Week 5

Question 1

Purpose of taxation

Answer 1

Taxation schemes are usually created for 3 basic purposes:

To raise revenue (Income) for government

To encourage, regulate, or restrict local or foreign investment

To protect consumers or local producers

Question 2

Income Taxes

Who/What can be taxed?

Answer 2

Income of individuals

Profits of companies

Question 3

How does the government collect income taxes? = 2 tax models

Answer 3

Schedular

Global

Question 4

Schedular tax model

Answer 4

Flat (fixed) rates on different sources of income (separate taxes are imposed on different categories of income)

Advantages = Simplicity in calculating taxes and ability to encourage or discourage economic sectors

Disadvantages = Equal tax for the rich & the poor. It is anti-entrepreneurial

Question 5

Global tax model;

Answer 5

A tax payer will pay taxes on the total of income from all sources.

Advantages = not regressive and not anti-entrepreneurial. (progressive tax ; A tax in which the rate of taxation increases as income increases)

Disadvantages = Does NOT encourage particular economic sectors.

Question 6

Taxpayers are

Answer 6

individuals (private persons) and

juridical entities (legal persons), such as companies.

Question 7

Taxpayers; Subordinate Business Structure

The representative office:

Answer 7

not subject to taxation (the most advantageous)
not engaged in any

• commercial activities within the host country.

Question 8

Taxpayers; Subordinate Business Structure

Agencies and branches

Answer 8

under the direct control of a foreign firm

less favorable tax treatment (than either domestic companies or subsidiaries).

Question 9

Taxpayers; Subordinate Business Structure

Subsidiaries (joint ventures)

Answer 9

Lower tax rates,

Limited liability for the foreign parent,

Attracting local participation,

The right to participate in the same activities as domestic companies

Insulation of the parent company from audits by local authorities.

Question 10

Nationality Principle

Answer 10

A state may tax the worldwide income of its nationals

• citizens or nationals of a country no matter where they may reside
• Domestic companies are sometimes treated as citizens or nationals of their home country.

Question 11

Bases of income taxation

Answer 11

National tax systems (the principles);

the nationality of the taxpayer,

the residence of the taxpayer,

the source of the taxpayer’s income or

The combination of these variables.

Question 12

Residency Principle

Answer 12

A state may tax the worldwide income of persons residing within its territory.

Question 13

Residence of companies (tests)

Answer 13

Where the company was organized OR

Where the company is managed and controlled.

Question 14

Source Principle

Answer 14

A state may tax income derived (obtained) from sources within its territory

Question 15

Worldwide income

Answer 15

Income derived from any source from any part of the world.

Question 16

Domestic income

Answer 16

Income originating within a particular country

Question 17

Deemed Income

Answer 17

Income is deemed to have come from a particular place depending upon the activity involved.

A sale is usually deemed to happen where the buyer takes control or possession of the property.

Ex; sale by an Egyptian for real property located in Uruguay to a Taiwanese would be deemed to have taken place in Uruguay.

Question 18

Interrelationship of taxation bases

Answer 18

For countries that use more than one basis for determining taxation, one will be used as the ordinary or default, rule and the others, will be used as special or supplementary rules.

• The most common of the ordinary or default rule is the source principle
• In the case of source principle -> nationally and residency are supplemental and subordinate rules. (will include or exclude income of particular taxpayers depending on the goals of the tax system)

Question 19

Income sources – 3 kinds

Answer 19

property located within the country,

any trade or profession -> carried on through any agency or branch within the country

employment carried on within the country.

Question 20

Taxable income

Answer 20

Personal and business income;
earnings or profits made by individuals and businesses.

Capital gains;
increases in the value of capital or other long-term investments.

Question 21

Double (dual) Taxation

Answer 21

The payment of taxes on one source of income to two different states. (income earned in one country may be (and often is) taxed a second time in another country.)

Question 22

Relief from double taxation:

Answer 22

unilaterally (by one state) or

bilateral or multilateral treaty.

Question 23

Forms of relief:

Answer 23

Exemption system: Income is taxed in one state and exempted from taxation in another.

Credit system: Tax paid in one state may be used as credit for tax due in another state.

Deduction system: Tax paid in one state may be deducted as an expense from the tax due in another state.

