International Tax Law Principles

• Module 2 addresses the principles of international tax law, including key issues, basic concepts, terminology, tax planning, types of domestic tax, and the meaning of residence for individuals.

Introduction

• Module 1 covered how financial services businesses require self-thinking individuals
• A fiduciary, trust, and company service provider needs knowledge in accounting, banking, compliance, data protection, investment, law, risk, and taxation
• Module 2 will focus on international tax law relevant to daily tasks
• The world includes ~200 independent states and few dependent jurisdictions, each able to tax
• Many independent states have internal bodies (cantons, states, provinces, municipalities, regions) with independent taxing rights
• Thousands of independent states and dependent self-taxing bodies exercise their sovereign taxing rights
• Nearly 200 sovereign states and thousands of internal authorities rarely apply identical tax regimes
• It is important to understand the taxation basis in your jurisdiction and generally grasp taxation principles for clients
• Articles referenced are from the OECD Convention

What is a Tax?

• Thomas M. Cooley's definition of taxes: enforced proportional contributions from persons and property, levied by the state for government and public needs
• The OECD Convention outlines the basis on which a tax may be levied rather than defining tax

Article 2 of the OECD Convention

• Applies to taxes on income and capital imposed on behalf of a Contracting State or its political subdivisions/local authorities
• Taxes on total income, capital, elements of income/capital, gains from property alienation, wages/salaries, and capital appreciation are regarded as taxes on income and capital

Difficulties in Tax Interpretation

• Varying language interpretations mean a consistent definition of tax may require a diplomatic agreement between countries
• A charge imposed by a government may be a social contribution, rather than a tax
• A government imposed financial penalty, like parking fines, may be considered as a tax

Economic Cost of Taxation

• Taxes levied on transactions reduce the economic benefit to those involved
• Tax imposition may deter transactions, causing a loss of economic benefit and a 'deadweight' cost on the economy
• Classical economic theory: demand for goods/services rises as their price decreases because acquiring the good/service is less worthwhile at a higher price

Supply and Demand

• Supply of goods/services rises as price increases; manufacturers increase production, attracting new companies seeking high returns
• Goods/services price settles where demand equals supply; demand exceeding supply raises prices, like concert tickets
• Supply exceeding demand leaves manufacturers with surplus stock, forcing price reductions

Impact of Taxes on Supply and Demand

• Tax introduction changes supply and demand
• Introduction of mobile phone tax example
• A company imports mobile phones made in China and sells them in Europe
• Supply and demand data for a mobile phone is as follows:
• $800 = supply of 8,000 & demand of 12,000
• $900 = supply of 9,000 & demand of 11,000
• $1,000 = supply of 10,000 & demand of 10,000
• $1,100 = supply of 11,000 & demand of 9,000
• $1.200 = supply of 12,000 & demand of 8,000

The Mobile Phone Illustration

• At a market price of $1,000, the importer sells 10,000 phones weekly
• A $200 tax is introduced on each phone, and the importer chooses between raising the price or reducing profit
• As a result, the importer sells 9,000 phones weekly at a price point of $1,100 (includes mobile phone tax)
• The importer receives $900 in aforementioned scenario, the remaining balance goes to the government

Tax Distribution

• Tax has a redistributive effect; the government receives $200 for each phone sold, shared between customer and importer
• 1,000 people stop buying the phone, losing economic benefit, previously valuing the phone more than $1,000
• The importer's profit decreases due to selling fewer phones, which also reduced the number of shipments, reducing staff hours
• Economic impacts of tax are not limited to the importer

International Tax

• Post-World War II rise in living standards results from international trade growth, enabled by dismantling 1930s protectionism

International Agreements

• Increased costs of taxes leads to a decrease in benefits from trade and other economic activities
• Imposes disadvantages to citizens and governments, which would lose revenue
• Governments should ensure cross-border transactions avoid prohibitive tax rates, encouraging economic activity

International Law

• It determines the rights/obligations of states, and municipal/national law concerns the individual
• International tax law derives from international public law
• Sources of international public tax law are wide

