International Taxation

Chapter 3: Introduction to International

Taxation
Semester 2, Jan. – March
Rennes School of Business
Instructor: Akanksha JALAN
Session contents:
• Introduction and historical background

• Key issues in international taxation:

1. Jurisdiction

2. Double Taxation

3. Base Erosion

4. Tax principles in an international context

5. Tax planning by MNEs

6. Tax administration

7. The Tax Gap

8. Cross-border enforcement of taxes

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Introduction
• The primary issue that arises in international taxation is that of jurisdiction.

• Simply speaking, jurisdiction refers to the scope and extent of a country’s right to tax an
individual or company.

• There is no ‘international tax system’ as such.

• In fact, each country has its set of domestic tax laws that have developed and evolved
over a long period of time.

• Therefore, any study of international taxation requires an understanding of both the

country-specific tax laws and the international system in which they operate.

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 • The end of World War II marked a significant increase in
liberalization and globalisation of the world economy.

• The current tax systems in most countries today are the product of
policies developed in the first half of the 20th century, when cross-
border trade was limited.

• Unfortunately, these old tax laws have failed to keep up with the
challenges of the global market that has virtually no boundaries.
Historical • Worse, it is not easy for governments to change and modify old tax
background - systems out of the fear of public outrage.

1 • This has led companies and individuals to look for opportunities to

play different tax systems against each other, to minimise overall tax
outflows.

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 • This has created a new problem of tax competition for national
governments who may suffer from reduced tax collections due to
such behaviour.
• The 1960’s marked an important period in terms of removal of
trade barriers between nations, but also in terms of massive tax
evasion by multinational enterprises (MNEs) that could now
exploit their presence in several different countries.
• In response, the U.S. began to pass anti-avoidance legislation to
Historical avoid loss of taxes collected from MNEs in the U.S.

background - • This has been followed by most other countries today to prevent
international tax avoidance.
2 • The increased complexity in tax rules, systems and policies across
the world had led to greater cooperation among nations in an
attempt to make their tax systems more robust to evasion.

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What is International Tax Law?
Typically, the system of International Tax Law consists of:

Bilateral agreements: These are double-tax treaties between

two or more nations that help resolve disputes relating to tax
jurisdicion or the right to tax.

International agreements: These include agreements such

as the Vienna Convention on the Law of Treaties, the Treaty
of Rome etc.

Protocols for exchange of information on taxpayers

(sometimes).

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Essential concepts
in International
Taxation

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1. Jurisdiction
• Which individuals and companies does a country
have the right to tax – those who live in it, or work
in it, or something else?

• The extent of a country’s right to tax is called its tax

jurisdiction.

• This is determined by the concept of Tax Residence,

which is different from physical residence.

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Determining tax jurisdiction
The two main systems used globally for determining tax jurisdiction are:

Residence: A country can tax an individual/

corporation which is tax resident in it, on
their worldwide income, i.e. on domestic
income as well as that generated beyond its
borders.

Source: A country may even tax the income

of a non-resident as long as the income being
taxed has been generated within the
territorial boundaries of the country (or
simply, ‘sourced’ in that country).

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2. Double Taxation
• The main issue in international taxation arises when a person
resident in one country generates or earns income in another
country.
• From the country-perspective, both governments will wish to tax
what they believe is rightfully theirs.
• But, from the taxpayer’s perspective, such a situation may result in
double-taxation.
• This will require some sort of mutual understanding between the
two nations as to their respective claims in the tax amount. These are
typically referred to as double-tax treaties.
• The most influential body in developing these treaties is the
Organisation for Economic Cooperation and Development (OECD).
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3. Base Erosion
• The tax base of a country refers to the total amount of earnings that
it has the right to tax.
• Higher the tax base, higher the tax collection for the government.
• Sometimes however, smart taxpayers may deliberately or
unintentionally, reduce the tax base by shifting their earnings to
another country.
• This is known as Base Erosion and can result from any kind of tax
planning, avoidance or evasion activity.
• Today, protecting the tax base from erosion has become a critical
issue for all governments.
• The OECD is playing a major role in this regard through its work
on BEPS (Base Erosion and Profit Shifting).
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4. Tax principles in an international environment
• We know that two key features of a good tax system are Equity (fairness)
and Economic Efficiency (neutrality in decision-making).
• But these features need to be revised in the international context.
A. Equity: We must now think of equity in terms of inter-nation equity, i.e.
how to fairly divide taxes between the two or more countries involved?
This will dépend upon the residence versus source principle in use in the
respective countries and often, the final answer will not be simple.
B. Economic Efficiency: In the international setting, this implies the
importance of global welfare over that of individual nations’ through
eliminating posibilities of playing one tax system against another.

