Introduction to International Taxation 2024 PDF

Introduction to International Taxation. Dr. Achim Roeder Ruhr-Universität Bochum Summer Term 2024  Organisational matters – content & language Content: Lecture: § Tax aspects of cross-border activities with a focus on double taxation issues § Unilateral as...

Introduction to International Taxation. Dr. Achim Roeder Ruhr-Universität Bochum Summer Term 2024  Organisational matters – content & language Content: Lecture: § Tax aspects of cross-border activities with a focus on double taxation issues § Unilateral as well as bi- or multilateral regulations to prevent double taxation as well as double non-taxation § Focus on transfer pricing § General international tax law and new developments, e.g. OECD Pillar I & II Tutorial: § Repetition of selected contents of the lecture § Focus on German international tax law and transfer pricing Language: Lecture in English Tutorial in German RUB Introduction to International Taxation, Summer Term 2024 2  Organisational matters – schedule & written exam Indicative Schedule, 08:00-12:00: Lecture Tutorial April 09, 23, 30 May 07, 14 June 04, 11, 18 July 02, 09, 16 Written exam: Questions in English Answers can be provided in English or German Date of written exam: probably 23 July 2024, 14:00 to 16:00 RUB Introduction to International Taxation, Summer Term 2024 3  Organisational matters – literature Literature: Arnold, International Tax Primer (5th edition), Den Haag 2023 Malherbe, Elements of International Taxation Bruxelles 2015 Oats Principles of International Taxation (8th edition), London 2021 Rohatgi, Roy Rohatgi on International Taxation, Volume 1: Principles (3rd edition) , Amsterdam 2018 RUB Introduction to International Taxation, Summer Term 2024 4  Structure 1. Economic aspects of cross border taxation 2. Double tax treaties 3. Tax law of the European Union 4. Aspects of transfer pricing 5. Controlled foreign companies 6. Current developments RUB Introduction to International Taxation, Summer Term 2024 5  Structure 1. Economic aspects of cross border taxation 1.1 Fundamentals 1.2 Double taxation and double tax exemption 1.3 Reasons for double taxation and double tax exemption 1.4 Avoidance of double taxation 1.5 Neutrality of taxation for economic decisions 2. Double tax treaties 3. Tax law of the European Union 4. Aspects of transfer pricing 5. Controlled foreign companies 6. Current developments RUB Introduction to International Taxation, Summer Term 2024 6  1. Economic aspects of cross border taxation 1.1 Fundamentals (1) Definition of taxation Taxation required to finance public spending for the provision of public goods, (re-)distribution of resources and economic stabilisation Compulsory levies Objectives: Imposed to raise revenue for the provision of public goods, for the redistribution of income and wealth, to promote social and economic welfare, to support economic stability, to harmonize domestic trade Elements of taxation Tax base (income or revenue, capital, expenditure, consumption, wealth …) Tax rate Taxpayer (legal vs. economic) Criteria to evaluate tax systems: equity (horizontal vs. vertical) and efficiency/neutrality Administrative and compliance costs of taxation RUB Introduction to International Taxation, Summer Term 2024 7  1. Economic aspects of cross border taxation 1.1 Fundamentals (2) Major trends in international taxation over time 1900 to 1950: limited cross border trade 1960s and 1970s: removal of trade barriers, growing integration of capital markets, growing tax evasion 1980s and 2000s: increased co-operation between nations, declining tax rates (OECD average 50% early 1980s to less than 30% today) 2010s: Financial crisis, BEPS, taxation of digital economy 2020s: COVID, climate crisis, war in Ukraine RUB Introduction to International Taxation, Summer Term 2024 8  1. Economic aspects of cross border taxation 1.2 Double taxation and double tax exemption (1) Definitions Legal double taxation § Same tax object § Same tax subject § Identical periods § Comparable tax Economic double taxation § Same tax object § Different tax subject Double tax exemption § No uniform definition § Tax loopholes caused by tax system § Tax loopholes caused by tax planning RUB Introduction to International Taxation, Summer Term 2024 9  1. Basic principles 1.2 Double taxation and double tax exemption (2) Distortion of competition and impact on economic choices of taxpayers regarding international transactions tax base economic target Juridical double taxation or Economic double taxation or double tax exemption double tax exemption RUB Introduction to International Taxation, Summer Term 2024 10  1. Basic principles 1.3 Reasons for double taxation and double tax exemption (1) Sovereign taxation right: No restriction on the state’s right to tax Taxation without regard to other states Connecting factors for taxation Personal attachment (residence rule) Economic attachment (source rule) - digitalization Differing connecting