|An aspect of fiscal policy|
International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries or the international aspects of an individual country's tax laws as the case may be. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residency, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more.
Many governments tax individuals and/or enterprises on income. Such systems of taxation vary widely, and there are no broad general rules. These variations create the potential for double taxation (where the same income is taxed by different countries) and no taxation (where income is not taxed by any country). Income tax systems may impose tax on local income only or on worldwide income. Generally, where worldwide income is taxed, reductions of tax or foreign credits are provided for taxes paid to other jurisdictions. Limits are almost universally imposed on such credits. Multinational corporations usually employ international tax specialists, a specialty among both lawyers and accountants, to decrease their worldwide tax liabilities.
With any system of taxation, it is possible to shift or recharacterize income in a manner that reduces taxation. Jurisdictions often impose rules relating to shifting income among commonly controlled parties, often referred to as transfer pricing rules. Residency based systems are subject to taxpayer attempts to defer recognition of income through use of related parties. A few jurisdictions impose rules limiting such deferral ("anti-deferral" regimes). Deferral is also specifically authorized by some governments for particular social purposes or other grounds. Agreements among governments (treaties) often attempt to determine who should be entitled to tax what. Most tax treaties provide for at least a skeleton mechanism for resolution of disputes between the parties.
- 1 Introduction
- 2 Taxation systems
- 3 Individuals versus enterprises
- 4 Source of income
- 5 Credits for taxes of other jurisdictions
- 6 Withholding tax
- 7 Treaties
- 8 Anti-deferral measures
- 9 Transfer pricing
- 10 Tax avoidance
- 11 See also
- 12 Notes
- 13 References
- 14 Further reading
- 15 External links
Systems of taxation vary among governments, making generalization difficult. Specifics are intended as examples, and relate to particular governments and not broadly recognized multinational rules. 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. Unless otherwise specified, the term "income" should be read broadly.
Jurisdictions often impose different income based levies on enterprises than on individuals. Entities are often taxed in a unified manner on all types of income while individuals are taxed in differing manners depending on the nature or source of the income. Many jurisdictions impose tax at both an entity level and at the owner level on one or more types of enterprises. These jurisdictions often rely on the company law of that jurisdiction or other jurisdictions in determining whether an entity's owners are to be taxed directly on the entity income. However, there are notable exceptions, including U.S. rules characterizing entities independently of legal form.
In order to simplify administration or for other agendas, some governments have imposed "deemed" income regimes. These regimes tax some class of taxpayers according to tax system applicable to other taxpayers but based on a deemed level of income, as if earned by the taxpayer. Disputes can arise regarding what levy is proper. Procedures for dispute resolution vary widely and enforcement issues are far more complicated in the international arena. The ultimate dispute resolution for a taxpayer is to leave the jurisdiction, taking all property that could be seized. For governments, the ultimate resolution may be confiscation of property, incarceration or dissolution of the entity.
Other major conceptual differences can exist between tax systems. 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.
Countries that tax income generally use one of two systems: territorial or residential. In the territorial system, only local income – income from a source inside the country – is taxed. In the residential system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. In addition, a very small number of countries, notably the United States, also tax their nonresident citizens on worldwide income.
Countries with a residential system of taxation usually allow deductions or credits for the tax that residents already pay to other countries on their foreign income. Many countries also sign tax treaties with each other to eliminate or reduce double taxation. In the case of corporate income tax, some countries allow an exclusion or deferment of specific items of foreign income from the base of taxation.
The following table summarizes the taxation of local and foreign income of individuals, depending on their residence or citizenship in the country. It includes 244 entries: 194 sovereign countries, their 40 inhabited dependent territories (most of which have separate tax systems), and 10 countries with limited recognition.
|Country or territory||Notes and sources|
|Bahamas||no||no||no||no||no||no||No personal income tax.|
|Bahrain||no||no||no||no||no||no||No personal income tax.|
|Bermuda||no||no||no||no||no||no||No personal income tax.|
|British Virgin Islands||no||no||no||no||no||no||No personal income tax.|
|Brunei||no||no||no||no||no||no||No personal income tax.|
|Cayman Islands||no||no||no||no||no||no||No personal income tax.|
|Kuwait||no||no||no||no||no||no||No personal income tax.|
|Maldives||no||no||no||no||no||no||No personal income tax.|
|Monaco||no||no||no||no||no||no||No personal income tax.|
|Nauru||no||no||no||no||no||no||No personal income tax.|
|Norfolk Island||no||no||no||no||no||no||No personal income tax.|
|Oman||no||no||no||no||no||no||No personal income tax.|
|Pitcairn Islands||no||no||no||no||no||no||No personal income tax.|
|Qatar||no||no||no||no||no||no||No personal income tax.|
|Saint Barthelemy||no||no||no||no||no||no||No personal income tax.[Note 1]|
|Saint Kitts and Nevis||no||no||no||no||no||no||No personal income tax.|
|Somalia||no||no||no||no||no||no||No personal income tax.|
|Turks and Caicos Islands||no||no||no||no||no||no||No personal income tax.|