Question 24

Tax Treaties

Answer 24

Regulate :

double taxation,

tax incentives (stimulations),

tax avoidance, and tax evasion

Question 25

OECD and the UN model tax treaties base taxation on

Answer 25

the residency of persons within the contracting states (verdragsluitende staten). This is typically established by Domestic law.

Question 26

Domestic law Residency established by

Answer 26

Domicile, residence, place of management, or some similar rule.

Question 27

Individuals who have dual residency, their tax status will be determined by the following rules set out in treaty. These are rules from both the OECD and the UN model treaties

Answer 27

An individual is normally a resident of the country in which he has a permanent home available to him. If an individual has a permanent home in both or neither of the countries, then his residence is in the country with which his personal and economic relations are closest. (center of vital interest). If a center of vital interest cannot be established, residence is in the country of the individual’s habitual abode ( this refers to the period of time a taxpayer spends in each country. If an individual has a habitual abode in both or neither of the countries, then his residence is in the country of which he is a citizen or national.

Question 28

Non-resident company (taxation)

Answer 28

``` permanent establishment (The OECD and the UN model treaties): A fixed place of business through which a non-resident carries on any commercial activity either wholly or partly. ``` -This includes: Branch offices, factories, and workshops, mines, oil and gas wells, quarries, and other places for extracting natural resources. Building sites, construction projects, and assembly projects that last for more than 12 months.

Question 29

Force-of-ATTRACTION rule:

Answer 29

Because a firm has a permanent establishment within a state, that (host) state may tax all of the firm's income whether earned by the permanent establishment or not. Example: A company in Country A has a permanent establishment in Country B. Country B may tax: the profits generated by the company through the permanent establishment and any profits that come to the company from trade or business that is carried on in Country B independent of the permanent establishment.

Question 30

Tax avoidance

Answer 30

Taking advantage of legal or arguably legal tax loopholes | Tax avoidance is legal (sometimes only "technically" legal).

Question 31

Tax evasion

Answer 31

The intentional misrepresentation or concealment of a person’s tax obligation Tax evasion is illegal

Question 32

Treaty shopping

Answer 32

a taxpayer ‘shops’ [looks, searches] for countries with beneficial tax treaty provisions then sets up subsidiary enterprises in those countries to take advantage of their treaties.

Question 33

Treaty shopping involves two basic situations:

Answer 33

the use of direct conduit companies; A holding company organized in a state that has beneficial tax provisions both with a state where a parent company is located and with a state where its subsidiary is located. the use of stepping-stone conduit companies; Holding companies organized in states that have a mutually beneficial tax treaty – one of which also has a beneficial tax treaty with a state where a parent company is located, while the other also has a beneficial tax treaty with a stat were the subsidiary is located.

Question 34

International Cooperation

Answer 34

The key to overcoming tax evasion in the international arena is cooperation. There are three multilateral arrangements for the international exchange of information. ``` Nordic Convention (NC) European Community (EC) Multinational agreement ```

Question 35

Nordic Convention (NC)

Answer 35

regards mutual assistance in matters relating to tax and is the most important. - It provides for exchange of information automatically, on request and spontaneously - The presence of a tax official from one country at a tax investigation in another country when the investigation is of interest to both countries - One country to carry out a tax investigation or audit at the request of another

Question 36

European Community (EC)

Answer 36

they place several restrictions on the exchange of information between member states.

Question 37

Multinational agreement

Answer 37

Convention on Mutual Administrative Assistance in Tax Matters of the Council of Europe and the Organization for Economic Cooperation and Development (OECD) - Mirrors the provisions of the EC directive in most respects but adds a significant provision requiring contracting states to “take the necessary steps to recover tax claims of [a requesting] state as if they were its own tax claims.”

Question 38

Turnover Taxes

Answer 38

taxes paid when goods or services are transferred from one person to another (sold). - generally referred to as Indirect taxes, Cost price increasing or Cost taxes: - Taxes increase the cost of goods and services

Question 39

Value- added tax (VAT)

Answer 39

Taxes paid by a taxpayer only on the value added to a good. - The VAT is a tax on turnover whose payment is split between all the economic stages that it covers, in the sense that at each of the stages that a product passes through, the tax is only levied (charged) on the value added to the product at that stage