International Taxation

Key Principles and Challenges of International Taxation

• There is no international tax system, and domestic tax systems interact with tax systems of other countries.
• Multinational companies (MNEs) take advantage of different tax regimes worldwide to reduce their global tax burden, even to 0%, leading to double non-taxation.
• The Base Erosion and Profit Shifting Project (BEPS 1.0) established by OECD failed to address the digital economy, leading to BEPS 2.0, which includes addressing the digital economy and setting a global minimum tax of 15%.
• General principles of international tax include inter-nation equity, capital export neutrality, harmonization, the benefit principle, value creation, and the single tax principle.
• Tax competition exists between countries to attract investment by using preferential regimes, such as different tax rates and special concessions.
• Incentives of offering citizenship or residence by investment are a form of tax competition, and golden passports are aimed at attracting people to become tax residents.
• Dual residency can lead to double taxation, and Article 4 of the OECD Model Tax Convention on Income and Capital determines residency status.
• For companies, the source and residence principles apply, and residence is determined by the legal or economic approach.
• The primary test for determining tax residency is central management and control, and the indicators include the location of directors' meetings, where decisions are made, and where strategic control is exercised.
• The Place of Effective Management is a test built upon the basis of the primary test, and there is controversy about whether it is the same as central management and control.
• The domicile is the country that a person deems his permanent home or in which he lives and is willing to remain or has a substantial connection.
• If residency criteria are met, the country has the right to tax the individual on his or her worldwide income, leading to double taxation, and if residency criteria are not met, the country only has the right to tax the individual on his or her income arising within its geographical borders.