factors Citizenship (e.g. USA) Residence (typically in industrialized countries) Source (typically in developing countries, but trend in industrialized countries) Varying basis for computing the tax Universal tax system: taxation on the basis of worldwide income Territorial tax system: taxation of income arising in fiscal jurisdiction RUB Introduction to International Taxation, Summer Term 2024 11  1. Basic principles 1.3 Reasons for double taxation and double tax exemption (2) Two states with identical Connecting factor connecting factor and tax base for taxation Residence Source Citizenship Universal Taxation basis Territorial Red: double taxation Green: no double taxation Yellow: tax exemption possible RUB Introduction to International Taxation, Summer Term 2024 12  1. Basic principles 1.3 Reasons for double taxation and double tax exemption (3) Tax is levied by residence state Yes No Yes Double taxation Taxation at source Tax is levied by source state No Taxation at place of residence Double tax exemption RUB Introduction to International Taxation, Summer Term 2024 13  1. Basic principles 1.3 Reasons for double taxation and double tax exemption (4) Different connecting factors used simultaneously For example: the same income is taxed twice, first by the country where it is derived under its “source rules” and then in the country where the taxpayer resides under its “residence rule” Qualification conflicts Income characterization conflicts: two states characterize or classify the same income or capital differently and, therefore, apply differing tax provisions Mismatching tax systems: § States have different accounting methods § States require different transfer prices (Example) Avoidance of double taxation Tax is levied by residence state, i.e. the source state waives taxation right Tax is levied by source state, i.e. residence state waives taxation right RUB Introduction to International Taxation, Summer Term 2024 14  1. Basic principles 1.3 Reasons for double taxation and double tax exemption (5) Country A (sA=40%) Country B (sB=30%) TP? Parent Subsidiary manufacturing costs: € 95 revenue from customers: € 125 Transfer price for tax purposes in country A 125 95 Tax in country A: 12 Tax in country A: 0 Transfer price for 95 Tax in country B: 9 Tax in country B: 9 tax purposes in country Tax in country A: 12 Tax in country A: 0 B 125 Tax in country B: 0 Tax in country B: 0 RUB Introduction to International Taxation, Summer Term 2024 15  1. Basic principles 1.4 Avoidance of double taxation (1) No international consensus on the appropriate method for granting relief from international double taxation. The following three methods are commonly used: Exemption method: The residence country provides its taxpayers with an exemption for foreign-source income. Credit method: The residence country provides its taxpayers with a credit against taxes otherwise payable for income taxes paid to a foreign country. § Unlimited tax credit: Combined domestic and foreign tax rate on the foreign- source income is equal to domestic tax rate § Limited tax credit: The credit for foreign taxes paid is limited to the amount of the domestic tax payable on the foreign-source income → effective tax rate is determined by the highest of the applicable domestic and foreign tax rates Deduction method: The residence country allows its taxpayers to claim a deduction for taxes, including income taxes, paid to a foreign government in respect of foreign source income. RUB Introduction to International Taxation, Summer Term 2024 16  1. Basic principles 1.4 Avoidance of double taxation (2) Example Domestic income: 150,000; Domestic tax rate (sI): 40% Foreign income: 50,000; Foreign tax rate (sA): 25%, 50%, 40% sA=25% Tax exemption Tax credit Tax deduction SA 12,500 12,500 12,500 SI 60,000 67,500 75,000 SA+SI 72,500 80,000 87,500 SI (200,000) 80,000 80,000 80,000 RUB Introduction to International Taxation, Summer Term 2024 17  1. Basic principles 1.4 Avoidance of double taxation (3) sA=50% Tax exemption Tax credit Tax deduction SA 25,000 25,000 25,000 SI 60,000 55,000 70,000 SA+SI 85,000 80,000 95,000 SI (200,000) 80,000 80,000 80,000 sA=40% Tax exemption Tax credit Tax deduction SA 20,000 20,000 20,000 SI 60,000 60,000 72,000 SA+SI 80,000 80,000 92,000 SI (200,000) 80,000 80,000 80,000 RUB Introduction to International Taxation, Summer Term 2024 18  1. Basic principles 1.5 Neutrality of taxation for economic decisions (1) National – Neutrality of taxation for investment decisions Taxation that distorts decisions imposes a welfare cost World without taxation as baseline Taxation has no influence on the ranking of investment alternatives Taxation has no influence on the invested amount Cross border – Neutrality of taxation for choice of investment location Taxation at location of investment has no effect on choice of investment location = capital export neutrality (or CEN); taxation should not influence whether investors resident in one