Sources of international tax law

• Multilateral international agreements (e.g. the Treaty of Rome)
• Bilateral agreements (e.g. double taxation treaties)
• Judicial decisions (e.g. decisions of the European Court)
• Customs and practices of international organisations (e.g. decisions of the European Commission)
• The US trend is to impose citizen reporting rules on entities abroad regardless of bilateral agreement

Understanding International Taxation

• International taxation is an amalgamation of tax authority claims on cross-border activities, tax treaties, and domestic international tax rules
• International tax law jurisprudence represents an evolution of international organizations guidance, like UN and OECD
• Tax treaties are the most significant aspect, following the OECD Convention

Introduction to International Organizations

• Countries join international organizations for specific issues
• Organizations becomes administrative bodies with rules and policies
• An example of such is the OECD

Regional Organizations

• Provide cooperation among members
• Governments participate jointly to develop an industry/industries that benefit each economy
• Each government will commit to the financing of a joint venture, buying a share of the output

Regional Cooperation Group Example

• Leading UK and Italian defense companies partner on an air combat program, signing a Statement of Intent (SOI) in 2019
• Parties will define a concept and partnership model with "knowledge sharing, product definition and technology advancement"
• Government is formed to foster geographic dialogue and development
• Example: IORA (Indian Ocean Rim Association) was established March 6, 1997, for cooperation and sustainable growth
• 22 members & 10 dialogue partners

IORA priority areas

• Academic, science, and technology cooperation
• Disaster risk management
• Fisheries management
• Maritime safety and security
• Tourism and cultural exchange
• Trade and investment facilitation

Free Trade Area

• Free trade areas are agreements between countries to reduce or eliminate customs, duties and other trade barriers
• Free trade area members maintain individual tariff schedules for external countries
• COMESA (Common Market for Eastern and Southern Africa) is the largest regional economic organization in Africa
• The member states cooperate in developing trade, as well as their resources
• COMESA promoted regional integration and launched a customs union in 2009, but it is still not operational

Customs Union

• A customs union has the free trade area's reduced or eliminated tariffs while adding a common external tariff on products imported from countries outside the union
• The EU was a customs union before becoming a common market
• ASEAN Economic Community (AEC) which was established in 2015, is a nascent customs union
• The AEC hopes to achieve the free movement of goods and services, investment, capital and skilled labor
• It wants to create agriculture, financial services, IP rights, and consumer protection standards
• AEC identified 611 measures, of which 80% have been completed and 99% of tariffs are being lowered to the 0-5% range

Common Market

• Eliminates internal trade tariffs and restrictions and adopts common external tariffs
• Removes restrictions on capital and labor flow among members
• Common market = common marketplace for goods and services (including labor) and capital
• MERCOSUR is a fast growing trading bloc that contains Argentina and Brazil, generating 70% of South American GDP

Political Union

• It fully integrates regional cooperation involving complete political and economic integration via voluntary/enforced measures
• When the 12 nations of the EEC ratified the Maastricht Treaty, it led to the creation of the EU
• The Maastricht Treaty allowed for the free movement of goods, persons, services and capital; a common currency; common foreign and security policies; a common justice system

Political Union - Tax

• The EU isn't responsible for levying or collecting taxes
• The EU has several initiatives beyond its member states to protect their tax revenues

About International Organizations

• International organizations are wider than regional ones with members from all over
• Guidelines from these bodies are not mandatory
• Regional organizations may or may not require guidelines to be implemented

Organisation for Economic Co-operation and Development (OECD)

• Established in 1961
• Goals are include achieving economic growth, employment and a rising standard of living in member countries, while maintaining financial stability
• Forum: member countries can discuss, develop and refine economic/social policies
• One of the world’s largest and most reliable sources of comparable statistical, economic and social data
• It helps to develop bilateral tax treaties between member states.