|United Arab Emirates||no||no||no||no||no||no||No personal income tax.|
|Vanuatu||no||no||no||no||no||no||No personal income tax.|
|Vatican City||no||no||no||no||no||no||No personal income tax.|
|Wallis and Futuna||no||no||no||no||no||no||No personal income tax.|
|Western Sahara||no||no||no||no||no||no||No personal income tax.|
|Costa Rica||yes||yes||yes||no||no||no||Territorial taxation.|
|Democratic Republic of the Congo||yes||yes||yes||no||no||no||Territorial taxation.|
|French Polynesia||yes||yes||yes||no||no||no||Territorial taxation.|
|Hong Kong||yes||yes||yes||no||no||no||Territorial taxation.|
|Marshall Islands||yes||yes||yes||no||no||no||Territorial taxation.|
|Palestinian Authority||yes||yes||yes||no||no||no||Territorial taxation.|
|Saint Helena||yes||yes||yes||no||no||no||Territorial taxation.|
|San Marino||yes||yes||yes||no||no||no||Territorial taxation.|
|Cuba||no||yes||yes||yes||no||no||Residential taxation of citizens, territorial taxation of foreigners. Does not tax nonresidents.|
|Philippines||yes||yes||yes||yes||no||no||Residential taxation of citizens, territorial taxation of foreigners.|
|Saudi Arabia||yes||yes||yes||yes||no||no||Residential taxation of citizens, territorial taxation of foreigners.[Note 2]|
|North Korea||yes||no||yes||no||yes||no||Residential taxation of foreigners, territorial taxation of nonresidents. Does not tax income of resident citizens.|
|Akrotiri and Dhekelia||yes||yes||yes||yes||yes||no||Residential taxation.|
|American Samoa||yes||yes||yes||yes||yes||no||Residential taxation.|
|Antigua and Barbuda||yes||yes||yes||yes||yes||no||Residential taxation.|
|Australia, including:||yes||yes||yes||yes||yes||no||Residential taxation.|
|Bosnia and Herzegovina||yes||yes||yes||yes||yes||no||Residential taxation.|
|Burkina Faso||yes||yes||yes||yes||yes||no||Residential taxation.|
|Cape Verde||yes||yes||yes||yes||yes||no||Residential taxation.|
|Central African Republic||yes||yes||yes||yes||yes||no||Residential taxation.|
|Cook Islands||yes||yes||yes||yes||yes||no||Residential taxation.|
|Côte d'Ivoire||yes||yes||yes||yes||yes||no||Residential taxation.|
|Czech Republic||yes||yes||yes||yes||yes||no||Residential taxation.|
|Dominican Republic||yes||yes||yes||yes||yes||no||Residential taxation.|
|East Timor||yes||yes||yes||yes||yes||no||Residential taxation.|
|El Salvador||yes||yes||yes||yes||yes||no||Residential taxation.|
|Equatorial Guinea||yes||yes||yes||yes||yes||no||Residential taxation.|
|Falkland Islands||yes||yes||yes||yes||yes||no||Residential taxation.|
|Faroe Islands||yes||yes||yes||yes||yes||no||Residential taxation.|
|Finland, including:||yes||yes||yes||yes||yes||no*||Residential taxation.
* except former residents, temporarily
* except in Monaco
|Ghana||yes||yes||yes||yes||yes||no||Residential taxation. Foreign income of residents is taxed only if it is moved to Ghana.|
* with another nationality or tax treaty
|Isle of Man||yes||yes||yes||yes||yes||no||Residential taxation.|
* except in tax havens
|New Caledonia||yes||yes||yes||yes||yes||no||Residential taxation.|
|New Zealand||yes||yes||yes||yes||yes||no||Residential taxation.|
|Northern Cyprus||yes||yes||yes||yes||yes||no||Residential taxation.|
|Northern Mariana Islands||yes||yes||yes||yes||yes||no||Residential taxation.|
|Papua New Guinea||yes||yes||yes||yes||yes||no||Residential taxation.|
|Puerto Rico||yes||yes||yes||yes||yes||no||Residential taxation.|
|Saint Lucia||yes||yes||yes||yes||yes||no||Residential taxation.|
|Saint Martin||yes||yes||yes||yes||yes||no||Residential taxation.[Note 3]|
|Saint Pierre and Miquelon||yes||yes||yes||yes||yes||no||Residential taxation.|
|Saint Vincent and the Grenadines||yes||yes||yes||yes||yes||no||Residential taxation.|
|São Tomé and Príncipe||yes||yes||yes||yes||yes||no||Residential taxation.|
|Sierra Leone||yes||yes||yes||yes||yes||no||Residential taxation.|
|Sint Maarten||yes||yes||yes||yes||yes||no||Residential taxation.|
|Solomon Islands||yes||yes||yes||yes||yes||no||Residential taxation.|
|South Africa||yes||yes||yes||yes||yes||no||Residential taxation.|
|South Korea||yes||yes||yes||yes||yes||no||Residential taxation.|
|South Ossetia||yes||yes||yes||yes||yes||no||Residential taxation.|
|South Sudan||yes||yes||yes||yes||yes||no||Residential taxation.|
* except in tax havens, temporarily
|Sri Lanka||yes||yes||yes||yes||yes||no||Residential taxation.|
|Taiwan||yes||yes||yes||yes||yes||no||Territorial taxation in general, but residential taxation under the alternative minimum tax.|
|Trinidad and Tobago||yes||yes||yes||yes||yes||no||Residential taxation.|
* except income not taxed by other countries of employees of Turkish government or companies
|United Kingdom||yes||yes||yes||yes||yes||no||Residential taxation.|
|United States Virgin Islands||yes||yes||yes||yes||yes||no||Residential taxation.|
|Eritrea||yes||yes||yes||yes||yes||yes||Residential and citizenship-based taxation. Foreign income of nonresident citizens is taxed at a reduced flat rate.|
|United States||yes||yes||yes||yes||yes||yes||Residential and citizenship-based taxation. Citizens are taxed in the same manner as residents.|
Residential systems face the daunting tasks of defining "resident" and characterizing the income of nonresidents. Such definitions vary by country and type of taxpayer, but usually involve the location of the person's main home and number of days the person is physically present in the country. Examples include:
- The United States taxes its citizens as residents, and provides lengthy, detailed rules for individual residency of foreigners, covering:
- Periods establishing residency (including a formulary calculation involving three years);
- Start and end date of residency;
- Exceptions for transitory visits, medical conditions, etc.
- The United Kingdom establishes three categories: non-resident, resident, and resident but not ordinarily resident.
- Switzerland residency may be established by having a permit to be employed in Switzerland for an individual who is so employed.
Territorial systems usually tax local income regardless of the residence of the taxpayer. 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. This has led governments to enact hybrid systems to recover lost revenue.
