Questions and Answers
What is the basis of the Resale Price Method?
Price at which a product, service or property right that has been purchased by a related party is resold to an unrelated party.
Which of the following is a pro of the Cost-Plus Method?
Data regarding the gross margin of transactions between independent parties are publicly available.
False
What is typically used to determine transactional net margin in the Transactional Net Margin Method?
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A significant aspect of the Residual Profit Split is the identification of ______ functions.
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What does the term 'low value-adding services' refer to?
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Match the following transfer pricing methods with their characteristics:
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Transfer pricing documentation is not required to be updated annually.
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What is the primary focus of the lecture in the Introduction to International Taxation?
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The written exam can only be answered in English.
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When is the written exam scheduled to take place?
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The literature includes the book titled ________ authored by Oats.
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Which of the following is a major trend in international taxation since 2000?
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What are the two influential model conventions for double tax treaties mentioned?
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Which method for avoiding double taxation provides a credit for foreign taxes paid?
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Transfer pricing is not a significant focus of the International Taxation course.
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Match the articles of the OECD Model Convention with their content:
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What criteria are used to evaluate tax systems?
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The ______ outlines the rules for interpreting tax treaties.
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Which of the following activities does not qualify as a permanent establishment?
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A person can act as an independent agent when they represent multiple enterprises.
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What is the primary purpose of the Parent-Subsidiary Directive?
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Which of the following is a method used for transfer pricing?
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Value Added Tax (VAT) is an indirect consumption tax paid on purchases of __________ and __________.
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What does the term 'destination system' refer to in VAT?
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The Arbitration Convention allows for mandatory binding decisions in transfer pricing conflicts.
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What is one of the foundations of direct taxation in the EU?
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What are some of the strengths of the Transactional Net Margin Method?
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The use of databases should encourage quantity over quality.
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What does Net Cost Plus mark-up ratio define?
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The __________ factors include characteristics of the property or services transferred.
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Match the industries with their NACE codes:
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What is the purpose of calculating an interquartile range in database benchmark analysis?
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The __________ approach starts from zero and adds potential comparables.
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Which of the following is NOT a typical criterion for the selection of comparables?
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Companies with losses are included when testing prices.
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What is the main advantage of establishing a foreign corporation for tax purposes?
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Study Notes
Organisational Matters
- The lecture covers tax aspects of cross-border activities, focusing on double taxation issues, unilateral and bilateral regulations, transfer pricing, and general international tax law.
- The tutorial focuses on repetition of selected lecture content and German international tax law and transfer pricing.
Schedule and Written Exam
- The indicative schedule for the lecture and tutorial is provided, with the written exam scheduled for July 23, 2024.
Literature
- The course literature includes:
- Arnold, International Tax Primer (5th edition)
- Malherbe, Elements of International Taxation
- Oats, Principles of International Taxation (8th edition)
- Rohatgi, Roy Rohatgi on International Taxation, Volume 1: Principles (3rd edition)
Structure
- The course is divided into six topics:
- Economic aspects of cross-border taxation
- Double tax treaties
- Tax law of the European Union
- Aspects of transfer pricing
- Controlled foreign companies
- Current developments
Economic Aspects of Cross-Border Taxation
- Definition of taxation: compulsory levies required to finance public spending, redistribute resources, and support economic stability.
- Elements of taxation: tax base, tax rate, taxpayer, and criteria for evaluation (equity, efficiency, and neutrality).
