International Taxation

International Taxation

Due to cross border economic transaction earnings are not restricted to national boundaries

→         Taxation in resident state (Taxation of global income)

→         Taxation in foreign state (Source based taxation)

➔ Double Tax Avoidance Agreements help avoiding double taxation

• Source = Where income is earned
• Residence = Income earners primary location
• Foreign tax credit = unilateral concession by a country to another country right to tax income, effected by reduction in the residence country’s tax on the income
• Territorial Taxation = Country limits tax base by excluding income earned outside its own territory

Tax Treaties:

• Network of bilateral income tax treaties, allocate tax base between treaty partners to reflect the nature of the income and how it is earned
• Business income first taxed in the source state, with the taxpayer’s primary state expected to relieve double taxation by providing foreign tax credit

Agreement between two nations may be based on these models:

• Organization for Economic Co-operation and Development (OECD Model)
• United Nations Model  (UN)
• US Model

Double Taxation:

• When residency in two states
•  When Global + Source-Based Taxation

➔ Double Tax Avoidance Agreements ( DTAA)

• Recovery of income tax in both countries
• Allocate equitable and fairly the taxing rights
• Encourage free flow of international trade
• Increase transparency

Two types of DTAA:

1. Bilateral Treaties (between two states)
2. Multilateral Treaties (between more states)

Relief mechanisms:

• Deduction method:

Resident country allows its taxpayers to claim a deduction for taxes paid to a foreign government.