- Eritrea taxes its nonresident citizens on their foreign income at a reduced flat rate of 2% (income tax rates for residents are progressive from 2 to 30%). It has been reported that Eritrea enforces this tax on its citizens abroad through denial of passports, denial of entry or exit from the country, confiscation of assets in Eritrea, and even harassment of relatives living in Eritrea, until the tax is paid. In 2011, the United Nations Security Council passed a resolution condemning the collection by illegal means of the Eritrean 'diaspora tax', and in 2013, the Canadian government expelled the Eritrean consul for collecting the tax. The Parliament of Sweden has also expressed its intention to prohibit the practice there.
- The United States taxes its citizens and resident foreigners on their worldwide income, and nonresident foreigners on their local income. US citizens residing in other countries may exclude some of their foreign income from US taxation, and take credit for income tax paid to other countries, but they must file a US tax return to claim the exclusion or credit even if they result in no tax liability. "US persons" abroad, like US residents, are also subject to various reporting requirements regarding foreign finances, such as FBAR, FATCA, and IRS forms 3520, 5471, 8621 and 8938. The penalties for failure to file these forms on time are often much higher than the penalties for not paying the tax itself.
A few other countries tax based on citizenship in limited situations:
- Finland continues taxing its citizens who move from Finland to another country as residents of Finland, for the first three years after moving there, unless they demonstrate that they no longer have any ties to Finland. After this period, they are no longer considered residents of Finland for tax purposes.
- France taxes its citizens who reside in Monaco as residents of France, according to a treaty signed between the two countries in 1963. However, in 2014, the French supreme administrative court ruled that the treaty only applies to those who actually moved to Monaco, so French citizens by descent who were born and have always lived in Monaco, who form the vast majority of the French citizens in Monaco, would not be subject to taxation as residents of France. The decision is awaiting implementation by the fiscal administration. Other than this case, France does not tax the foreign income of its nonresident citizens.
- Hungary taxes its nonresident citizens as residents of Hungary, unless they also have another nationality or reside in a country which has a tax treaty with Hungary.[Note 4]
- Italy continues taxing its citizens who move from Italy to a tax haven[Note 5] as residents of Italy, unless they demonstrate that they no longer have any ties to Italy. Other than this case, Italy does not tax the foreign income of its nonresident citizens.
- Spain continues taxing its citizens who move from Spain to a tax haven[Note 6] as residents of Spain, for the first five years after moving there. After this period, they are no longer considered residents of Spain for tax purposes. Other than this case, Spain does not tax the foreign income of its nonresident citizens.
- Turkey taxes its citizens who are residing abroad to work for the Turkish government or Turkish companies as residents of Turkey, but exempts their income that is already taxed by the country where it is earned. Other than this case, Turkey does not tax the foreign income of its nonresident citizens.
A few other countries used to tax the foreign income of nonresident citizens, but have abolished this practice:
- Romania used to tax the worldwide income of its citizens regardless of where they resided, but abandoned this practice some time between 1933 and 1954.
- Mexico used to tax its citizens in the same manner as residents, on worldwide income. A new income tax law, passed in 1980 and effective 1981, determined only residence as the basis for taxation of worldwide income.
- Bulgaria used to tax its citizens on worldwide income regardless of where they resided. A new income tax law, passed in 1997 and effective 1998, determined residence as the basis for taxation of worldwide income.
- The Philippines used to tax the foreign income of nonresident citizens at reduced rates of 1 to 3% (income tax rates for residents were 1 to 35% at the time). It abolished this practice in a new revenue code in 1997, effective 1998.
- Vietnam used to tax its citizens in the same manner as residents, on worldwide income. The country passed a personal income tax law in 2007, effective 2009, removing citizenship as a criterion to determine residence.
- Myanmar used to tax the foreign income of its nonresident citizens at a flat rate of 10% (income tax rates for residents range from 3 to 40%). As part of a series of reforms, the country abolished this practice in 2011, effective 2012.
Countries do not necessarily use the same system of taxation for individuals and corporations. For example, France uses a residential system for individuals but a territorial system for corporations, while Singapore does the opposite, and Brunei taxes corporate but not personal income.
Many systems provide for specific exclusions from taxable (chargeable) income. For example, several countries, notably Cyprus, Luxembourg, Netherlands and Spain, have enacted holding company regimes that exclude from income dividends from certain foreign subsidiaries of corporations. These systems generally impose tax on other sorts of income, such as interest or royalties, from the same subsidiaries. They also typically have requirements for portion and time of ownership in order to qualify for exclusion. The Netherlands offers a "participation exemption" for dividends from subsidiaries of Netherlands companies. Dividends from all Dutch subsidiaries automatically qualify. 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.
Some countries, such as the United States and Singapore, allow deferment of tax on foreign income of resident corporations until it is remitted to the country.
Individuals versus enterprises
Many tax systems tax individuals in one manner and entities that are not considered fiscally transparent in another. The differences may be as simple as differences in tax rates, and are often motivated by concerns unique to either individuals or corporations. For example, many systems allow taxable income of an individual to be reduced by a fixed amount allowance for other persons supported by the individual (dependents). Such a concept is not relevant for enterprises.
Many systems allow for fiscal transparency of certain forms of enterprise. For example, most countries tax partners of a partnership, rather than the partnership itself, on income of the partnership. A common feature of income taxation is imposition of a levy on certain enterprises in certain forms followed by an additional levy on owners of the enterprise upon distribution of such income. For example, the U.S. imposes two levels of tax on foreign individuals or foreign corporations who own a U.S. corporation. First, the U.S. corporation is subject to the regular income tax on its profits, then subject to an additional 30% tax on the dividends paid to foreign shareholders (the branch profits tax). The foreign corporation will be subject to U.S. income tax on its effectively connected income, and will also be subject to the branch profits tax on any of its profits not reinvested in the U.S. Thus, many countries tax corporations under company tax rules and tax individual shareholders upon corporate distributions. Various countries have tried (and some still maintain) attempts at partial or full "integration" of the enterprise and owner taxation. Where a two level system is present but allows for fiscal transparency of some entities, definitional issues become very important.
Source of income
Determining the source of income is of critical importance in a territorial system, as source often determines whether or not the income is taxed. For example, Hong Kong does not tax residents on dividend income received from a non-Hong Kong corporation. Source of income is also important in residency systems that grant credits for taxes of other jurisdictions. Such credit is often limited either by jurisdiction or to the local tax on overall income from other jurisdictions.
