INTERNATIONAL TAXATION
REVIEWED SUMMARY
Taxable subject
The person or entity that is taxed
Taxable object
The tax base. What is taxed (ex. Income or capital)
Net capital importing country
More capital is invested in the country by foreigners than
locals are investing overseas (dependent on investments
by foreigners for its economy to grow)
Net capital exporting country
More is invested overseas by locals than foreigners are
investing in the country (wealthy country, entities invest
their surplus outside)
International tax
Body of legal provisions of different countries that cover
tax aspects of cross-border transactions (commonly
national level)
Direct taxes
Taxes paid directly to the government tax authorities by
the taxpayer, including Income taxes, estate taxes, gift
taxes, wealth taxes and social security contributions.
Indirect taxes
Taxes levied on spending to buy goods and services,
some or all of the taxes by the consumer is paid to the
government by the firms. Value added, goods and
services taxes, sales taxes and customs duties
,5 Objectives of international tax
1. National wealth maximization
2. Tax equity (fairness)
3. Economic efficiency
4. Administrative efficiency
5. International compatibility
Compliance costs
Deadweight costs (costs to the economy arising from the
imposition of the tax). Expenses associated with meeting
the requirements of legal regulations
Inward investment
Foreign entities or individuals investing capital in domestic
assets or operations
Capital Import Neutrality (CIN)
INBOUND INVESTMENTS Tax regime must be neutral in
the way it taxes income derived by suppliers of investment
capital (the way in which foreign and local investors are
taxed, they should face the same effective tax rate)
Make the host country indifferent to whether it attracts
foreign capital or not, based solely on tax considerations.
The tax system should not create artificial barriers or
incentives for foreign investors.
Two ways of getting taxed
1. Foreigners need to file a tax return (usually annually)
and pay tax on the net income derived from the country
2. Pay withholding tax at source
Withholding tax
Tax is deducted at the time the income is paid to the
foreigner by the payer in the country of source of income
Passive income
,Income that does not involve productive activity (ex.
dividends, interest and royalties
When both tax collection methods apply...
The withholding tax deducted during the year is credited
against the taxpayer with a balance of tax to pay or a tax
refund at the end of the year
Outward investment
Investment made by a country´s residents or businesses
in foreign countries
Capital Export Neutrality (CEN)
OUTBOUND INVESTMENTS: Is neutral in the way it
taxes income derived from exported capital and the way it
taxes income derived domestically
It aims to make investors indifferent to wether they invest
their capital domestically or abroad. Make sure tax
considerations do not disproportionately favor or
discourage either option
FDI or non-portfolio
Significant investment in a particular foreign entity (If
interests are 10% or more)
Portfolio
Relatively smaller investment (usually made out of many
investments of less than 10%)
CFC
Controlled foreign company
CFC income
Is treated as it belongs to the local investors for tax
purposes. In proportion to the investors shareholding
interest.
Whitelist
, Fall outside the scope of the CFC rules because their tax
impost is comparable to that of the home country
Greylist
Fall within the CFC rules under certain conditions, not fully
in complaint with international standards but have
committed to making improvements in areas such as tax
transparency, anti-money laundering measures etc
Blacklist
Always fall within the scope of CFC rules, such as tax
havens because their tax impost is always considerably
lower than that of the home country.
Effect of CFC regulation
To tax foreign sources of income on accural basis instead
of on a receipt basis (targeted only at some CFCs)
Double taxation
When taxpayers that engage in cross border transactions
are taxed more than once on the same amount of income
Source jurisdition of taxation
Nexus between the country and the activities that produce
income. It determines where income is generated or
where economic activities take place. The country will tax
if it has provided public goods (roading,
infrastructure,police, legal system) for the benefit of the
non-resident to enable it to undertake economic activity.
DTA
Double taxation agreement. Bilateral pacts made between
two countries.