jurisdiction invest their capital at home or abroad Residence of investor has no effect on choice of investment location = capital import neutrality (or CIN); taxation should not influence whether an investment is made by a domestic or a foreign investor (legal/policy interpretation, i.e. level playing field between foreign and domestic investors) RUB Introduction to International Taxation, Summer Term 2024 19  1. Basic principles 1.5 Neutrality of taxation for economic decisions (2) Taxation on the basis of worldwide income Establish taxation at the tax rate of the residence state Achieve capital export neutrality by unlimited tax credit Domestic tax rate considered most important Taxation on the basis of source income Establish taxation at the tax rate of source state Achieve capital import neutrality by tax exemption Foreign tax rate considered most important Example Investor, resident in country A, decides between investment in country B or C Tax rates in the specific countries: sA=50%, sB=40%, sC=60% RUB Introduction to International Taxation, Summer Term 2024 20  1. Basic principles 1.5 Neutrality of taxation for economic decisions (3) Capital export neutrality Location of investment domestic foreign resident r = rI · (1 – sI) r = rA · (1 – sI) Investor foreign r = rI · (1 – sA) r = rA · (1 – sA) Assumptions Perfect competition on capital market No arbitrage through change of investment location Consequences Harmonization of gross interest yields (production efficiency) Net interest yields depending on state of residence RUB Introduction to International Taxation, Summer Term 2024 21  1. Basic principles 1.5 Neutrality of taxation for economic decisions (4) Capital export neutrality Country B Country C rv=14% rv sA = 50% rv=8% rs,B=7% rs rs,C=4% rs=(1-sA)·rv RUB Introduction to International Taxation, Summer Term 2024 22  1. Basic principles 1.5 Neutrality of taxation for economic decisions (5) Capital import neutrality Location of investment domestic foreign resident r = rI · (1 – sI) r = rA · (1 – sA) Investor foreign r = rI · (1 – sI) r = rA · (1 – sA) Assumptions: Perfect competition on capital market Consequences Harmonization of net interest yields Investors realize different gross interest yields Production efficiency is only achieved in case of similar tax rates RUB Introduction to International Taxation, Summer Term 2024 23  1. Basic principles 1.5 Neutrality of taxation for economic decisions (6) Capital import neutrality sB = 40% sc = 60% Country B Country C rv,C=15% rv,B=14% rv,B=10% rv,C=8% rs=8,4% rs=6% rs=3,2% rs=(1-sB)·rv rs=(1-sC)·rv RUB Introduction to International Taxation, Summer Term 2024 24  1. Basic principles 1.5 Neutrality of taxation for economic decisions (7) Comparison capital import neutrality vs. capital export neutrality Capital import neutrality Capital export neutrality Advantages Advantages No distortion of competition in local markets Neutral with regard to cross-border movement of persons , goods, services and capital Simplified administration: only national accounting necessary, not global Equability in terms of absolute equal treatment of residents Disadvantages Globally efficient capital allocation No global production efficiency Neutralization of local tax advantages Easing international tax competition and tax planning by way of shifting income or capital Disadvantages Limitation of tax competition between states Extensive administrative effort due to broad accounting in the residence state RUB Introduction to International Taxation, Summer Term 2024 25  Structure 1. Economic aspects of cross border taxation 2. Double tax treaties 2.1 Introduction 2.2 OECD Model Tax Convention 2.3 Permanent establishments 3. Tax law of the European Union 4. Aspects of transfer pricing 5. Controlled foreign companies 6. Current developments RUB Introduction to International Taxation, Summer Term 2024 26  2. Double tax treaties 2.1 Introduction (1) Double tax convention Treaties are agreements between sovereign states Elimination of double taxation → Facilitate cross-border trade and investment by eliminating the tax impediments to these cross-border flows Elimination of double tax exemption; prevention of fiscal evasion or avoidance → Secure public revenue By assignment of the taxation right to one or both of the Contracting States Treaty provisions usually override those of domestic tax law Two influential model conventions § OECD Model Convention on Income and Capital (OECD MC) § United Nations Double Taxation Convention between Developed and Developing Countries (UN MC) Most German tax treaties are based on the OECD MC; but there are differences in the details RUB Introduction to International Taxation, Summer Term 2024 27  2. Double tax treaties 2.1 Introduction (2) Interpretation of tax treaties Vienna Convention on the Law of Treaties § Interpretation rules of the Vienna Convention apply to all treaties § Most countries have signed the Vienna Convention (notable exception: USA) § Basis rule of interpretation: “A treaty shall be interpreted in good faith in accordance with the ordinary meaning and given to the terms of the treaty in their context and in light of object and purpose.” Three-stages process of interpretation 1. Does the treaty provide a definition of the term (special or general)? 