Source of income is where the income is considered to arise under the relevant tax system. The manner of determining the source of income is generally dependent on the nature of income. Income from the performance of services (e.g., wages) is generally treated as arising where the services are performed. Financing income (e.g., interest, dividends) is generally treated as arising where the user of the financing resides. Income related to use of tangible property (e.g., rents) is generally treated as arising where the property is situated. Income related to use of intangible property (e.g., royalties) is generally treated as arising where the property is used. Gains on sale of realty are generally treated as arising where the property is situated.
Gains from sale of tangible personal property are sourced differently in different jurisdictions. The U.S. treats such gains in three distinct manners: a) gain from sale of purchased inventory is sourced based on where title to the goods passes; b) gain from sale of inventory produced by the person (or certain related persons) is sourced 50% based on title passage and 50% based on location of production and certain assets; c) other gains are sourced based on the residence of the seller.
In specific cases, the tax system may diverge for different categories of individuals. U.S. citizen and resident alien decedents are subject to estate tax on all of their assets, wherever situated. The nonresident aliens are subject to estate tax only on that part of the gross estate which at the time of death is situated in the U.S. Another significant distinction between U.S. citizens/RAs and NRAs is in the exemptions allowed in computing the tax liability.
Where differing characterizations of an item of income can result in differing tax results, it is necessary to determine the characterization. Some systems have rules for resolving characterization issues, but in many cases resolution requires judicial intervention. Note that some systems which allow a credit for foreign taxes source income by reference to foreign law.
Definitions of income
Some jurisdictions tax net income as determined under financial accounting concepts of that jurisdiction, with few, if any, modifications. Other jurisdictions determine taxable income without regard to income reported in financial statements. Some jurisdictions compute taxable income by reference to financial statement income with specific categories of adjustments, which can be significant.
A jurisdiction relying on financial statement income tends to place reliance on the judgment of local accountants for determinations of income under locally accepted accounting principles. Often such jurisdictions have a requirement that financial statements be audited by registered accountants who must opine thereon. Some jurisdictions extend the audit requirements to include opining on such tax issues as transfer pricing. Jurisdictions not relying on financial statement income must attempt to define principles of income and expense recognition, asset cost recovery, matching, and other concepts within the tax law. These definitional issues can become very complex. Some jurisdictions following this approach also require business taxpayers to provide a reconciliation of financial statement and taxable incomes.
Systems that allow a tax deduction of expenses in computing taxable income must provide for rules for allocating such expenses between classes of income. Such classes may be taxable versus non-taxable, or may relate to computations of credits for taxes of other systems (foreign taxes). A system which does not provide such rules is subject to manipulation by potential taxpayers. The manner of allocation of expenses varies. U.S. rules provide for allocation of an expense to a class of income if the expense directly relates to such class, and apportionment of an expense related to multiple classes. Specific rules are provided for certain categories of more fungible expenses, such as interest. By their nature, rules for allocation and apportionment of expenses may become complex. They may incorporate cost accounting or branch accounting principles, or may define new principles.
Most jurisdictions provide that taxable income may be reduced by amounts expended as interest on loans. By contrast, most do not provide tax relief for distributions to owners. Thus, an enterprise is motivated to finance its subsidiary enterprises through loans rather than capital. Many jurisdictions have adopted "thin capitalization" rules to limit such charges. Various approaches include limiting deductibility of interest expense to a portion of cash flow, disallowing interest expense on debt in excess of a certain ratio, and other mechanisms.
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. Most systems contain rules preventing recognition of income or loss from certain types of such events. In the simplest form, contribution of business assets to a subsidiary enterprise may, in certain circumstances, be treated as a nontaxable event. Rules on structuring and restructuring tend to be highly complex.
Credits for taxes of other jurisdictions
Systems that tax income earned outside the system's jurisdiction tend to provide for a unilateral credit or offset for taxes paid to other jurisdictions. Such other jurisdiction taxes are generally referred to within the system as "foreign" taxes. Tax treaties often require this credit. A credit for foreign taxes is subject to manipulation by planners if there are no limits, or weak limits, on such credit. Generally, the credit is at least limited to the tax within the system that the taxpayer would pay on income earned outside the jurisdiction. The credit may be limited by category of income, by other jurisdiction or country, based on an effective tax rate, or otherwise. Where the foreign tax credit is limited, such limitation may involve computation of taxable income from other jurisdictions. Such computations tend to rely heavily on the source of income and allocation of expense rules of the system.
Many jurisdictions require persons paying amounts to nonresidents to collect tax due from a nonresident with respect to certain income by withholding such tax from such payments and remitting the tax to the government. Such levies are generally referred to as withholding taxes. These requirements are induced because of potential difficulties in collection of the tax from nonresidents. Withholding taxes are often imposed at rates differing from the prevailing income tax rates. Further, the rate of withholding may vary by type of income or type of recipient. Generally, withholding taxes are reduced or eliminated under income tax treaties (see below). Generally, withholding taxes are imposed on the gross amount of income, unreduced by expenses. Such taxation provides for great simplicity of administration but can also reduce the taxpayer's awareness of the amount of tax being collected.
Tax treaties exist between many countries on a bilateral basis to prevent double taxation (taxes levied twice on the same income, profit, capital gain, inheritance or other item). In some countries they are also known as double taxation agreements, double tax treaties, or tax information exchange agreements (TIEA).
Most developed countries have a large number of tax treaties, while developing countries are less well represented in the worldwide tax treaty network. The United Kingdom has treaties with more than 110 countries and territories. The United States has treaties with 56 countries (as of February 2007). Tax treaties tend not to exist, or to be of limited application, when either party regards the other as a tax haven. There are a number of model tax treaties published by various national and international bodies, such as the United Nations and the OECD.