- Major trends in international taxation:
- 1900-1950: limited cross-border trade
- 1960-1980: removal of trade barriers, growing capital market integration, and growing tax evasion
- 1980-2000: increased cooperation, declining tax rates
- 2010s: financial crisis, BEPS, and taxation of the digital economy
- 2020s: COVID, climate crisis, and war in Ukraine
- Double taxation and double tax exemption:
- Legal double taxation: same tax object, subject, period, and comparable tax
- Economic double taxation: same tax object, different tax subject
- Distortion of competition and economic choices
- Reasons for double taxation and double tax exemption:
- Sovereign taxation right, no international consensus on relief methods
- Different connecting factors (residence, source, citizenship) and tax bases
- Qualification conflicts and mismatching tax systems
- Avoidance of double taxation:
- Exemption method, credit method, and deduction method
- Examples of credit method and deduction method
Neutrality of Taxation for Economic Decisions
- National neutrality: taxation should not influence investment decisions
- Cross-border neutrality: taxation should not influence choice of investment location
- Capital export neutrality (CEN): taxation should not influence whether investors invest at home or abroad
- Capital import neutrality (CIN): taxation should not influence whether an investment is made by a domestic or foreign investor
- Examples of capital export neutrality and capital import neutrality### Capital Export Neutrality
- Advantages:
- No distortion of competition in local markets
- Simplified administration: only national accounting necessary, not global
- Equability in terms of absolute equal treatment of residents
- Globally efficient capital allocation
- Neutralization of local tax advantages
- Disadvantages:
- Limitation of tax competition between states
- Extensive administrative effort due to broad accounting in the residence state
Double Tax Treaties
- Purpose:
- Elimination of double taxation
- Facilitate cross-border trade and investment
- Secure public revenue
- Types:
- OECD Model Convention on Income and Capital (OECD MC)
- United Nations Double Taxation Convention between Developed and Developing Countries (UN MC)
- Interpretation:
- Vienna Convention on the Law of Treaties applies to all treaties
- Three-stages process of interpretation:
- Treaty definition
- Domestic meaning
- Context and purpose
OECD Model Convention
- Structure:
- Scope of the Convention (Art. 1-2)
- Definitions (Art. 3-5)
- Taxation of income (Art. 6-21)
- Taxation of capital (Art. 22)
- Methods for elimination of double taxation (Art. 23)
- Special provisions (Art. 24-29)
- Final provisions (Art. 30-31)
- Key articles:
- Art. 4: Residence
- Art. 5: Permanent establishment
- Art. 6: Income from immovable property
- Art. 7: Business profits
- Art. 8: International transport
- Art. 9: Associated enterprises
- Art. 10-12: Dividends, Interest, and Royalties
- Art. 13-21: Capital gains, Independent Personal Services, and other income
Permanent Establishment
- Definition:
- A fixed place of business through which the business of an enterprise is wholly or partly carried on
- Exclusions:
- Storage, display, or delivery of goods or merchandise
- Maintenance of a stock of goods or merchandise
- Purchasing goods or merchandise or collecting information
- Carrying on, for the enterprise, any other activity of a preparatory or auxiliary character
- Examples:
- Branches, offices, factories, workshops, mines, oil wells, etc.
- Building and construction sites lasting more than 12 months
Tax Law in the European Union
- EU Institutions:
- European Council
- Council of the European Union
- European Commission
- European Parliament
- European Court of Justice
- European Court of Auditors
- EU principles affecting tax issues:
- Fundamental freedoms:
- Freedom of movement for workers
- Freedom of establishment
- Freedom to provide services
- Freedom of movement of capital
- Primary vs. Secondary Law
- Fundamental freedoms:
Value Added Tax (VAT)
- Basics:
- Indirect consumption tax
- Charged on purchases of goods and services, not on net income/profits
- Credit-invoice method applied
- VAT rates and exemptions:
- Different rates (e.g., 0% rate) and exemptions (e.g., financial services, real estate)
- Example:
- Business A sells to Business B, Business B sells to Consumer C
- VAT declared by Business A and Business B, VAT paid by Consumer C
Monopoly Model Equilibrium
- Diagram:
- Price
- Demand
- Marginal Cost
- Marginal Revenue
- Quantity
- Can changes in VAT affect the profits of a business?### Tax Law in the European Union
- Value Added Tax (VAT)
- Increase in VAT rate leads to an increase in cost in a monopoly model