OECD Focus

• The OECD is focused on eliminating double non-taxation, which occurs when profits are shifted
• Profits are shifted to countries with low or zero tax ("tax jurisdiction")
• The OECD partners with G20 and leads the base erosion and profit sharing (BEPS) agenda
• "Base erosion" creates "a serious risk to tax revenues, tax sovereignty and tax fairness for many countries"

International Monetary Fund (IMF)

• Fosters global growth and economic stability through policy advice
• IMF provides financing to members facing economic difficulties and works with developing nations
• The IMF is a UN agency with its charter, governing structure, and finances

Conflict of Laws

• Laws of one country will conflict with the laws of another
• Results of such circumstance are complex and challenging
• Service providers must understand how such conflicts operate
• Involves understanding the territoriality of a state to tax foreign individuals/entities
• Lacks a single, universal body of conflict-of-laws rules
• The provider should encourage clients to obtain expert advice before engaging in structuring
• Providers often require tax advice be sought up front

Legal Advice

• Tax advice is obtained by high-net-worth individual (HNWI) and associated entities
• A tax advisor will determine and advise the HNWI on specific tax consequences of a proposed investment
• An advisor may recommends structuring using an offshore trust or company that has a low or nil tax jurisdiction

Tax Jurisdiction Example

• Consider the corporation AB, Inc. It incorporates in State A, where the manufacturers Product sells there and to the world, with a 30% corporate tax
• Subsidiary CD, Inc is incorporated in State B, an offshore financial center
• AB, Inc. sells Product to CD at cost; CD, Inc. then makes sub-sales of Product at market
• In this scenario: AB Inc. has zero taxable profits while CD, Inc. enjoys nil or exempt corporate tax rate
• An understanding of the intention of the process provides more value

Service Provisions

• Service providers are insured and competent
• Use of an offshore structure can negatively impact position of a HNWI

Jurisdiction to Tax

• The tax system has to balance "domestic and international objectives" when a country's own citizens transact international business or trade outside its domestic jurisdiction
• Countries must maintain international and domestic trade
• Jurisdictions can limit how a country taxes their own citizens/residents doing business abroad within set conventions

Mainstream Principles

• Developed through domestic legislation and jurisprudence to address international taxation claims
• Includes source / residence basis for exercising tax jurisdiction
• On an international level, these are amplified by bilateral double tax treaties (DTTs)

Tax Liability

• It occurs when a connecting factor is established between a taxing authority and a tax subject/object, as per residence/source principle
• Tax subject = taxpayer, and tax object = subject matter (facts that arise)

Residences vs Territory

Residence Principle

• A country taxes its residents no matter where income is received
• United States: all worldwide income of all citizens (even from outside the US) is eligible for US taxation

Source System

• Taxes income in the country where income originated
• The physical or legal residence of the recipient is not regarded

Why Use Residence Principles

• Residents can contribute toward good government and the cost to reside in a territory

Why Tax All Income from One Territory

• The right to tax rests on the assumption that a country that produces wealth by reason of its natural resources has a share of that wealth, wherever the recipient of it may live

Which to Enforce?

• Most countries and jurisdictions do not use a residence/source principle, rather they use a combination of the two
• Systems from residence tax income for those sourced within their borders, though the definition of what that "source income" is, can lead to complex legal questions
• Gradually extend scope of their taxes by deeming certain income like "dividends" to be legally sourced, making them subject to tax
• It argued that the country where the wealth lives has the privilege to do that

Conflicts between Taxes

• "While the academic debate continues, the ultimate result of the two systems is not that different once all the exceptions and compromises are applied"
• Best system for each territory has to do with "economic strategies, net cross-border tax flows, the relative sizes of the national and domestic economies, relative tax rates, history and administrative capacity"

Conflicting Claims

• "Double taxation essentially occurs when taxation is levied in more than one country on the same asset or transaction and arises due to the overlap of fiscal sovereignty at the domestic or the international level"
• Example: can happen within a country at the federal and state levels
• Internationally: tax jurisdictions claim the tax residency of a person

Kinds of Double Tax

• Economic - applies to the same tax object with legally different subject matter Economic double taxation = double or multiple tax on same income due to different subject matter

• Juridical - the same object/subject are taxed Jurisdictional double taxation- fiscal jurisdiction issues stem the imposition of comparable taxes as the overlapping claims In the long term

• overlapping tax laws can create 3 types of conflicts

3 Types of Double Tax Conflicts

1. Source-Source - two or more countries claim a taxpayer's same income using their own laws
2. Residence-Residence - ""regard the same taxpayer as tax resident"", known as dual residence
3. Residence-Source - the same income gets taxed twice using different sets of rules in different countries

