International taxation
Residency-based systems are subject to taxpayer attempts to defer recognition of income through use of related parties.
The intellectual foundation of the modern international taxation regime was set with a 1923 report prepared by prominent political economists and tax law experts for the League of Nations.
[1] The report formulated "general principles" to avoid the adverse effects of double taxation and encourage free trade, international capital flows, and economic growth.
[1] Prior to the publication of the report, these kinds of questions were primarily decided through unilateral state decisions or bilateral tax treaties.
Taxes may be levied on varying measures of income, including but not limited to net income under local accounting concepts (in many countries this is referred to as 'profit'), gross receipts, gross margins (sales less costs of sale), or specific categories of receipts less specific categories of reductions.
Procedures for dispute resolution vary widely and enforcement issues are far more complicated in the international arena.
These include, but are not limited to, assessment vs. self-assessment means of determining and collecting tax; methods of imposing sanctions for violation; sanctions unique to international aspects of the system; mechanisms for enforcement and collection of tax; and reporting mechanisms.
In addition, a small number of countries also tax the worldwide income of their nonresident citizens in some cases.
The following table summarizes the taxation of local and foreign income of individuals, depending on their residence or citizenship in the country.
The key problem argued for this type of system is the ability to avoid taxation on portable income by moving it outside of the country.
Very few countries tax the foreign income of nonresident citizens in general: Several countries tax based on citizenship in specific situations: A few other countries used to tax the foreign income of nonresident citizens, but have abolished this practice: In Iran, Iraq, North Korea, the Philippines and Saudi Arabia, citizenship is relevant for the taxation of residents but not for nonresidents.
For example, several countries, notably the United States, Cyprus, Luxembourg, Netherlands and Spain, have enacted holding company regimes that exclude from income dividends from certain foreign subsidiaries of corporations.
For other dividends to qualify, the Dutch shareholder or affiliates must own at least 5% and the subsidiary must be subject to a certain level of income tax locally.
Where a two level system is present but allows for fiscal transparency of some entities, definitional issues become very important.
Some systems have rules for resolving characterization issues, but in many cases resolution requires judicial intervention.
[193] Some jurisdictions extend the audit requirements to include opining on such tax issues as transfer pricing.
Some jurisdictions following this approach also require business taxpayers to provide a reconciliation of financial statement and taxable incomes.
The organization or reorganization of portions of a multinational enterprise often gives rise to events that, absent rules to the contrary, may be taxable in a particular system.
In the simplest form, contribution of business assets to a subsidiary enterprise may, in certain circumstances, be treated as a nontaxable event.
[199] The credit may be limited by category of income,[200] by other jurisdiction or country, based on an effective tax rate, or otherwise.
Such computations tend to rely heavily on the source of income and allocation of expense rules of the system.
[206] Such taxation provides for great simplicity of administration but can also reduce the taxpayer's awareness of the amount of tax being collected.
[214] U.S. shareholders are U.S. persons owning 10% or more (after the application of complex attribution of ownership rules) of a foreign corporation.
Sweden has adopted a "white list" of countries in which subsidiaries may be organized so that the shareholder is not subject to current tax.
Most sets of rules prescribe methods for testing whether prices charged should be considered to meet this standard.
In addition, transfer pricing may allow for "earnings stripping" as profits are attributed to subsidiaries in low-tax jurisdictions.
[219] The Organisation for Economic Co-operation and Development (OECD) has proposed a two-pillar solution to address tax avoidance schemes used by multinational corporations.
The first pillar is mostly focused on reallocating profits to where they have been generated, and would only apply to a few hundred of the world's largest companies.
GILTI involves a minimum tax rate of around 10%, and is targeted more at intangible assets such as patents and intellectual property.
Responses to this issue began when the United States introduced the Foreign Account Tax Compliance Act (FATCA) in 2010, and were greatly expanded by the OECD's Common Reporting Standard (CRS), a new international system for the automatic exchange of tax information, to which around 100 jurisdictions have committed.
