国际税收chapter4

1、Qin Luo, School of Public Finance and Taxation,SLUC 1. Because most countries tax on the basis of both the residence status of the taxpayer and the source of income, foreign-source income earned by a resident of a country may be taxed by both the country of source and the country of residence. When

2、tax rates are high, its very necessary to relieve double taxation.Qin Luo, School of Public Finance and Taxation,SLUC 2.three types（causes） of double taxation: (1) source-source claims (2) residence-residence claims (3) residence-source claims (most popular) 3. Tax treaties typically provide relief

3、from the above three major types of international double taxation. Qin Luo, School of Public Finance and Taxation,SLUC 4.relief from double taxation resulting from the residence-source conflicts is ordinarily granted by the residence country. In other words, the source countrys right to tax has prio

4、rity over the residence countrys right.Qin Luo, School of Public Finance and Taxation,SLUC 1. There isnt any precise definition of the term “double taxation”. 2. legal definition of international double taxation-narrow: Imposition of comparable income taxes by two or more sovereign countries on the

5、same item of income (including capital gains) of the same taxable person for the same taxable period. Qin Luo, School of Public Finance and Taxation,SLUC 3. economic definition of international double taxation-broad: The taxable person may be different persons.Qin Luo, School of Public Finance and T

6、axation,SLUC Juridical double taxation occurs where the same legal person is taxed twice on the same income or other taxable item by more than one State. Economic double taxation is where two different legal persons are taxed on the same income or other taxable item by more than one State.Qin Luo, S

7、chool of Public Finance and Taxation,SLUC Examples: (1) Jack is the resident of U.S. and he also gets service income in China in 2014. Then both US and China will tax on his service income. (2) T Co. is incorporated in France but has its effective management in Singapore. Then both France and Singap

8、ore will tax on the income of T Co.Qin Luo, School of Public Finance and Taxation,SLUC (3) P Co. is the parent company in Japan and Q Co. is the subsidiary company in China. Q will pay the dividend to P. Obviously the dividend is from the profit after tax in China. Then the dividend of P will be tax

9、ed by Japanese government too.Qin Luo, School of Public Finance and Taxation,SLUC10US CoChina subUS company liable for 10% tax on dividend income from China. dividendsChina Subsidiary pays 25% tax on its business incomeWill that potentially give rise to double taxation? 4. If the comparable income i

10、s taxed by two different types of tax, such as sales tax and consumption tax, or income tax and wealth tax, it is not included in the double taxation discussed here. Can you give an example of China?Qin Luo, School of Public Finance and Taxation,SLUC 5. International double taxation should be distin

11、guished from internal or domestic double taxation. Domestic double taxation often happens in federalism countries. Eg. In U.S., the taxes include federal taxes, state taxes and local taxes.Qin Luo, School of Public Finance and Taxation,SLUC Central government taxes Taxes shared between the central a

12、nd local government Local government taxes Offices of SATLocal tax bureaus CustomsSATCustoms Duty, VAT and Consumption Tax on importQin Luo, School of Public Finance and Taxation,SLUC There are three methods in common use for granting relief from international double taxation.Qin Luo, School of Publ

13、ic Finance and Taxation,SLUCSubtract :Exemptions and DeductionsGross incomeStep 1：Step 2：Taxable incomeSubtract:CreditsTax payable before creditsStep 3：Tax liabilityStep 4：Apply :Rate schedule15 1. Definition: Foreign taxes paid by a resident of a country are deducted as current expenses in computin

14、g the residents taxable income in the resident country. A deduction is a reduction in the gross (total) amount that must be included in the taxable base.Qin Luo, School of Public Finance and Taxation,SLUC 2. Example: T Co. is the resident of country A.Country ACountry BIncome7030Tax rate40%30%Qin Lu

15、o, School of Public Finance and Taxation,SLUC (1) without relief of double taxation: Foreign tax: 30*30%=9 Domestic tax: 100*40%=40 Total tax: 9+40=49Qin Luo, School of Public Finance and Taxation,SLUC (2) Deduction method Foreign tax: 30*30%=9 Foreign income taxable: 30-9=21 Total income taxable: 7

