Podcast
Questions and Answers
What is the traditional test for determining residency?
What is the traditional test for determining residency?
In the US, what test is used to determine an individual's residency for tax purposes (besides holding a green card)?
In the US, what test is used to determine an individual's residency for tax purposes (besides holding a green card)?
What is the key concept in taxation, as opposed to citizenship?
What is the key concept in taxation, as opposed to citizenship?
Which of the following is NOT a factor considered in determining residency for tax purposes?
Which of the following is NOT a factor considered in determining residency for tax purposes?
Signup and view all the answers
What is the main difficulty faced by tax authorities when determining residency?
What is the main difficulty faced by tax authorities when determining residency?
Signup and view all the answers
Which of the following is the most common test used to determine residency in the UK?
Which of the following is the most common test used to determine residency in the UK?
Signup and view all the answers
Why is it important to distinguish between residency and citizenship in the context of taxation?
Why is it important to distinguish between residency and citizenship in the context of taxation?
Signup and view all the answers
What is the key takeaway from the provided content regarding the determination of residency for tax purposes?
What is the key takeaway from the provided content regarding the determination of residency for tax purposes?
Signup and view all the answers
What is the fundamental issue in the taxation of companies that have an economic activity in multiple territorial jurisdictions?
What is the fundamental issue in the taxation of companies that have an economic activity in multiple territorial jurisdictions?
Signup and view all the answers
What is the key difference between the 'residency' and 'citizenship' types of jurisdictions?
What is the key difference between the 'residency' and 'citizenship' types of jurisdictions?
Signup and view all the answers
Which of the following examples illustrates the 'source' type of jurisdiction?
Which of the following examples illustrates the 'source' type of jurisdiction?
Signup and view all the answers
Which type of jurisdiction is most commonly associated with double taxation?
Which type of jurisdiction is most commonly associated with double taxation?
Signup and view all the answers
Which country is mentioned in the text as using the 'citizenship' type of jurisdiction?
Which country is mentioned in the text as using the 'citizenship' type of jurisdiction?
Signup and view all the answers
What is the primary taxing authority in international taxation, and why?
What is the primary taxing authority in international taxation, and why?
Signup and view all the answers
What is the primary reason for using special purpose vehicles (SPVs) in the context of offshore operations?
What is the primary reason for using special purpose vehicles (SPVs) in the context of offshore operations?
Signup and view all the answers
If all countries in the world adopted the same jurisdictional criteria, would there be a risk of double taxation?
If all countries in the world adopted the same jurisdictional criteria, would there be a risk of double taxation?
Signup and view all the answers
Which of the following is NOT a benefit of using offshore locations for businesses?
Which of the following is NOT a benefit of using offshore locations for businesses?
Signup and view all the answers
What does the text suggest is the most common type of jurisdiction overlap leading to double taxation?
What does the text suggest is the most common type of jurisdiction overlap leading to double taxation?
Signup and view all the answers
What is a key characteristic of transfer pricing?
What is a key characteristic of transfer pricing?
Signup and view all the answers
How does the concept of "asset management and protection" relate to offshore operations?
How does the concept of "asset management and protection" relate to offshore operations?
Signup and view all the answers
Which of these statements accurately reflects the impact of taxation on international investment decisions?
Which of these statements accurately reflects the impact of taxation on international investment decisions?
Signup and view all the answers
What is a key factor in identifying a harmful preferential tax regime?
What is a key factor in identifying a harmful preferential tax regime?
Signup and view all the answers
What is "ring fencing" in the context of harmful tax regimes?
What is "ring fencing" in the context of harmful tax regimes?
Signup and view all the answers
What is a key characteristic of a tax haven proper, as opposed to a harmful preferential tax regime?
What is a key characteristic of a tax haven proper, as opposed to a harmful preferential tax regime?
Signup and view all the answers
What is a key indicator of a tax haven, as identified by the OECD in 1998?
What is a key indicator of a tax haven, as identified by the OECD in 1998?
Signup and view all the answers
What is a common form of non-transparency in harmful preferential tax regimes?
What is a common form of non-transparency in harmful preferential tax regimes?
Signup and view all the answers
What is the difference between a tax haven proper and a harmful preferential tax regime?
What is the difference between a tax haven proper and a harmful preferential tax regime?
Signup and view all the answers
What is the purpose of the 'ring fencing' of a preferential tax regime?
What is the purpose of the 'ring fencing' of a preferential tax regime?
Signup and view all the answers
Which of the following is NOT a characteristic of a tax haven as identified by the OECD in 1998?
Which of the following is NOT a characteristic of a tax haven as identified by the OECD in 1998?
Signup and view all the answers
Which of the following statements accurately describes the concept of tax incidence?
Which of the following statements accurately describes the concept of tax incidence?
Signup and view all the answers
What is a common counterargument to the idea that indirect taxes are always passed through to the final consumer?
What is a common counterargument to the idea that indirect taxes are always passed through to the final consumer?