Why Tax Issues Arise

• "tax rules and practices in different countries" mean there isn't consistency
• Each country's application uses their own legal system resulting in different interpretation

Reasons for Multi-Jurisdictional Conflicts

• different tax term definitions in different countries, but most may vary considerably to context
• ex. revenue/capital for examples in income tax treaties can have a totally different understanding in one or more areas vs domestic laws
• application in different ways create this
• ex. foreign tax credit calculations The taxpayer can be
• those with dual citizenship
• married
• families
• companies as a whole

Tax Treaties To Help

• While juricidal taxation issues have help, it "usually" can be helped by "legislation"
• Relief is given "double taxation treaties" and "domestic laws", but it depends on each country

Key things to remember with jurisdiction

• Double taxation = two or more jurisdiction.
• It is not always for international as is federal.
• It mostly has to do with conflicting countries

Tax Consequences

• main ones are twofold: limits of effective tax rate and divides how they taxes are shared
• this has to be mutually bargained
• jurisdiction has lower or higher taxed based where the income source is, so this sometimes causes problems.
• because refunds aren't always asked and this "uncommon" and because sometimes the the tax treaties is more than other
• because of laziness (for lack of better word) there's ignorance or some think it's not worth the money.

Interpretation

• above considering with the source and residence must is the understanding on interpretation
• most treaties are by this convention but there should still be care
• the treaties should not reference their to make sure each country does this
• domestic courts have different things they have to look at too. This may be to make sure there's no bias

###Domestic Courts look what:

• objective approach- how it's word is written (plain language)
• subjective approach- based to the intentions
• The teleological approach - should be based on what it's goals are

courts interpretations

• courts' are going to be so open as before and it will be "literal" to what's on the document
• the international treaties affect generally from the vienna of law
• VCLT (vienna convention on law of treatises) has to do to which is to states or countries to treaty
• the way the treaty is for the the resident/taxpayer

Contrast With Domestic/Tax planning

• it's been known as important as taxation that "its" ok and understanding of how "I" change the way "I" work, so there' no "I" the one to be target for taxation
• planning perspective the attention to reducing the expenses
• it not the tax is taxable income but that it also change of "cash flow" because you can't withdrawal funds"

contrast international vs domestic

• techniques to "look" at:
• potential expiation- dividends and big capital, some
• it all be take from taxation and especially sense" a short term
• reducing the tax % ex lower for long term

The Difference:

• domestic- has be related to what one one is given
• international planning- the income to "offshore" company/not the "same year" a deductions/to look mismatch
• varies with the systems in different countries
• domestic law is in what is
• tax treaties limit to national systems

In General

what:

• it can tax
• who can be taxed
• to be taxed
• to be "tax sharing"
• the main purpose is to make the the tax as lower/ to help

How Domestic System Works

• ex powers
• is the tax % to pay
• kinds of income taxed

General Note

• all mostly or based on the to the rules of which is host and each countries

Key factors that determine the " base"

• accounting policies
• and dectuions
• and subdities
• of tax laws
• in general

Laws and rules

• most the law is that "what's" and "where" to make a great/good
• there all kinds of "expenditure" what can claim

the "Capital" thingy

• its for tax mostly
• items that amortized
• "licences" those assets/and the thing of what's in line

Individuals

• it is normal now how there's " allowanced: to those people"
• tax are granted " tax resident"
• the cost is is the one who in the " employ ment"

The Actitivies

• there's "fiscal/actitivites" used by what "taxpayers" do the " economy"

losses/or not

• there's has be not now
• not much to the back thingy

incomes

to remember! all what income " is" and the treaty one" and not the thing of " individual" ones in relation

• two ways of "to that": globally/with schedular
• the global one has only one type to it
• not many or much but a royalty income

final words

how much or is too in what they do for the taxes

• the what income is /what what what and "root" is
• interests and royalties
• the most often meeting from relating to royalties in that sense

Interests

• "generally" there's two: simple can/can be what it is for what period
• under: calculated is is added to at intervals

what's interests

• money of used/ in that percentage, from the principal thingy to that is.

taxes/in general

• there is now "to it" if it's an cross border
• "some are" to that thing

more on to that

• state in "the" with the way it all is in general (either you give "me" or that will help of what" that" of what's a credits/deduct"