16、0+21=91 Total tax: 91*40%=36.4Qin Luo, School of Public Finance and Taxation,SLUC Exercise 1:France Germany290,00068,00035%30%Qin Luo, School of Public Finance and Taxation,SLUC 3. Valuation: The deduction method is the least generous method of granting relief from international double taxation, so

17、it is not sanctioned by the OECD Model Treaty and UN Model Treaty. But several countries that have adopted the credit method have retained the deduction method as an optional form of relief.Qin Luo, School of Public Finance and Taxation,SLUC For example, U.S.: deduction method and credit method Neth

18、erland: the foreign withholding tax can be deducted as expenses.Qin Luo, School of Public Finance and Taxation,SLUC 4. Conclusion: The effect of the deduction method is that residents earning foreign-source income and paying foreign income taxes on that income are taxable at a higher combined tax ra

19、te than the rate applied to domestic-source income. So the deduction method creates a bias in favor of domestic investment over foreign investment.Qin Luo, School of Public Finance and Taxation,SLUC From the viewpoint of national self-interest, deduction method may be justified. But from the perspec

20、tive of the total tax burden on a taxpayers worldwide income, deduction method does not achieve equal treatment of residents.Qin Luo, School of Public Finance and Taxation,SLUC 1. Definition: The country of residence taxes its residents on their domestic-source income and exempts them from domestic

21、tax on their foreign-source income. Qin Luo, School of Public Finance and Taxation,SLUC 2. Application: (1) Very few countries Hong Kong is a prominent example have adopted the exemption method with respect to all foreign source income earned by their residents. (It is in fact the source jurisdictio

22、n.) Other examples: Panama, Argentina, Venezuela Q: Where does the system encourage taxpayer to invest?Qin Luo, School of Public Finance and Taxation,SLUC (2) For most countries (examples: Germany, France, Spain, Holland, Austria, Norway, Sweden ) using the exemption method, however, the exemption o

23、f foreign source income is limited to certain types of income, most commonly business income and dividends from foreign affiliates. （participation exemption,p35.p4） Further, the exemption method is often restricted to income that has been subject to tax or subject to a minimum rate of tax by the for

24、eign country.Qin Luo, School of Public Finance and Taxation,SLUC 3. Two methods in countries whose tax rates are progressive: (1) Full exemption (2) Exemption with progression An exemption method under which certain foreign-source income is exempted from tax but is taken into account in determining

25、the rate of tax applicable to other income.Qin Luo, School of Public Finance and Taxation,SLUC A tax rate is some percentage applied to the tax base to determine a taxpayers liability. Tax rate structure usually are either proportional or progressive. A proportional tax rate is one that remains at a

26、 constant percentage regardless of the size of the tax base.Qin Luo, School of Public Finance and Taxation,SLUC A progressive tax rate is one in which an increasing percentage rate is applied to increasing increments of the tax base. A regressive tax structure is one in which a decreasing percentage

27、 rate is applied to increasing increments of the tax base.Qin Luo, School of Public Finance and Taxation,SLUC Example 1: page 34 in the textbook Example 2: T Co. is the resident of country A, which adopts full progressive tax rate. Country ACountry BIncome7030Tax rate80, 40%30%Qin Luo, School of Pub

28、lic Finance and Taxation,SLUC (1) Full exemption The income 30 of country B is free of tax. Country A only levy tax on the domestic income 70. Tax: 70*35%=24.5Qin Luo, School of Public Finance and Taxation,SLUC (2) Exemption with progression Suppose all the income is domestic, then the tax rate woul

29、d be 40%. Tax: 70*40%=28 Exercise: Suppose country A adopts super progressive tax rate. Qin Luo, School of Public Finance and Taxation,SLUC The average tax rate =(80*35%+20*40%)/100=36%40% Tax: 70*36%=25.2Qin Luo, School of Public Finance and Taxation,SLUC Exercise 2FranceGermany290,00068,000350,000

