International Tax - Essay Example

International tax work assignment Contents Contents 2 Introduction 3 Discussion 3 Conclusion 9 Introduction The international business taxationhas raised several social and political issues related to taxation in the economy. The main problem in case of international taxation is the amount of tax that is levied on the residents and the non residents carrying out business operation within its borders or territory. The double taxation treaty has been introduced in order to minimize the issue related to introduction of tax rate on a uniform basis. This treaty is introduced with the purpose of preventing tax evasion. The model tax convention has been adopted by the countries. The international tax system is required to be structured in such a way that any company carrying out its business in more than two countries should be liable to the domestic law of more than one country and the conflict of laws existing between the countries can be resolved by implementing the international law. The company residence acts have been introduced in which the company is considered as the resident of that country where its real business is being carried out. The technical fees services are required to be adopted under which the right to tax is assigned to the respective State of residence. Discussion Fundamental change to international tax The fundamental change to the international tax explains that the payment for technical services may erode the source country’s tax base. But the payment of technical services is not often taxed by the source country under the provision of United Nation Model Convention Treaty. Therefore the multinational companies often use this technical fees for availing technical, consulting and management services for generating profit from their subsidiaries. The main aim of the base erosion and price shifting is to provide certainty to the international businesses for harmonizing their international tax rules (Thuronyi, 2003). The main reason of addition of this provision to the UN model is that more than 100 treaties have been introduced and formulated but there is absence of proper and definite standard of doing the task. Introduction of different treaty creates a problem for the international tax payers who are required to verify the provisions laid by each treaty for carrying out its business operation within the border and abroad. The OECD transfer pricing guidelines has been formulated for the multinational companies and also for the tax administrations. This principle of transfer pricing is accepted by all the companies across the world. OECD approach associated with the intellectual property explains the functions that is outsourced to the independent enterprises and offers compensation on the basis of arm length principle. OECD has focused on the operating profit of the company that is under investigation with the operating profit of other comparable companies (FIAS, 2007). UK and US has focused on the technique of profit sharing. These countries have emphasized on the fact that the payment of technical service fees is not related to tax dodging. Instead the technical service fees facilitated the international tax system to carry out its operation in a systematic way. It provides an advantage to those countries that contributes to the multinational profit and specializes in quality services the right to share those profits. Principles of Source and residence Under the principle of residence, a country will be considered as the resident of that country in which it carries out its business operation. OECD has introduced a guideline for explaining the principle of residence which defines that a particular place will be considered as the place of resident of the company where the commercial and the key management decisions for carrying out the particular business operations are conducted. It is required to verify the place of effective management of the company since a company may have more than one place of management but only one effective management at a time. The developing countries of the world mainly abide by the UN model which impacts the source country taxation. The OECD model safeguards the right of the developing countries which is mostly the state of residence for the income earning companies. US generally possess its own model which it applies at the time of entering into the negotiation with other countries across the world. The OECD countries of the world have introduced such convention which is commonly known as the OECD Model Tax Convention on capital and income that emphasizes on residence of the individual tax payer. The UN Model Tax Convention has focused on the source of income. There are countries which consider the source as the state where the intangible property of the country is being utilized and in some cases it is considered as the residence of the company or the place where it is started or where the intangible rights of the company are being registered. The double taxation avoidance agreement has been introduced with the purpose of avoiding double taxation of the same income. This treaty is considered as important since every country expects to be taxed on the basis of the principle of residence or on the basis of source of principle. The companies that are legally registered in USA are considered as the tax resident of USA and the companies whose management and control is in some other country will be considered as the tax resident of that particular country (Hearson, 2012). Figure 1: profit sharing by the companies The fees for technical services are generally not included in the taxation laws related to domestic laws of other states. It is generally taxed as the independent personal service or the business income in the states where the services are being provided or rendered. It is considered as the alternative of the double taxation conventions (Picciotto, 2001). Cross border tax avoidance The OECD has introduced guidelines for resolving the issues related to cross border tax avoidance. It has adopted various steps and measures for minimizing the tax evasion. Since the government of all states expects that their residents are paying of their taxes to them and therefore they exercise their control in gathering information related to the payment of tax from the other governments. Providing such information of the foreign residents makes the country less attractive to the foreign investments. The cross border tax avoidance has created a problem for the international taxation and its agreement to squeeze the multinational companies. UK was of the opinion that the right to tax a company should rest solely to the establishment of a physical business within the borders regardless of considering the value of sales to its residents. Therefore the government is against the changes to the UN Model tax treaty