Treaties tend to provide reduced rates of taxation on dividends, interest, and royalties. They tend to impose limits on each treaty country in taxing business profits, permitting taxation only in the presence of a permanent establishment in the country. Treaties tend to impose limits on taxation of salaries and other income for performance of services. They also tend to have "tie breaker" clauses for resolving conflicts between residency rules. Nearly all treaties have at least skeletal mechanisms for resolving disputes, generally negotiated between the "competent authority" section of each country's taxing authority.
Residency systems may provide that residents are not subject to tax on income outside the jurisdiction until that income is remitted to the jurisdiction. Taxpayers in such systems have significant incentives to shift income outside its borders. Depending on the rules of the system, the shifting may occur by changing the location of activities generating income or by shifting income to separate enterprises owned by the taxpayer. Most residency systems have avoided rules which permit deferring income from outside its borders without shifting it to a subsidiary enterprise due to the potential for manipulation of such rules. Where owners of an enterprise are taxed separately from the enterprise, portable income may be shifted from a taxpayer to a subsidiary enterprise to accomplish deferral or elimination of tax. Such systems tend to have rules to limit such deferral through controlled foreign corporations. Several different approaches have been used by countries for their anti-deferral rules.
In the United States, rules provides that U.S. shareholders of a Controlled Foreign Corporation (CFC) must include their shares of income or investment of E&P by the CFC in U.S. property. U.S. shareholders are U.S. persons owning 10% or more (after the application of complex attribution of ownership rules) of a foreign corporation. Such persons may include individuals, corporations, partnerships, trusts, estates, and other juridical persons. A CFC is a foreign corporation more than 50% owned by U.S. shareholders. This income includes several categories of portable income, including most investment income, certain resale income, and certain services income. Certain exceptions apply, including the exclusion from Subpart F income of CFC income subject to an effective foreign tax rate of 90% or more of the top U.S. tax rate.
The United Kingdom provides that a UK company is taxed currently on the income of its controlled subsidiary companies managed and controlled outside the UK which are subject to "low" foreign taxes. Low tax is determined as actual tax of less than three-fourths of the corresponding UK tax that would be due on the income determined under UK principles. Complexities arise in computing the corresponding UK tax. Further, there are certain exceptions which may permit deferral, including a "white list" of permitted countries and a 90% earnings distribution policy of the controlled company. Further, anti-deferral does not apply where there is no tax avoidance motive.
Rules in Germany provide that a German individual or company shareholder of a foreign corporation may be subject to current German tax on certain passive income earned by the foreign corporation. This provision applies if the foreign corporation is taxed at less than 25% of the passive income, as defined. Japan and some other countries have followed a "black list" approach, where income of subsidiaries in countries identified as tax havens is subject to current tax to the shareholder. Sweden has adopted a "white list" of countries in which subsidiaries may be organized so that the shareholder is not subject to current tax.
The setting of the amount of related party charges is commonly referred to as transfer pricing. Many jurisdictions have become sensitive to the potential for shifting profits with transfer pricing, and have adopted rules regulating setting or testing of prices or allowance of deductions or inclusion of income for related party transactions. Many jurisdictions have adopted broadly similar transfer pricing rules. The OECD has adopted (subject to specific country reservations) fairly comprehensive guidelines. These guidelines have been adopted with little modification by many countries. Notably, the U.S. and Canada have adopted rules which depart in some material respects from OECD guidelines, generally by providing more detailed rules.
Arm's length principle: It is a key concept of most transfer pricing rules, that prices charged between related enterprises should be those which would be charged between unrelated parties dealing at arm's length. Most sets of rules prescribe methods for testing whether prices charged should be considered to meet this standard. Such rules generally involve comparison of related party transactions to similar transactions of unrelated parties (comparable prices or transactions). Various surrogates for such transactions may be allowed. Most guidelines allow the following methods for testing prices: Comparable uncontrolled transaction prices, resale prices based on comparable markups, cost plus a markup, and an enterprise profitability method.
Tax avoidance schemes may take advantage of low or no-income tax countries known as tax havens. Corporations may choose to move their headquarters to a country with more favorable tax environments. In countries where movement has been restricted by legislation, it might be necessary to reincorporate into a low-tax company through reversing a merger with a foreign corporation ("inversion" similar to a reverse merger). In addition, transfer pricing may allow for "earnings stripping" as profits are attributed to subsidiaries in low-tax countries.
- Public finance
- List of countries by tax rates
- Tax equalization
- Tax haven
- Tax treaty
- Functional currency
- New residents of Saint Barthelemy are considered residents of France for tax purposes, for the first five years after moving there. After this period, they become residents of Saint Barthelemy for tax purposes.
- Saudi Arabia taxes nonresidents, as well as residents who are not citizens of the countries in the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), only on their local income. Residents of Saudi Arabia who are citizens of these countries do not pay income tax, but pay mandatory zakat instead, calculated on their worldwide assets and some kinds of income.
- Residents of France who move to Saint Martin are not considered residents of Saint Martin for tax purposes, and continue to be taxed as residents of France, for the first five years after moving there. After this period, they become residents of Saint Martin for tax purposes.
- As of 2014, Hungary has tax treaties with the following countries and territories: Albania, Armenia, Australia, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kosovo, Kuwait, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Montenegro, Morocco, Netherlands, Norway, Pakistan, Philippines, Poland, Portugal, Qatar, Romania, Russia, San Marino, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Tunisia, Turkey, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan, Vietnam. Hungary has also signed tax treaties with Bahrain and Saudi Arabia.
- As of 2010, the following countries and territories are considered tax havens by Italy: Andorra, Anguilla, Antigua and Barbuda, Aruba, Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Brunei, Cayman Islands, Cook Islands, Costa Rica, Djibouti, Dominica, Ecuador, French Polynesia, Gibraltar, Grenada, Guernsey (including Alderney and Sark), Hong Kong, Isle of Man, Jersey, Lebanon, Liberia, Liechtenstein, Macau, Malaysia, Maldives, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles (Bonaire, Curaçao, Saba, Sint Eustatius, Sint Maarten), Niue, Oman, Panama, Philippines, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, San Marino, Seychelles, Singapore, Switzerland, Taiwan, Tonga, Turks and Caicos Islands, Tuvalu, United Arab Emirates, Uruguay, Vanuatu.