- Destination system: VAT is not charged to the exporting supplier, but to the customer on import to the country of destination
- Origin system: VAT is charged by the exporting supplier in its home country
- No international consensus on VAT system
- Reverse charge: imports of goods under a destination system, where VAT is not paid to a foreign supplier, but the importing firm charges VAT itself
- VAT in the EU
- EU single market requires harmonized VAT systems to facilitate free trade of goods and services
- European countries adopted VAT as a common system for indirect taxation in 1967
- 1993: system based on a mixture of origin and destination principles was implemented
- B2B transactions: destination principle applies under the reverse charge procedure
- B2C transactions: origin principle is used, where the supplier charges VAT at the rate of its home country
- Multiple registration for VAT in different countries is a specific administrative issue
- VAT fraud is a concern, taking advantage of the reverse charge system
Direct Taxes
- Member States are responsible for direct taxation
- Only general harmonization within the framework of regulations governing the common market and economic and monetary union
- Major EU Court of Justice rulings:
- Schumacker, C-279/93 – cross-border commuting Belgium to Germany
- Lankhorst-Hohorst, C-324/00 – cross-border shareholder financing
- Lasteyrie du Saillant, C-9/02 – taxation of exit from France to Belgium
- Marks & Spencer, C-446/03 – deduction of cross-border losses
- Cadbury Schweppes, C-196/04 – CFC rules
- Rewe Zentralfinanz, C-347/04 – deduction of loss in fair value of shares
- Société de Gestion Industrielle SA, C-311/08 – potential justification of discriminating treatment
- Commission/Germany, C-284/09 – dividend taxation of portfolio investments
- Parent-Subsidiary Directive (1990)
- Avoids double taxation on dividends and other distributions paid by subsidiaries to parent companies
- Resident state of subsidiary has taxation right for profits realized by the subsidiary
- Resident state of parent company avoids double taxation of dividends and distributions by way of tax exemption or tax credit
- Minimum holding quota: 10% (since 2009)
- Merger Directive (1990)
- Facilitates cross-border reorganization of companies
- Four cases of application:
- Merger: Transfer of all assets and abandonment of juristic autonomy
- Demerger: Transfer of businesses or separable parts of business operations to one or more recipients
- Contribution: Transfer of a business or separable part of a business operation against shares
- Share-exchange: Acquisition of majority voting interest against own shares
- Interest and Royalty Directive (2003)
- Eliminates taxes levied by source states on qualifying intra-group payments of interest and royalties between associated companies
- Specific rules for European Companies and European Cooperative Society
- Arbitration Convention (1990)
- Permits the optional use of arbitration procedures to resolve transfer pricing conflicts within the Member States of the European Union
- Scope: Transfer Pricing and Permanent Establishment issues
- Council Directive on Tax Dispute Resolution Mechanisms (2017)
- Additional procedure for taxpayers to resolve double taxation disputes with an arbitration phase for all double taxation cases within the EU
Aspects of Transfer Pricing
- Introductory Example
- Domestic manufacturer M produces bags
- Production costs amount to €10 per bag
- Transfer price per unit for foreign distributor D: various options
- Introductory Example (2)
- Purchase price for final customer: €90 per unit; no further costs for D
- Production = Sales = 1 million bags
- Introductory Example (3)
- Transfer price options: a) €5, b) €30, c) €50, d) €70, e) €95
- Profit/Loss M and D, Group profit, Tax burden M and D, Overall tax burden
Economic Analysis and Transfer Pricing Methods
- Functions
- Intangibles
- Risks
- Arm's length principle
- Important prerequisite: Availability of sufficient third-party data and other information
- Comparable Uncontrolled Price Method (CUP)
- Compares the price charged for products, services, or property rights in a controlled transaction to the price charged for goods or services transferred in a comparable uncontrolled transaction
- External vs internal price test
- Direct vs indirect price test
- Typical areas of application: License fees, Interest rates
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Description
This quiz covers tax aspects of cross-border activities, double taxation issues, and transfer pricing. It's based on a lecture by Dr. Achim Roeder at Ruhr-Universität Bochum in Summer Term 2024.