Signup and view all the answers
What is a key difference between direct and indirect taxation, as discussed in the text?
What is a key difference between direct and indirect taxation, as discussed in the text?
Signup and view all the answers
Based on the text, what is a potential advantage of direct taxation over indirect taxation?
Based on the text, what is a potential advantage of direct taxation over indirect taxation?
Signup and view all the answers
What is the main reason countries compete in terms of taxation?
What is the main reason countries compete in terms of taxation?
Signup and view all the answers
What is a primary consequence of tax competition?
What is a primary consequence of tax competition?
Signup and view all the answers
What is the main driver behind the decline in corporate tax rates in developed countries over the past three decades?
What is the main driver behind the decline in corporate tax rates in developed countries over the past three decades?
Signup and view all the answers
How does the “immorality” of tax competition manifest itself?
How does the “immorality” of tax competition manifest itself?
Signup and view all the answers
What is the main argument put forward by those who oppose tax competition?
What is the main argument put forward by those who oppose tax competition?
Signup and view all the answers
What is one potential benefit of tax coordination among countries?
What is one potential benefit of tax coordination among countries?
Signup and view all the answers
What are the two main responses by national policymakers to tax arbitrage?
What are the two main responses by national policymakers to tax arbitrage?
Signup and view all the answers
Study Notes
International Business Environment
- The document discusses the international business environment, focusing on the economic environment, specifically taxation.
The Economic Environment
- Core dimensions include taxation, currency and inflation, financial industry (access to credit), economic growth and development, and others.
Taxation
-
Taxation is the core instrument of the state to extract resources from society to finance the public sector.
-
It aims to alter individual behavior (e.g., through excise duties).
-
It can also follow other policy objectives like economic growth.
-
A tax is an obligation for a person to transfer money to a sovereign authority.
-
It's not a contractual obligation, but a unilateral transfer created by law.
-
A legal relationship between a taxpayer and the sovereign authority gives rise to the right to tax (jurisdiction).
-
Tax base is the monetary value of the activity or transaction subject to taxation.
-
Tax rate is usually expressed as a percentage.
-
Tax = Tax base x Tax rate
The Tax Obligation
- A tax obligation can be a result of a payer's status/activity (direct taxation) or event/contingency/transaction (indirect taxation).
Direct Taxation
- Direct taxation obligation arises irrespective of economic or legal behavior; it's activity-based.
- Examples: income tax, capital gains tax, and property tax (real estate and other assets).
Indirect Taxation
- Indirect taxation is a result of a specific economic and legal behavior of the taxpayer.
- This is an event-based or transaction-based taxation.
- Examples of indirect taxes: value-added tax (VAT), sales tax, customs duties, excises, and inheritance taxes.
Tax Incidence
- Tax incidence is the ability to pass the burden of the tax through to the final consumer. Indirect taxes can be passed through, but direct taxes cannot.
- Counter-arguments to complete transfer of the tax burden: companies often calculate profit margins already factoring anticipated tax changes; the view that producers are simply price-takers is not accurate.
Direct Taxation versus Indirect Taxation
- All countries employ both direct and indirect taxes but some countries rely more on indirect taxation for government revenue—European Union countries, for example— while in others, such as the USA, the main revenue comes from direct taxation.
Does Taxation Matter?
- Some economists believe the total tax rate (overall tax burden) is the important aspect of taxation.
- Other economists argue that the type of taxation matters (e.g., direct taxation encourages economic activity, while indirect taxation penalties economic activity).
- Indirect taxes are often easier for the state to collect than direct taxes.
Total Tax Rate (World Bank 2019)
- The global average total tax rate is 47.8%.
- The lowest tax rates are in Brunei (0.2%), Vanuatu (8.4%), Georgia (9.9%), Qatar (11.3%), and Macedonia (13%).
- The highest rates are found in Argentina (106.3%), Eritrea/Bolivia (83.7%), and several EU states.
Tax Structure Versus Tax Rate
- The structure of taxes (number of taxes) may be more important than the level of taxation.
- There is debate about what aspect of taxation is more important—the structure or the total rate.
- Countries like Sweden (low number of tax types but high total tax burden) stand out from countries with many tax types but a lower rate.
Flat Tax vs. Progressive vs. Regressive Taxation
- Flat tax: same percentage for all income levels.
- Progressive tax: higher income earners pay a higher percentage of their income in taxes.
- Regressive tax: higher income earners pay a lower percentage of their income in taxes.
- Progressive taxation is the most common type of taxation.
Core Advantages of a "Flat Tax"
- Supporters of flat tax systems emphasize simplicity in calculations and fiscal formalities; it minimizes associated costs like tax consultations.
- Claim flat tax is socially just, preventing special interest groups (favored/privileged) from paying lower taxes and incentivizing capital accumulation.
Types of Jurisdictions
- Jurisdiction determines the nature of the tax system.