- As of 2015, the following countries and territories are considered tax havens by Spain: Anguilla, Antigua and Barbuda, Bahrain, Bermuda, British Virgin Islands, Brunei, Cayman Islands, Cook Islands, Dominica, Falkland Islands, Fiji, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Jordan, Lebanon, Liberia, Liechtenstein, Macau, Mauritius, Monaco, Montserrat, Nauru, Northern Mariana Islands, Oman, Saint Lucia, Saint Vincent and the Grenadines, Seychelles, Solomon Islands, Turks and Caicos Islands, United States Virgin Islands, Vanuatu.
- E.g., the U.S. taxes corporations on their income and their shareholders on dividends distributed from the corporation. See U.S. IRC sections 11, 1, and 61.
- U.S. Internal Revenue Service (U.S. IRS) Reg. (hereafter 26 CFR) §§301.7701-2 and -3.
- The 2011 global executive, Ernst & Young, August 2011.
- Monaco Tax Rates, TaxRates.cc.
- Expat Nauru, Expat Intelligence.
- Taxation Options for Norfolk Island, Australian Department of the Treasury, 2003.
- Norfolk Island Reforms
- Pitcairn Today, OnlinePitcairn.com.
- A French island without taxes, Le Monde diplomatique, January 2006. (French)
- Individuals whose residence for tax purposes is outside France, Fiscal Administration of France, 2013. (French)
- Code of Contributions of Saint Barthelemy, Collectivity of Saint Barthelemy, January 15, 2014. (French)
- St. Kitts and Nevis Personal Taxation, Lowtax.
- Somalia, Franklin Amoo.
- Turks and Caicos Tax Rates, TaxRates.cc.
- Vanuatu Tax Rates, TaxRates.cc.
- Vatican City: Fun Facts, Information, and Resources, The Free Resource.
- The rip-off of the century in Wallis and Futuna, ActuFinance. (French)
- Moroccan Sahara, that tax haven, Omar El Hyani. (French)
- Interim Stabilisation Levy Act, Government of Anguilla, March 7, 2011.
- Personal Income Tax Guide Book, Department of Revenue and Customs of Bhutan.
- General Code of Taxes 2011, Ministry of Economy and Finances of Djibouti. (French)
- French Polynesia Tax Rates, TaxRates.cc.
- Gibraltar Tax Rates, TaxRates.cc.
- Income Tax Act 1989, Pacific Islands Legal Information Institute.
- Code of the Federated States of Micronesia, Legal Information System of the Federated States of Micronesia.
- Palau National Code, Government of Palau.
- Income Tax Ordinance, Government of Saint Helena.
- Fiscal policy San Marino, SanMarinoSite.com.
- The Body of Laws on Direct Taxation, Republic of Somaliland.
- Income Tax Rules 1997, Pacific Islands Legal Information Institute.
- Income Tax Act 1992, Pacific Islands Legal Information Institute.
- General description of taxes applied in Cuba, Inter-American Center of Tax Administrations, August 1, 2004. (Spanish)
- Study on labor and fiscal regulation for individuals in Cuba, Economic and Social Office of Spain in Cuba, May 2010. (Spanish)
- Enforcement Regulations for Foreign-Invested Business and Foreign Individual Tax Law, World Intellectual Property Organization.
- Tax? What Tax? The North Korean Taxation Farce, Yoo Gwan Hee, 2008.
- Law on the income tax on individuals, RN-Shelf Abkhazia, August 17, 2011. (Russian)
- The Income Tax Ordinance 2003, Sovereign Base Areas Administration, July 7, 2003.
- Algeria Tax Rates, TaxRates.cc.
- Filing Information for Individuals in Certain U.S. Possessions, Internal Revenue Service.
- Individual income tax, Government of Andorra. (Catalan)
- Antigua and Barbuda Tax Rates, TaxRates.cc.
- International tax - Bangladesh Highlights 2012, Deloitte.
- Income and Business Tax Act, Income Tax Department of Belize.
- Benin Tax Rates, TaxRates.cc.
- Bosnia and Herzegovina Tax Rates, TaxRates.cc.
- Burkina Faso tax highlights, PricewaterhouseCoopers, June 2012.
- General code of taxes and fees, Ministry of Finances of Burundi, January 1, 2006. (French)
- Fiscal Guide, Ministry of Finances of Cape Verde. (Portuguese)
- Report on internship at DRIDCNNE, Odilon Wakanga, 2009. (French)
- General tax code, Ministry of Finances of Chad, August 14, 2006. (French)
- China Wants Taxes Paid by Citizens Living Afar, New York Times, January 7, 2015.
- General tax code, Comores-droit.com. (French)
- Taxation, Business Trade Investment Board of the Cook Islands.
- Income Tax Act, Government of the Commonwealth of Dominica.
- A guide for income taxpayers, Ministry of Finance of East Timor, June 30, 1905.
- Employment and Taxation, Falkland Islands Government.
- General information about income tax in the Faroe Islands, TAKS.
- Åland residents get most state money per capita, Helsingin Sanomat.
- Gambia Tax Rates, TaxRates.cc.
- General information about income tax in Greenland, Nordisk eTax.
- Grenada Tax Rates, TaxRates.cc.
- Convention between the Portuguese Republic and the Republic of Guinea-Bissau to avoid double taxation in the matter of income taxes and to prevent tax evasion, Assembly of Portugal. (Portuguese)
- Guyana Tax Rates, TaxRates.cc.
- Income tax, Ministry of Economy and Finances of Haiti. (French)
- Iran Tax Rates, TaxRates.cc.
- Income Tax Act 1990, Pacific Islands Legal Information Institute.
- Law on personal income tax, Assembly of Kosovo.
- What should a foreigner know about Kyrgyzstan's tax system, The Times of Central Asia.
- Revenue Code of Liberia Act of 2000, Ministry of Foreign Affairs of Liberia, August 2002.
- General tax code, Chamber of Commerce and Industry of Mali, July 1999.(French)
- Personal Income Tax of Mongolia, China Radio International, August 26, 2008.