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5. Tax planning by MNEs
• MNEs typically consist of groups of companies or business entities that operate
in several different jurisdictions, but remain under common control and
management.
• Given their global presence, they are better equipped to shift profits between
countries to minimise their global tax bill and maximise their after-tax profits at
the group level.
• Large corporations invest huge amounts in tax planning activities, saving on
average $4 for every $1 spent on these efforts. (Maydew, 1998).
• Common techniques employed include the use of tax havens, shell companies
and other opaque mechanisms that conceal the true nature and scope of their
activities and earnings.
• Some large corporations have faced significant reputational damage on account
of media exposure of their tax avoidance activities. Any guesses who they are?
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6. Tax Administration - 1
• The purpose of any system of tax administration is to ensure smooth
collection of taxes, and minimisation of associated costs.
• In the international context, governments already frustrated by
increasingly creative mechanisms of tax avoidance have come together in
higher cooperation and exchange of information.
• For instance, the OECD regularly publishes comparative information
about global tax practices for a large number of developed and emerging
economies (56 in total in its 2015 report).
• Similarly, the European Commission (EC) brings together representatives
from member nations to discuss tax expériences, on an annual basis.

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6. Tax Administration - 2
• Tanzi (2000) brings up the concept of ‘fiscal termites’, or factors
that threaten the integrity of tax systems worldwide.
• Some of these are:
• E-commerce
• Electronic money
• Offshore financial centres (OFCs) and tax havens
• Derivatives and hedge funds
• Braithwaite (2005) argues that fiscal termites lead to ‘moral’
termites, implying an overall decline in tax morality among a
population as such behaviour becomes normalized.

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7. The Tax Gap
• ‘To close the Tax gap’ is now a new agenda among nations of the
world, as they try to maximise tax revenues and limit base erosion.
• Tax gap is the difference between the rightful amount of tax that
should have been collected and that which has actually been
collected.
• Larger the tax gap, larger the loss of revenue to the Treasury.
• Tax gaps occur on account of factors such as under-reporting of
income, non-payment, tax evasion and jurisdictional disagreements
with other nations.

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8. Cross-border enforcement of taxes - 1
• Historically, the general principle in international tax law has been that a country
shall not assist another country in its collection of taxes. This is known as the
Revenue Rule.
• However, in the increasingly complex times today, there is increased tax
cooperation among nations.
• Common channels include:
• Provisions in the thousands of bilateral double-tax treaties that require
exchange of tax information and sometimes, even assistance in tax
collection from another country.
• Unilateral agreements whereby a country promises to voluntarily provide
information to another country to facilitate smooth collection of taxes.
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8. Cross-border enforcement of taxes - 2

• The EU and OECD measures in this regard include:

• The requirement to exchange information, automatically, without demand by the other
state. For example, lists of interest payments by a bank in one country to that in another.
• The right to permit tax officials from another country, to visit for purposes of
investigation.
• Recovery of tax claims, where one state may actually collect taxes on behalf of another
state and later, transmit the amount collected.
• Measures of conservancy, such as freezing/ seizing the assets of the defaulting taxpayer
to ensure that the other state can recover its dues smoothly.
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Thank you!