- Common types of tax jurisdiction:
- Territorial (income produced in the country is taxable, regardless of the tax payer's residence).
- Residency (income generated by a resident, regardless of location).
- Citizenship (residents of a country are taxable regardless of residency).
Residency (Factors)
- Difficulties in defining residency: different criteria used (e.g., principle place of business, domicile).
- Different countries employ differing rules when calculating residency.
- US uses a "substantial presence" test
- The UK uses the De Beers Consolidated Mines v Howe case to establish residency.
Tax Competition
- From a government's viewpoint, tax competition is driven by the attempt to reduce tax burden, encourage inward income shifting, and attract economic activities.
- From a taxpayer's perspective, it is a situation where it is possible to shift income or transfer profits to tax jurisdictions with lower overall taxes.
Core Trends in Taxation
- Average top personal tax rates in industrialized countries have dropped from over 67% in 1980 to 42% in 2010.
- Average corporate tax rates in developed countries have significantly decreased from about 48% in 1980 to under 27% in 2010.
- The number of countries using a flat tax regime has increased from 3 in 1980 to over 25 in 2010.
Opposition to Tax Competition
- Opposition argues tax competition is a "race to the bottom", making taxation irrelevant to business decisions, potentially harming majority of citizens and the population (and owners of immobile resources), and increasing global inequality.
- OECD (1998) states that taxpayers benefit from public spending while avoiding contributing to its financing (free-riders).
Core Benefit of Tax Competition
- Supporters argue that the threat of income shifting motivates responsible policy-making and accountability among policy makers.
- Historical example: The failure of the EEC to agree on a minimum corporate tax rate in the 1960s led to further tax competition and lower rates.
Ireland (Relevant Taxation History)
- Ireland's tax history illustrates shifts to a more favorable tax environment (lowering tax rates) to encourage investment, resulting in economic growth (dubbed the "Celtic Tiger").
OECD (1998) and Tax Avoidance
- Closing tax loopholes and cracking down on illegal tax evasion can reduce tax avoidance, but high tax rates are still a significant contributing factor to the problem.
Harmful Tax Competition
- Different developed countries and international organizations (OECD, UN) do not fully recognize the value of tax competition
- Harmful tax competition involves using tax policies to "steal" tax bases from other jurisdictions by aggressively competing to attract operations.
Tax Havens (Characteristics)
- Tax havens are characterized by:
- Low or no taxation on income.
- Lack of effective exchange of information.
- Lack of transparency in operations.
- No requirement of substantial activities.
Transfer Pricing
- Transfer pricing is the practice used by multinational enterprises with affiliates in different countries with differing tax systems attempting to optimize their financial/tax positions.
- Transfer prices may result in the artificial increase in profits in a lower-tax country and the decrease of profits in a higher-tax country.
Empirical Evidence (Mid-1990s)
- Significant numbers of large companies in the USA with assets of USD 250 million or above pay little or no income tax.
- The USA government incurs substantial losses due to these tax practices by transnational companies.
United Kingdom (2015)
- Large companies such as Google, Amazon, and Starbucks reported low tax payments in the UK, despite significant sales revenue.
Reactions of Governments to Tax Arbitrage
- Some governments reduce tax rates to attract FDI, prevent capital flight, or respond to tax competition.
- Other states coordinate to homogenize taxation to prevent companies from choosing between jurisdictions based on tax factors.
Fighting Transfer Pricing (Efforts)
- OECD has proposed guidelines for multinational enterprises and tax authorities to address transfer pricing issues (Transfer Pricing Guidelines).
Some Principles for Identifying Transfer Prices
- Identifying a "comparable uncontrolled price" between independent entities is a common method to determining fair market value.
- Other methods include "Resale Price Method", "Cost Plus Method" and "Profit Split Method" and "Global Formulary Apportionment".
Challenges for APAs
- APAs (Advanced Pricing Agreements) that involve tax authorities and multinational enterprises, often require significant resources and sensitive commercial information.
Tax Evasion
- Tax evasion involves breaking legal or accounting rules in order to avoid reporting economic activity.
- Under-reporting activity/revenue and creating an informal or underground economy are common forms of tax evasion.
Causes of Tax Evasion
- High tax rates can lead to higher rates of informal economies.
- Complex and difficult regulations to comply with.
- Lack of legitimacy in the government's actions or a lack of results when participating in the government process.
- Macroeconomic conditions.
Considerations Regarding Underground Economies
- Fundamental resource allocations occur via market mechanisms.
- Underground economies are impacted by a lack of legal protections and enforcement (with common criminal activity).
- Transparency concerns and a difficulty in gaining access to information create greater costs in transactions within the black market..
- Adverse selection can lead to increased participation by criminal organizations in underground economies.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz explores the international business environment with a focus on taxation and its impact on economic behavior. Learn about key concepts such as tax obligations, tax rates, and how taxation relates to public finance. Test your understanding of how these factors interplay in the global economy.