- Income Tax Act, Inland Revenue Department of Montserrat, January 1, 2002.
- Myanmar Tax Rates, TaxRates.cc.
- Summary of taxes, State Tax Service of the Nagorno-Karabakh Republic, 2010. (Armenian)
- Income Tax Act 2002 – Handbook, Inland Revenue Department of Nepal.
- Tax code of New Caledonia, Juridical documentation of New Caledonia. (French)
- International tax - Niger Highlights 2012, Deloitte.
- Income Tax Act 1961, Pacific Islands Legal Information Institute.
- Income Tax Act, Ministry of Finance, Revenue and Tax Administration of the Turkish Republic of Northern Cyprus, 2010. (Turkish)
- Know Your Taxes, Inland Revenue Department of Saint Lucia.
- General tax code of the Collectivity of Saint Martin, Collectivity of Saint Martin, January 1, 2012. (French)
- General code of territorial collectivities, Legifrance, July 26, 2012. (French)
- Instructions to fill in your tax return, Administration of Fiscal Services of Saint Pierre and Miquelon. (French)
- St. Vincent and the Grenadines: Offshore Structures and Onshore Tax and Residency Laws, Offshore Investment.
- Income Tax Act 1974, Pacific Islands Legal Information Institute.
- Code of personal income tax, Ministry of Planning and Finances of São Tomé and Príncipe, October 8, 2009. (Portuguese)
- Sierra Leone Tax Rates, TaxRates.cc.
- 2008 Income Tax Guide, Inland Revenue Division of the Solomon Islands.
- Law on the income tax on individuals, Committee on Taxes and Duties of the Republic of South Ossetia. (Russian)
- International tax - South Sudan Highlights 2012, Deloitte.
- International tax - Sudan Highlights 2012, Deloitte.
- Personal, Tax Service of Suriname. (Dutch)
- Law on tax in Svalbard, Lovdata, August 10, 2012. (Norwegian)
- Tax Code of the Republic of Tajikistan, State Committee on Investments and State Property Management of the Republic of Tajikistan.
- Tax assessment, liquidation and control, eRegulations Togo. (French)
- Income Tax Act, Pacific Islands Legal Information Institute.
- Law on the income tax on individuals, Law of Pridnestrovian Moldavian Republic, September 30, 2000. (Russian)
- Income Tax Law, Turkish Tax Law.
- Lega and tax aspects of doing business in Turkmenistan 2009, Central Asia Business Consultants, August 13, 2009.
- Yemen Tax Rates, TaxRates.cc.
- A proclamation to provide for payment of income tax, Economic and Commercial Counsellor's Office of the Embassy of the People's Republic of China in Eritrea, July 24, 2008.
- Eritrea: Selected Issues and Statistical Appendix, International Monetary Fund, July 2003.
- See, e.g., "Tax Information for Visitors to the United States", Publication 513 (annual), Internal Revenue Service, U.S. Department of Treasury, page 2.
- See, e.g., "Residents and non-residents", IR20, Inland Revenue, HMRC, page 6 et seq.
- Switzerland requires a work permit to be employed in Switzerland. A person working in Switzerland for more than 30 days may be a resident. See http://www.taxation.ch/index.cfm/fuseaction/show/temp/default/path/1-534.htm
- Tax History: Why U.S. Pursues Citizens Overseas, Wall Street Journal, May 18, 2012.
- Canadian banks to be compelled to share clients' info with U.S., CBC News, November 25, 2013.
- A form of extortion – Eritrea's 2% Diaspora tax, Daniel Berhane, November 20, 2011.
- Security Council, by Vote of 13 in Favour, Adopts Resolution Reinforcing Sanctions Regime against Eritrea 'Calibrated' to Halt All Activities Destabilizing Region, United Nations, December 5, 2011.
- Canada expels Eritrea envoy over expat fees claims, BBC, May 29, 2013.
- Riksdag wants to halt Eritrean exile taxes, The Local, February 24, 2012.
- Information for U.S. Citizens or Dual Citizens Residing Outside the U.S., Retrieved November 28, 2013
- Despite FATCA, FBAR Penalties Still Under Fire Forbes, March 12, 2012.
- FBARs & FATCA Form 8938: Maddening Duplication?, Forbes, April 10, 2012.
- FBAR Penalties: When Will IRS Let You Off With A Warning?, Forbes, June 4, 2012.
- Finnish citizens and the 3-year rule, Finnish Tax Administration.
- Honouring of obligations and commitments by Monaco, Parliamentary Assembly of the Council of Europe, June 7, 2007.
- Article Monaco Matin of April 18, 2014, on the subject of ruling no. 362237 of the Conseil d'État, Union des Français de l'Etranger, April 18, 2014. (French)
- Individual taxation of foreign-source income and social contribution obligations, National Tax and Customs Administration of Hungary, 2012. (Hungarian)
- Hungary Now Imposes Tax on Non-Resident Citizens, The Nestmann Group, October 2, 2012.
- Double taxation treaties of Hungary, National Tax and Customs Administration of Hungary, January 1, 2014. (Hungarian)
- Latest Treaty Updates: Hungary, TreatyPro.com, October 8, 2014.
- Identification of states and territories with a privileged tax regime, Department of the Treasury of Italy. (Italian)
- International taxation, Revenue Agency of Italy. (Italian)
- Taxation of nonresidents, Tax Agency of Spain, July 15, 2015. (Spanish)
- Law no. 88/1933 for the unification of direct contributions and for the establishment of tax on global income, Lege5. (Romanian)
- Decree no. 153 of 11 May 1954 regarding the tax on income of the population, Chamber of Deputies of Romania. (Romanian)
- The income tax on resident individuals, in Mexico and Spain (generalities), National Autonomous University of Mexico. (Spanish)
- Personal income tax act, United Nations Public Administration Network.
- Law of income taxes on natural persons, Constitutional Court of Bulgaria. (Bulgarian)
- An act amending certain provisions of the National Internal Revenue Code of 1977 as amended, and for other purposes, PhilippineLaw.info.
- National Internal Revenue Code, Bureau of Internal Revenue of the Philippines.
