International Tax Law and Treaties Quiz

International Tax Law Elements

• Bilateral Tax Treaties (DTAs) are agreements between two countries to avoid double taxation. They allow companies operating in multiple countries to avoid being taxed twice on the same income.
• Domestic Tax Laws are specific laws within each country that define how taxes are calculated, collected, and applied within a country's jurisdiction. These laws must respect international agreements (like DTAs).
• International Guidelines (e.g., OECD Guidelines) provide non-binding recommendations for countries to align their tax practices with global standards. They act as a framework for more consistent tax practices worldwide but aren't legally binding until a country adopts them into domestic law.

Hierarchy of International Tax Law

• Domestic laws are supreme within a country.
• Bilateral tax treaties apply to cross-border tax issues, overriding any conflicting domestic law.
• International guidelines help interpret and apply treaties and laws but are not legally enforceable if not integrated into domestic law.

OECD and EU Role in International Tax Matters

• OECD (Organisation for Economic Co-operation and Development): Develops international tax standards. Examples include the OECD Model Tax Convention and Transfer Pricing Guidelines. It also launched the Base Erosion and Profit Shifting (BEPS) Project to address schemes for multinational tax avoidance.
• EU Institutions
• European Commission: Proposes tax rules and ensures compliance with EU law.
• Council of the EU: Approves tax directives, requiring unanimous agreement from all member states.
• CJEU (Court of Justice of the EU): Resolves disputes about EU tax laws and ensures fair treatment across member states.

Tax Directives and Tax Transparency

• Parent-Subsidiary Directive: Eliminates withholding taxes on dividends paid between EU parent and subsidiary companies. This prevents double taxation on company profits.
• Anti-Tax Avoidance Directives (ATAD 1 and 2): Designed to prevent tax avoidance through methods like profit-shifting or hybrid mismatches.
• DAC Directives (e.g., DAC6): Require disclosure of cross-border tax arrangements that can be used for tax avoidance.

Tax Conventions

• A tax convention is a treaty between two or more countries to avoid double taxation and prevent tax evasion. This clarifies rules around taxing income such as profits, dividends, or royalties between different countries.
• Examples of the use of treaties includes a Latvian consultant earning income in France being able to avoid double taxation using a Latvian-France tax treaty.

EU Tax Freedoms

• Free Movement of Goods: Ensures that goods can move freely without unfair taxes, as seen in the case Commission v. Germany (C-18/11).
• Free Movement of Workers: Workers must not face tax discrimination based on where they work or live.
• Freedom of Establishment: Companies can operate in other EU countries without facing discriminatory taxes.
• Freedom to Provide Services: Ensures service providers in the EU aren't taxed unfairly.
• Free Movement of Capital: Protects investors from discriminatory taxes.

Fiscal State Aid (Tax Rulings)

• Fiscal State Aid involves a government providing selective tax advantages to particular companies, which may violate EU law (article 107(1) of the Treaty on the Functioning of the European Union).
• This happens when governments issue preferential tax rulings, provide favorable tax rates, or grant exemptions from standard tax rules, giving unfair advantage.
• Examples of State Aid include Apple (Ireland), Starbucks (Netherlands), and McDonald's (Luxembourg) cases.

Francovich Doctrine

• The Francovich Doctrine allows individuals to claim compensation from a Member State for losses caused by a state's failure to implement or correctly apply EU law. It reinforces the supremacy of EU law over national legislation.
• Elements of the Francovich Doctrine:
  • EU law confers rights on individuals.
  • A member state is in breach of EU obligations.
  • There is a direct causal link between the breach and damage to an individual.

Advance Tax Ruling

• An Advance Tax Ruling is a decision provided by tax authorities before engaging in a tax transaction, explaining how a given transaction will be treated under tax law.
• It provides clarity and certainty to taxpayers, reducing risk of future tax disputes and allowing for better planning.
• Examples are confirming whether a transaction will trigger taxes like capital gains or VAT.

Advance Pricing Arrangements (APA)

• An APA is an agreement between a taxpayer and tax authorities, determining the price of goods, services, or intangibles transferred between related entities. It establishes pricing rules for a set period, usually related to ensuring fair pricing between related entities within a company group.

Transfer Pricing

• Transfer pricing is the price a company sets to transfer assets or services between related parties. It is a common issue for multinational companies.
• The arm's length principle means the pricing of assets should be consistent with similar transactions involving unrelated parties. This principle ensures fairness and prevents unfair advantages.

VAT Fraud Schemes

• Missing Trader Intra-Community (MTIC/Carousel) Fraud: A trader purchases goods VAT-free within the EU (intra-community transactions); then resells, charging VAT to the buyer, but doesn't remit the VAT to authorities due to disappearing after the sale. This is repeated with the same goods.
• Invoice Fraud: Fraudsters submit fake invoices to claim VAT refunds for transactions that did not occur.
• VAT Evasion in E-Commerce: Online sellers fail to charge VAT on goods sold to consumers in jurisdictions where VAT should be applied, mainly focusing on cross-border sales.
• Bogus Companies Fraud: Fraudulent companies are created solely to issue fake invoices or claim fraudulent VAT refunds then vanish quickly.

Economic Impacts of VAT Fraud

• Loss of Public Revenue: Fraud drains billions from government budgets, impacting public services.
• Market Distortions: Fraud allows manipulative advantage over legitimate businesses, undermining trust and competitiveness.
• Increased Taxpayer Burden: Losses are offset by increases on compliant taxpayers, potentially affecting law-abiding citizens and businesses.
• Cross-Border Complexity: Fraud often involves multiple jurisdictions, escalating administrative costs and potentially creating conflict and issues.

VAT Framework

• VAT (Value-Added Tax): A consumption tax levied at each stage of production and distribution, ultimately borne by the end consumer.
• EU VAT Directive: (Council Directive 2006/112/EC) provides a unified framework for VAT application in all member states.
• Key Principles:
• Scope: Supplies of goods and services (intra-EU and imports).
• Standardization: Minimum VAT rates, and specific reduced rates.
• Collection and Remittance: VAT collected at various stages is ultimately borne by the consumer.

Key Takeaways

• Tax planning is legal and often encourages financial efficiency, such as investments in tax-advantaged retirement savings.
• Tax avoidance utilizes loopholes in tax laws, often seen as unethical when it reduces tax liabilities unfairly.
• Tax evasion is illegal and carries penalties.

Test your knowledge on international tax agreements, including bilateral tax treaties and their implications. Explore roles played by organizations like the OECD and the European Commission, and understand the effects of fiscal state aid and landmark cases in international tax law.