that is supported by the developing countries of the world. The international tax avoidance is created when the companies take the advantage of international financing, manipulation in transfer pricing techniques and secrecy havens. The acceptance of the principle of residence has eliminated the cross border tax avoidance. The European Union tax harmonization treaty was introduced in order to minimize the risk associated with the cross border tax avoidance. It mainly emphasizes on increasing the tax transparency, exchanging of information with the investors country residence. The rules related to anti avoidance depend on the tax administrators either to pay the tax or evade the payment of tax. In case of US, where the tax payer is non-resident and had failed to maintain the books which reflect his income, the tax court discards the corporation established by him and treats the money generated by him from his business as the amount for computing his income. International planning of tax system, especially by the exploitation of the tax treaty and the tax havens has increased the legitimacy and effectiveness of the international tax arrangements. The European Union has also formulated that the dividend should not be exempted in the case where the tax payer has received a tax deduction (Evans, Freedman and Krever, 2011). Tax planning strategies The most effective method for overcoming the issues related to international taxation is adopting tax planning strategies that is implemented by the countries in order to prevent the avoidance and evasion of tax. The emergence of the international tax planning has solved the problems related to the failure in implementing the effective arrangements or the international principles of tax equity for the allocation of tax. The tax planning strategies help the countries to formulate an effective tax structure that is beneficial for both their countries where the business is being carried out by the concerned company. Tax planning strategies play an important role since two countries perceives the transaction in two different ways for the purpose of taxation (James, 2009). The main problem that is encountered in the international taxation is framing of the guidelines or principle on the basis of which the Multinational Company carrying out its business together with its subsidiaries will be taxed. Since each individual tax payer is considered as an independent tax payer. The Multinational corporations are being controlled and supervised by their headquarters. For example in case of Starbucks it is paying a very high amount of tax in USA. The companies operating its business in Netherlands and Switzerland is required to pay very less amount of tax since the rate of tax in these countries are less. The main problem in taxing the multinational companies are the tax authorities in the countries in which the MNC Carries out their business operations are national and they are controlled and cooperated centrally focusing towards a common goal and objective. The MNC generally overcomes the international barriers or obstacles that exist in relation to its culture language and distance. The principle issue is that every country wishes to implement its own tax laws and legislations which provides an opportunity to the multinational companies to exploit the differences that exist in the tax structure of both the countries and this problem is encountered and never ending due to the non cooperation of the member countries (Lang, 1998). Changes in the OECD model The main objective or the aim behind changing the OECD model is that it will minimize the frequency of alteration in the treaty. OECD will adopt a particular protocol which is required to be abided by every company that is carrying out its business across the borders. The changes have led to the conversion of the bilateral treaty into multilateral treaty (Phyllis, 2003). The plan for the introduction of United Nation Model Tax Convention can be explained by considering UK as an example since it exports a lot from the other countries which will be affected and it would not be able to gain from this proposal. It will face loss since it provides the business in UK a tax credit where they are required to pay the taxes for carrying out its business in the overseas market. But the developing countries who are engaged in importing from these countries will be benefitted. Therefore it can be considered as the distribution of taxation rights from the rich countries to the poor countries. Conclusion The statement above explains that the technical service fees are not defined under the taxation laws and therefore it must be taxed as the independent personal service or the business income in the states where the business is conducted. The fees for technical services are based on the principle of OECD model and UN model. The MNCs are mainly influenced by the management of the company of the host countries without the participation in equity. Sharing of technology, skills and knowledge are considered as the base of such relationship that exists between the countries. The companies of the host countries will enter into the agreements related to technical services with the foreign partners resulting in the avoidance of the technical service fees. The arrangements or the provisions of technical services are not observed in the treaties that are conducted between the small nations of the world which includes Switzerland and Ghana. Therefore the UN model would provide more power to the developing countries of the world. References Evans, C., Freedman, J. and Krever, R.E., 2011. Tax, Discretion and the Rule of Law. Netherlands: IBFD. FIAS, 2007. South Africa: Tax Compliance burden for small businesses: a survey of tax practitioners. [online]. Available at: < http://www.fias.net/ifcext/fias.nsf/Content/Pubs_BusinessTaxation > [Accessed on 11May2014]. Hearson, M., 2012.Would a new article in the un model tax treaty be a ‘fundamental change’ to international tax? [online]. Available at: < https://martinhearson.wordpress.com/2012/10/17/would-a-new-article-in-the-un-model-tax-treaty-be-a-fundmaental-change-to-international-tax/ > [Accessed on 11 May2014]. James, M., 2009. The UK Tax System: An Introduction. London: Spiramus Press Ltd. Lang, M., 1998. Multilateral Tax Treaties: New Developments in International Tax Law. Canada: Kluwer Law International. Phyllis, L.M., 2003. Tax Avoidance and Anti-avoidance Measures in Major Developing Economies. New York: Greenwood Publishing Group. Picciotto, S., 2001. International business taxation. [online]. Available at: < http://www.taxjustice.net/cms/upload/pdf/Picciotto%201992%20International%20Business%20Taxation.pdf >. [Accessed on 11 May2014]. Thuronyi, V., 2003. Comparative Tax Law. London: Kluwer Law International. Read More

 

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