Explore the principles and practices of international taxation, including concepts such as transfer pricing, tax treaties, foreign tax credits, and the taxation of multinational corporations.
International Taxation – Key Concepts & Structure
| Element | Description |
|---|---|
| Purpose | Prevent double taxation, curb tax evasion, and allocate taxing rights among jurisdictions. |
| Scope | Applies to cross‑border activities of individuals, corporations, and other entities. |
| Primary Instruments | • Domestic tax laws • Bilateral/Multilateral Tax Treaties • International guidelines (OECD, UN, EU). |
| Principle | What It Means | Typical Application |
|---|---|---|
| Residence Principle | Taxation based on the taxpayer’s legal domicile or place of effective management. | Individuals taxed on worldwide income if resident; non‑residents taxed only on source income. |
| Source Principle | Taxation based on where income is generated. | Rental income from property located in Country A taxed by A, regardless of the owner’s residence. |
| Territoriality vs. Worldwide Taxation | Territorial systems tax only local source income; worldwide systems tax all income of residents. | Most EU states = territorial; United States = worldwide. |
| Non‑Discrimination | Same treatment for domestic and foreign taxpayers in comparable situations. | Treaty articles often require “national treatment.” |
| Mutual Agreement Procedure (MAP) | Mechanism for treaty partners to resolve disputes and eliminate double taxation. | Administered by tax authorities; may involve competent‑authority rulings. |
| Method | Mechanics | Example |
|---|---|---|
| Exemption Method | Exempt foreign‑source income from domestic tax. | A German resident earns dividends from a UK subsidiary; Germany exempts the dividend. |
| Credit Method | Credit domestic tax liability for foreign tax paid, up to the amount of domestic tax on the same income. | A French company pays 20 % tax in Brazil; France allows a 20 % credit against French tax on that profit. |
| Deduction Method | Allow foreign tax as an itemized deduction against taxable income. | Less common; used where credit limits are exceeded. |
| Feature | Detail |
|---|---|
| Model Conventions | • OECD Model – for developed economies (focus on prevention of double taxation, exchange of information). • UN Model – for developing economies (gives source states greater taxing rights). |
| Key Articles | 1. Resident Definition 2. Permanent Establishment (PE) 3. Dividends, Interest, Royalties 4. Capital Gains 5. Elimination of Double Taxation (credit/exemption) 6. Exchange of Information 7. Non‑Discrimination |
| Treaty Shopping | Strategies to exploit treaty benefits by routing income through a treaty‑favoured jurisdiction. Counter‑measures include anti‑abuse clauses (e.g., Limitation on Benefits). |
| Multilateral Instruments | • Mli (Multilateral Convention to Implement Tax Treaty‑Related Measures) – addresses treaty abuse, mandatory dispute‑resolution, and principal‑purpose test. |
| Type | Definition | Tax Implication |
|---|---|---|
| Fixed‑Place PE | Physical location (office, factory, branch) where business is carried out. | Profits attributable to the PE |