2. If the treaty does not provide a definition, what is the domestic meaning of it? 3. Does the context of the treaty require a meaning different from the domestic meaning? Commentary to the OECD Model Convention § Highly necessary for interpreting treaties between Contracting States § Contains observations by particular countries on specific aspects of the Commentary RUB Introduction to International Taxation, Summer Term 2024 28  2. Double tax treaties 2.2 OECD Model Convention (1) Structure of the OECD Model Convention I. Scope of the Convention (Art. 1, 2) Definitions: including e.g. who may benefit from the treaty, residents, taxable II. Definitions (Art. 3-5) presence of business enterprises III. Taxation of income (Art. 6-21) Classification and allocation of income IV. Taxation of capital (Art. 22) Rights to tax capital V. Methods for elimination of double taxation (Art. 23) Methods of double tax relief VI. Special provisions (Art. 24-29) Administrative and anti- avoidance provisions VII. Final provisions (Art. 30-31) Current version of Model Convention dates back to 1963, with most recent updates in July 2008, July 2010, July 2014 and November 2017 RUB Introduction to International Taxation, Summer Term 2024 29  2. Double tax treaties 2.2 OECD Model Convention (2) I. Scope of the Convention Article 1: Persons covered Requirements in order to claim benefits under the treaty § persons who are § residents of one or both of the contracting states Article 2: Taxes covered Taxes on income and on capital List of the taxes covered when it was signed Extension to new taxes introduced after the treaty has been signed II. Definitions Article 3: General definitions General definitions of treaty terms Not defined elsewhere in the model convention Definition apply, unless the context otherwise requires RUB Introduction to International Taxation, Summer Term 2024 30  2. Double tax treaties 2.2 OECD Model Convention (3) Article 4: Residence Definition of residence under the tax treaty Special rule if an individual is tax resident in both contracting states (tie-breaker rules; from 2017 mutual agreement required for companies) Article 5: Permanent establishment Definition of permanent establishment under the treaty; broadly includes place of management, branch, office, factory, workshop, mine, long-term construction sites III. Taxation of income Article 6: Income from immovable property Income from immovable property, e.g. rent from office building or from land used for agriculture, may be taxed in the state in which that property is located, i.e. in the source state Article 7: Business profits The article provides for the taxation of cross-border business profits of an enterprise Permanent establishment required (Article 5) RUB Introduction to International Taxation, Summer Term 2024 31  2. Double tax treaties 2.2 OECD Model Convention (4) Article 8: International transport (general rule: taxed in country of residence) Article 9: Associated enterprises → Section 4. “Transfer Pricing” Article 10: Dividends (taxed in both states; with WHT capped at 15%) Article 11: Interest (taxed in both state; with WHT capped at 10%) Article 12: Royalties (taxed in country of residence of beneficial owner) Article 13: Capital gains (taxed in country of residence of taxpayer; but land) Article 14: Independent Personal Services [Deleted] Article 15: Income from employment (basic rule: source country if stay >183 days) Article 16: Director’s fees (basic rule residence of company) Article 17: Artists and sportspersons (basic rule: source country) Article 18: Pensions (basic rule: country of residence, but many exceptions) Article 19: Government Service (basic rule: source country) Article 20: Students (basic rule: source country) Article 21: Other income (e.g. gambling winnings; country of residence) RUB Introduction to International Taxation, Summer Term 2024 32  2. Double tax treaties 2.2 OECD Model Convention (5) IV. Taxation of capital Article 22: Capital The article applies to taxes on capital from the possession or ownership of capital, and not to the income from gains from capital Under this article, the state of residence has generally the exclusive taxation rights on all items of capital V. Methods for elimination of double taxation Article 23 A: Exemption method Tax exemption with progression Article 23 B: Credit method Credit for the foreign taxes paid in the other Contracting State RUB Introduction to International Taxation, Summer Term 2024 33  2. Double tax treaties 2.2 OECD Model Convention (6) VI. Special provisions Article 24: Non-discrimination Article 25: Mutual agreement procedure Disputes