- Vietnam: Law on Personal Income Tax, Library of Congress.
- Burmese Abroad Welcome Tax Break, but More Reforms Needed, Myanmar News Linking Site, January 10, 2012.
- International tax - France Highlights 2012, Deloitte.
- International tax - Singapore Highlights 2012, Deloitte.
- International tax - Brunei Darussalam Highlights 2012, Deloitte.
- The rules have changed over the years. For a good explanation of the 2006 changes by a major UK law firm, see http://www.freshfields.com/publications/pdfs/2006/corp-tax-reform.pdf.
- "What is taxable income", Inland Revenue Authority of Singapore.
- The U.S. taxes businesses generally at rates from 15% to 35%. However, the graduated rates for individuals are different from those for corporations. United States Code Title 26 sections 1 and 11, hereafter 26 USC 1 and 11
- E.g., 26 USC 701, et seq.
- Supra. 26 USC 861(a)(3)
- 26 USC 861(a)(1) and (2) and 862(a)(1) and (2), supra.
- U.S. IRC sections 861(a)(4) and 862(a)(4), supra.
- 26 USC 861(a)(6) and 862(a)(6), supra.)
- 26 USC 863(b).
- 26 USC 865(a). (other examples needed)
- Robert F. Klueger (2012). "Overview of International Estate Planning" (PDF). Valley Lawyer. Retrieved June 26, 2014.
- See, e.g., Pierre Boulez, in which a U.S. court determined that income received by a performer relating to sale of recordings of a musical performance was sourced to where such recordings were purchased by consumers.
- See, e.g., India’s rules
- The U.S. and many of its states define taxable income independently of financial statement income, but require reconciliation of the two. See, e.g., California Revenue and Taxation Code sections 17071 et seq.
- "www.cra-arc.gc.ca/E/pbg/tf/t2sch1/t2sch1-08e.pdf" (PDF).
- "Auditors - GBA4".
- U.S. IRS Form 1120 Schedule M-3; Canadian CRA Form T-2 Schedule 1
- U.S. regulations under 26 CFR 1.861-8, et seq. at (hereafter U.S. regulations §)
- Contrast to "integrated" systems providing a credit to enterprise owners for a portion of enterprise level taxation.
- 26 USC 163(j) and long proposed regulations thereunder
- 26 USC 351.
- E.g., Egypt limits the credit to the Egyptian income tax "that may have been payable with respect to profits from works performed abroad," but without a thorough definition of terms. Article (54).
- U.S. rules limit the credit by categories based on the nature of the income. 26 USC 904. For 20 years prior to changes first effective in 2007, there were at least nine such categories. These included, e.g., financial services income, high-taxed income, other passive income, and other (operating or general) income. UK rules provide for separate limitations based on the schedule of income on which UK tax is computed. Thus, credits were separately limited for salaries versus dividends and interest.
- E.g., under U.S. rules, the credit is limited to U.S. tax on foreign source taxable income for a particular category. The rules for determining source for taxation of foreign persons (sections 861-865) apply in computing such credit, and detailed rules are provided in regulations (above) for allocating and apportioning expenses to such income.
- Materials from one major accounting firm provide a table of over sixty such countries. Such table is not comprehensive.
- E.g., Australia imposes a 10% withholding tax rate on interest, subject to treaty reduction.
- E.g., Thailand taxes dividends at 10% and interest at 15%.
- E.g., Italy taxes dividends paid to nonresidents having voting rights in the company paying the dividends at 27% but taxes dividends paid to nonresidents not having such rights at 12.5%.
- See, e.g., 26 USC 871, 881, and 1441.
- "History of the U.S. Tax System". U.S. Department of Treasury. Retrieved 2006-10-31.
- Shafik Hebous (2011) "Money at the Docks of Tax Havens: A Guide", CESifo Working Paper Series No. 3587, p. 9
- Christians, Allison (April 2005). "Tax Treaties for Investment and Aid to Sub-Saharan Africa: A Case Study". Northwestern Public Law Research Paper No. 05-10; Northwestern Law & Econ Research Paper No. 05-15.
- "Model Tax Convention on Income and on Capital" (PDF). OECD. July 2008. Retrieved 2009-06-26.
- Permanent establishment is defined under most treaties using language identical to the OECD model. Generally, a permanent establishment is any fixed place of business, including an office, warehouse, etc.
- See, for example, Singapore's provision that income from outside its borders is not taxed until brought onshore.
- Anti-deferral and other shifting measures have also been combatted by granting broad powers to revenue authorities under "general anti-avoidance" provisions. See a discussion of Canadian GAAR a CTF article.
- Subpart F (sections 951-964)
- Part XVII of Chapter IV ICTA 1988
- "Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations".
- E.g., UK ICTA Section 28AA and guidelines thereunder
- U.S. Department of the Treasury. (2007). Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties.
- Malherbe, Philippe, Elements of International Income Taxation,Bruylant (2015)
- Thruonyi, Viktor, Comparative Tax Law, Aspen Publishers (2003)
- Lymer, Andrew and Hasseldine, John, eds., The International Taxation System, Kluwer Academic Publishers (2002)
- Kuntz, Joel D. and Peroni, Robert J.; U.S. International Taxation
- International Bureau of Fiscal Documentation offers subscription services detailing taxation systems of most countries, as well as comprehensive tax treaties, in multiple languages. Also available and searchable by subscription through Thomson subsidiaries.
- CCH offers shorter descriptions for fewer countries (at a lower fee) as well as certain computational tools.
- At least six international accounting firms (BDO, Deloitte, Ernst & Young, Grant Thornton, KPMG, and PriceWaterhouseCoopers) and several law firms have individual country and multi-country guides available, often to non-clients. See the in-country web sites for each for contact information.
- Hong Kong IRD
- India Income Tax Department
- UK HM Revenue & Customs (formerly Inland Revenue)
- UK International Manual (non-technical guidance)
- U.S. law by code section
- U.S. regs
- USTC post-94 decisions
- USSC cases 1937-1975
- OECD - Centre for Tax Policy and Administration
- United Nations Taxation Committee