Taxation of International Companies - Assignment Example

Current Rules To The Deciding Taxation Of International Companies Is there an “international tax regime”? A significant degree of convergence has been witnessed in the domestic tax laws of the developed nations. The convergence is especially advanced with regard to matters pertaining to international tax. This is because there is an interaction of tax law of the different jurisdictions (Avi-Yonah 2007). As such, it is possible to document instances of a direct influence. For instance, it is a common practice today to find every developed county taxing its citizens who may be residents of an overseas country (OECD 2001). These taxation measures have especially been inspired by the example of the United States. In addition, the same rules also defer or exempt the active income of businesses. Consequently, there has been a loss in force with regard to a distinction between those nations with a global tax jurisdiction, and those whose taxation system is territory-oriented (Avi-Yonah 2007). A network of bilateral tax treaty holds claims about the existence of international tax. The treaty borrows heavily from the U.N. model, as well as that of the Organization for Economic Co-operation and Development (OECD). For a majority of the countries, these treaties enjoy an elevated status relative to the domestic laws. As such, the domestic tax jurisdiction is often constrained. This implies that where international tax matters are concerned, national are usually bound by such treaties to act in specific ways. For example, a country could be constrained from not taxing a foreign trader who does not have a permanent residency. Current international practice A majority of the countries today tax their residents in line with their tax legislation, and as they would be taxed had they been in their resident country, the sources of the taxable income not withstanding. Similarly, non-residents of a country are usually taxed on that portion of the income that the government of the country feels that it is a source of the country (Gowthorpe et al 1998). The two practices are commonly integrated internationally, but the problem usually arises when a resident of a country has his/her worldwide income taxed, including that part of the income which could be a source from another country. As a result, a case of double taxation usually results. With regard to the international law, a case of judicial double taxation is often not deemed illegal. Nevertheless, such a practice usually poses a danger as it negatively affects the movements of persons, goods, and capital among the different countries (Terra & Wattel 2005). In a bid to try and avoid such a scenario from occurring, a majority of the countries have thus far entered into double taxation bilateral agreements. This move is aimed at helping in the clarification of those contracting countries that legally have a right to double taxation. This means that the other countries will then have to waive their income taxation rights. Double taxation agreements, UN and the OECD model conventions on taxation The preparations of bilateral agreements usually employ the UN and OECD models of taxation. The OECD model has a focus towards the developed countries, while the UN model hopes to have an impact on the developing countries. The two model conventions have a lot of similarities, with the only variation being in terms of how the models adapt to the various economic environments (OECD 2001). Nevertheless, the UN model has not had a significant impact on a majority of the international tax treaties. At the same time, none of the two models forms any part of the international customary law. This is because the two models fail to meet opinion rules, and as such, they cannot be accepted internationally. However, the two models still have a profound interpretive influence in times of taxing rights conflicts, as per the conferment of the double taxation agreements (Avi-Yonah 2007). Perhaps article 17 of taxation convention model of the OECD would really appeal to this topic. The said article came into being as mechanism to help avoid implementation schemes meant to help foreign-income earners of a resident country from either under-reporting their income, or not reporting their income at all. As a result, the performance income under-taxation, as well as tax revenues loss of the country of residence comes into being (Helminen 1999) Distributive rules of double taxation Under the model conventions, ‘distributive rules’ have been instituted with a view to helping in the avoidance of double taxation The assignment rules, as the distributive rules are also called, aids in the categorization of the different items based on source and type. Then, these items are later on assigned to the contracting states, via the taxing rights. in the case of the United States, for every one of the states, each will normally highlight these threes alternatives, based on income source; full rights for taxing, shared limited rights for taxing, or a lack of taxing rights by any one of the contracting states. Basically, the taxing rights of a country shall normally be limited by the income that can be derived from such a source, and also within the jurisdiction of its territory. Conversely, a residence state may enjoy total rights for taxation, based on the global income. As such, that state of residence, except as per the treaty provision, gets to retain taxation, based on the global income. Nevertheless, there is a stipulation that a relief be granted to a tax payer, in the case of a double taxation, if similar rights are also to be granted to the source state. On the other hand, the model treaty of the OECD provides that double taxation be availed by either the credit method, or the exemption method (Helminen 1999). Among the European commission members, the OECD model often applies. Besides a relief of double taxation, as well as the application of the distributive rule, the operative rules also come into play. These include the definitions, scope, mutual agreement, information exchange, non-discrimination, and anti-abuse, among others. in a bid to divide a tax jurisdiction, such connecting elements as business activity of the one paying tax, place of employment, management place of the company, where a real property is located, place of residence of a taxpayer, cross-border employment duration, or even an employee’s nationality (Terra & Wattel 2005). US tax source rules In the United States, the exercise of taxing foreigners is normally based on whether the said income has been sourced from within the country, or not. A majority of the source rules have a statutory prescription. Although such rules have a slight variation from the rules that have been adopted from the OECD, they nevertheless yield remarkable results. The income source is used in reference to the area where a service has been performed (Helminen 1999). The yielding of dividends by US corporations is usually regarded as an income source from the United States. On the other hand, those from corporations of foreign nations will normally be treated as US income source, in the event that 25 percent of the gross income of such a corporation is attributable to the carrying out of business in the United States, during the base period of operation. Additionally, the payment of interests by a domestic corporation in the United States is usually viewed at as an income source for the United States. Conversely, the interest paid by a United States trade to a foreign based corporation is usually treated as an income source for the United States too (Helminen 1999). Profits attribution to permanent establishment The act of attributing profits to an establishment that is permanent happens to be amongst the most complex areas of international tax. This is because domestic legislations, and treaty rules often interact, and such an interaction may at times lead to such unacceptable results as double taxation, or the lack of it. As per the model convention of the OECD, the profits accruing from an enterprise owned by a contracting state resident can only get taxed from that state. However, there is an exception to this rule, in the event that such an enterprise has what is known as a permanent establishment in yet another contracting state. In this case, those profits now get taxed in that other contracting state. In this case, those profits attributable to the permanent establishment could as well now get taxed in that other contacting state. In other words, the business enterprise gets taxed by virtue of its location (Russo 2005). In the determination of the profits that results from a permanent establishment, a two told approach on the basis of the treaty purposes, is usually followed. First, the determination is done based on the source state, with a view to ascertaining the amount of profit that has been taxed in that particular state. Secondly, the determination is assessed from the residence state perspective, with an aim of assessing the total income tax. In the case of a double taxation, then such a taxpayer is liable to a tax relief, to avoid being taxed twice (Russo 2005). In France, a territorial approach of assessing corporate tax has been adopted. As such, those companies with a permanent establishment in France are only taxed on the profits whose source is attributed to France. In addition, those enterprises undertaking their business in France, as well as those that have been subjected to France taxation under the international treaties fro tax, are also subjected to the corporate income tax of France. This is as per the domestic tax law of France. In the United Kingdom, non-residents companies could as well be subjected to the payment of income tax on that portion of the income that has been exempted from corporate tax, at a rate of 22 percent of the basic income. Contrary to corporation tax, the scope of income tax, from a territorial perspective, has not been defined in legislation. In line with this, though practically the income of non-UK residents may not be taxed, the domestic tax laws of the United Kingdom holds that all the UK-income sources are availed for taxation on income, even in a case whereby such an income belongs to a non-resident (Russo 2005). Can the OECD proposals affect the plans of George, Gordon and Nicolas? Based on the provided OECD proposal that have already been implemented by the member countries, as well as the united states, it is quite evident that the plans that are contained therein will definitely thwart the attempts by the three business partners from the United Kingdom, the United States, and France, since the individual member countries are signatory to the provisions of the OECD agreements (Gowthorpe et al 1998). In their quest to help their clients stash away profits in a tax haven abroad, the truth will come to haunt than later, when they have to declare their tax returns. Definitely, the have to declare their source of income, and how much, as well as the location of the business establishment. Perhaps it would be best if these partners could find a country that offers a lowers tax rates, or better still, a total waiver of tax on Foreign Direct Investment (FDI) enterprises. Brazil is such one country, and they enjoys a lower tax withholding on dividends that is much lowers than other businesses that have been established in other developing countries. Avoiding the paying of tax is not ethical, and incase the authorities catches up with you, one is not only likely you land in jail, but also their dignity gets ruined, and more importantly, thousands of jobs o f innocent employees could be lost. It is through the payment of taxes that we can enjoy the provision of sound services from the government. Works cited Avi-Yonah, Reuven. International tax as international law: an analysis of the international tax regime Cambridge: Cambridge university press, 2007. Available at: http://books.google.co.ke/books?hl=en&id Retrieved November 24, 2008. Gowthorpe, Catherine, Blake, John, & Pilkington, Catherine. Ethical issues in accounting. London: Routledge, 1998. Available at: http://books.google.co.ke/books?id= Retrieved November 24, 2008. Helminen, Marjaana. The dividend concept in international tax law: divided payments between corporate entities. Amsterdam: Kluwer law international, 1999. Available at: http://books.google.co.ke/books?hl=en&id= Retrieved November 24, 2008. OECD. Transfer pricing guidelines fro multinational enterprises and tax. OECD publishing, 2001. available at: http://books.google.co.ke/books?id= Retrieved November 24, 2008. Terra, B. & Wattel, Peter. European tax law. Amsterdam: Kluwer law international, 2005. Russo, Raffaele. The attribution of profits to permanent establishments. IBFD, 2005. Available at: http://books.google.co.ke/books?id= Retrieved November 24, 2008. Read More