affecting a taxpayer resident in a contracting state due to taxation which is or is likely to be inconsistent with the treaty provisions (Art. 25 (1), (2)) Difficulties relating to the interpretation or application (Art. 25 (3)) Elimination of double taxation in cases not provided for in the treaty (Art. 25 (3)) → The contracting states are required to make efforts Article 26: Exchange of information Article 27: Assistance in the collection of taxes Article 28: Members of diplomatic missions and consular posts Article 29: Entitlement to benefits VI. Final provisions Article 30: Entry into force Article 31: Termination RUB Introduction to International Taxation, Summer Term 2024 34  2. Double tax treaties 2.3 Permanent establishments (1) Legal entity HO Country A Country B PE RUB Introduction to International Taxation, Summer Term 2024 35  2. Double tax treaties 2.3 Permanent establishments (2) 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. … [This definition broadly includes: places of management, branches, offices, factories, workshops, mines, oil wells etc. and buildings and construction sites lasting more than 12 months] 4. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include: a. the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; c. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; RUB Introduction to International Taxation, Summer Term 2024 36  2. Double tax treaties 2.3 Permanent establishments (3) 4. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include: d. the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; e. the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; f. the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that such activity or in the case of subparagraph f), the overall activity of the fixed place of business, is of a preparatory or auxiliary character. RUB Introduction to International Taxation, Summer Term 2024 37  2. Double tax treaties 2.3 Permanent establishments (4) Legal entity HO Country A Country B Legal entity C RUB Introduction to International Taxation, Summer Term 2024 38  2. Double tax treaties 2.3 Permanent establishments (5) 5. Notwithstanding the provisions of paragraphs 1 and 2 but subject to the provisions of paragraph 6, where a person is acting in a Contracting State on behalf of an enterprise and in doing so, habitually concludes contracts, or habitually plays a principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are a) in the name of the enterprise, or b) for the transfer of ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or c) for the provision of services by that enterprise that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business (other than a fixed place of business to which paragraph 4.1 would apply), would not make this fixed place of business a permanent establishment under the provisions of that paragraph. RUB Introduction to International Taxation, Summer Term 2024 39  2. Double tax treaties 2.3 Permanent establishments (6) Legal entity A HO Country A Country B Legal entity B Legal entity C „PE“ RUB Introduction to International Taxation, Summer Term 2024 40  2. Double tax treaties 2.3 Permanent establishments (7) 6. Paragraph 5 shall not apply where the person acting in a Contracting State on behalf of an enterprise of the other Contracting State carries on business in the first-mentioned State as an independent agent and acts for the enterprise in the ordinary course of that business. Where, however, a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person shall not be considered to be an independent agent within the meaning of this paragraph with respect to any such enterprise. 7. … 8. … RUB Introduction to International Taxation, Summer Term 2024 41  Structure 1. Economic aspects of cross border taxation 2. Double tax treaties 3. Tax law of the European Union 3.1 Introduction 3.2 Value Added Tax 3.3 Direct Taxes 4. Aspects of transfer pricing 5. Controlled foreign companies 6. Case studies on tax planning 7. Taxation and digitalization RUB Introduction to International Taxation, Summer Term 2024 42  3. Tax Law in the European Union 3.1 Introduction EU Institutions European Council (Art. 15 Treaty on European Union – TEU) Council of the European Union (Art. 16 TEU) European Commission (Art. 17 TEU) European Parliament (Art. 14 TEU) European Court of Justice (Art. 19 TEU) European Court of Auditors (Art. 13 TEU) RUB Introduction to International Taxation, Summer Term 2024 43  3. Tax Law in the European Union 3.1 Introduction EU principles affecting tax issues – fundamental freedoms Freedom of movement for workers Freedom of establishment of nationals of a Member State in the territory of another Member State Freedom for a national of a Member State to provide services to a person in another Member State Freedom of movement of capital between Member States, and between Member States and third countries Primary vs. Secondary Law RUB Introduction to International Taxation, Summer Term 2024 44