" systems providing a credit to enterprise owners for a portion of enterprise level taxation.
  183. https://www.law.cornell.edu/uscode/text/26/163- 26 USC 163(j)
  184. https://www.law.cornell.edu/uscode/text/26/351- 26 USC 351
  185. E.g., Egypt limits the credit to the Egyptian income tax "that may have been payable with respect to profits from works performed abroad," but without a thorough definition of terms. Article (54).
  186. U.S. rules limit the credit by categories based on the nature of the income. 26 USC 904. For 20 years prior to changes first effective in 2007, there were at least nine such categories. These included, e.g., financial services income, high-taxed income, other passive income, and other (operating or general) income. UK rules provide for separate limitations based on the schedule of income on which UK tax is computed. Thus, credits were separately limited for salaries versus dividends and interest.
  187. E.g., under U.S. rules, the credit is limited to U.S. tax on foreign source taxable income for a particular category. The rules for determining source for taxation of foreign persons (sections 861-865) apply in computing such credit, and detailed rules are provided in regulations (above) for allocating and apportioning expenses to such income.
  188. Materials from one major accounting firm provide a table of over sixty such countries. Such table is not comprehensive.
  189. E.g., Australia imposes a 10% withholding tax rate on interest, subject to treaty reduction.
  190. E.g., Thailand taxes dividends at 10% and interest at 15%.
  191. E.g., Italy taxes dividends paid to nonresidents having voting rights in the company paying the dividends at 27% but taxes dividends paid to nonresidents not having such rights at 12.5%.
  192. See, e.g., 26 USC 871, 881, and 1441.
  193. Web site: History of the U.S. Tax System. U.S. Department of Treasury. 2006-10-31. dead. https://web.archive.org/web/20101127050245/http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtml. 2010-11-27.
  194. 705541. Christians. Allison. Tax Treaties for Investment and Aid to Sub-Saharan Africa: A Case Study. April 2005. Northwestern Public Law Research Paper No. 05-10; Northwestern Law & Econ Research Paper No. 05-15.
  195. Web site: Model Tax Convention on Income and on Capital 2014. OECD. October 30, 2015. 2016-08-15.
  196. Permanent establishment is defined under most treaties using language identical to the OECD model. Generally, a permanent establishment is any fixed place of business, including an office, warehouse, etc.
  197. See, for example, Singapore's provision that income from outside its borders is not taxed until brought onshore.
  198. Anti-deferral and other shifting measures have also been combatted by granting broad powers to revenue authorities under "general anti-avoidance" provisions. See a discussion of Canadian GAAR a CTF article .
  199. Subpart F (sections 951-964)
  200. Part XVII of Chapter IV ICTA 1988.
  201. Web site: INTM200000 - International Manual - HMRC internal manual - GOV.UK. hmrc.gov.uk.
  202. Web site: Site homepage. www.oecd-ilibrary.org. 8 March 2023.
  203. E.g., UK ICTA Section 28AA and guidelines thereunder
  204. U.S. Department of the Treasury. (2007). Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties .
  205. Chand . V. . Turina . A. . Romanovska . K. . 2022-02-21 . Tax Treaty Obstacles in Implementing the Pillar Two Global Minimum Tax Rules and a Possible Solution for Eliminating the Various Challenges . World Tax Journal . 14 . 1 . 10.59403/33wxjhc . 2352-9237.
  206. The Global Minimum Tax and the taxation of MNE profit . OECD Taxation Working Papers . 2024-01-09 . Organisation for Economic Co-Operation and Development (OECD). 10.1787/9a815d6b-en .
  207. Web site: Global Intangible Low-Taxed Income (GILTI): Overview & FAQs . 2024-04-29 . tax.thomsonreuters.com . en-US.
  208. Knight. Andrew. 23 November 2016. Is there room for privacy planning in a tax-transparent world?. International Investment.
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