DTAs therefore require that non-resident business
taxpayers have a "permanent establishment" to be
charged taxes in the foreign country, a non-resident that
REVIEWED SUMMARY
Taxable subject
The person or entity that is taxed
Taxable object
The tax base. What is taxed (ex. Income or capital)
Net capital importing country
More capital is invested in the country by foreigners than
locals are investing overseas (dependent on investments
by foreigners for its economy to grow)
Net capital exporting country
More is invested overseas by locals than foreigners are
investing in the country (wealthy country, entities invest
their surplus outside)
International tax
Body of legal provisions of different countries that cover
tax aspects of cross-border transactions (commonly
national level)
Direct taxes
Taxes paid directly to the government tax authorities by
the taxpayer, including Income taxes, estate taxes, gift
taxes, wealth taxes and social security contributions.
Indirect taxes
Taxes levied on spending to buy goods and services,
some or all of the taxes by the consumer is paid to the
government by the firms. Value added, goods and
services taxes, sales taxes and customs duties
,5 Objectives of international tax
1. National wealth maximization
2. Tax equity (fairness)
3. Economic efficiency
4. Administrative efficiency
5. International compatibility
Compliance costs
Deadweight costs (costs to the economy arising from the
imposition of the tax). Expenses associated with meeting
the requirements of legal regulations
Inward investment
Foreign entities or individuals investing capital in domestic
assets or operations
Capital Import Neutrality (CIN)
INBOUND INVESTMENTS Tax regime must be neutral in
the way it taxes income derived by suppliers of investment
capital (the way in which foreign and local investors are
taxed, they should face the same effective tax rate)
Make the host country indifferent to whether it attracts
foreign capital or not, based solely on tax considerations.
The tax system should not create artificial barriers or
incentives for foreign investors.
Two ways of getting taxed
1. Foreigners need to file a tax return (usually annually)
and pay tax on the net income derived from the country
2. Pay withholding tax at source
Withholding tax
Tax is deducted at the time the income is paid to the
foreigner by the payer in the country of source of income
Passive income
,Income that does not involve productive activity (ex.
dividends, interest and royalties
When both tax collection methods apply...
The withholding tax deducted during the year is credited
against the taxpayer with a balance of tax to pay or a tax
refund at the end of the year
Outward investment
Investment made by a country´s residents or businesses
in foreign countries
Capital Export Neutrality (CEN)
OUTBOUND INVESTMENTS: Is neutral in the way it
taxes income derived from exported capital and the way it
taxes income derived domestically
It aims to make investors indifferent to wether they invest
their capital domestically or abroad. Make sure tax
considerations do not disproportionately favor or
discourage either option
FDI or non-portfolio
Significant investment in a particular foreign entity (If
interests are 10% or more)
Portfolio
Relatively smaller investment (usually made out of many
investments of less than 10%)
CFC
Controlled foreign company
CFC income
Is treated as it belongs to the local investors for tax
purposes. In proportion to the investors shareholding
interest.
Whitelist
, Fall outside the scope of the CFC rules because their tax
impost is comparable to that of the home country
Greylist
Fall within the CFC rules under certain conditions, not fully
in complaint with international standards but have
committed to making improvements in areas such as tax
transparency, anti-money laundering measures etc
Blacklist
Always fall within the scope of CFC rules, such as tax
havens because their tax impost is always considerably
lower than that of the home country.
Effect of CFC regulation
To tax foreign sources of income on accural basis instead
of on a receipt basis (targeted only at some CFCs)
Double taxation
When taxpayers that engage in cross border transactions
are taxed more than once on the same amount of income
Source jurisdition of taxation
Nexus between the country and the activities that produce
income. It determines where income is generated or
where economic activities take place. The country will tax
if it has provided public goods (roading,
infrastructure,police, legal system) for the benefit of the
non-resident to enable it to undertake economic activity.
DTA
Double taxation agreement. Bilateral pacts made between
two countries.
DTAs therefore require that non-resident business
taxpayers have a "permanent establishment" to be
charged taxes in the foreign country, a non-resident that