30、: 50%Qin Luo, School of Public Finance and Taxation,SLUC 4. advantage and disadvantage: Advantage: The exemption method is relatively simple for the tax authorities to administer and is effective in eliminating international double taxation. Qin Luo, School of Public Finance and Taxation,SLUC For th

31、e partial exemption system to work effectively, a country must be able to ensure that the exemption is limited to foreign source income that is subjective to foreign tax comparable to domestic tax.Qin Luo, School of Public Finance and Taxation,SLUC disadvantage: (1) The exemption with progression sy

32、stem is more complex. (2) It offends against the tax policy objectives of fairness and economic efficiency. (why? See p34, p5) Therefore, a full exemption method of relieving double taxation is difficult to justify and is used by few countries. Qin Luo, School of Public Finance and Taxation,SLUC (3)

33、 One weakness of an exemption system is its likely impact on the shifting of tax burdens from the earner to the income payer. Example 3 : p36 (also see p26.p2)Qin Luo, School of Public Finance and Taxation,SLUC 1. Definition: Foreign taxes paid by a resident of a country are credited against the res

34、idence countrys tax on the residents foreign-source income. The credit method completely eliminates international double taxation of the residence-source type. Qin Luo, School of Public Finance and Taxation,SLUC For example, T Co. is the resident of country A and has a branch in country B.Country AC

35、ountry Bincome80002000tax rate(1) 30%30%(2) 30%20%(3) 30%40%Qin Luo, School of Public Finance and Taxation,SLUCdomestic tax before credit10 000*30%=3 000(1)(2)(3)Foreign tax2000*30%=6002000*20%=4002000*40%=800Foreign tax credit600400600Final domestic tax3000-600=24003000-400=26003000-600=2400Qin Luo

36、, School of Public Finance and Taxation,SLUC Under the credit method: (1) full credit (2) ordinary credit foreign-source income is subject to domestic tax whenever the foreign tax rate is less than the domestic tax rate.Qin Luo, School of Public Finance and Taxation,SLUC Credit countries invariably

37、do not pay tax refunds when their taxpayers pay a foreign income tax at an effective rate that is higher than the domestic effective tax rate. Nor do they allow the excess foreign tax to offset taxes imposed on domestic income. Qin Luo, School of Public Finance and Taxation,SLUC In other words, the

38、credit for foreign taxes paid is usually limited to the amount of the domestic tax payable on the foreign-source income (limitation on the credit). Excess foreign tax credit =foreign tax limitation on the credit foreign tax credit balance = limitation on the credit foreign tax Qin Luo, School of Pub

39、lic Finance and Taxation,SLUC Resident taxpayers are treated equally from the perspective of the total domestic and foreign tax burden, except if foreign taxes exceed domestic taxes. Moreover, subject to the same exception, the credit method is neutral with respect to a resident taxpayers decision t

40、o invest domestically or abroad. Example 4: p37.p3Qin Luo, School of Public Finance and Taxation,SLUC Many countries allow excess foreign tax credits to be carried forward and credited against domestic taxes in future years. The carry-forward period differs from country to country. Such as Canada 7

41、years, USA 5 years, Japan 3 years, China 5 years.Qin Luo, School of Public Finance and Taxation,SLUC Besides carry forward, carry backward is also allowed in some countries. For instance, Canada 3 years. Some other countries ,such as Germany, Luxembourg and France allow the excess foreign tax credit

42、s to be deducted as current expenses. Qin Luo, School of Public Finance and Taxation,SLUC Example 5,limitation Foreign taxexcessbalance Domestic tax201052011 1510530Qin Luo, School of Public Finance and Taxation,SLUC (1) carry-forward is not allowed: The effective credit is 10 and the final domestic

43、 tax is 20 (30-10). (2) carry-forward is allowed: The effective credit is 15 and the final domestic tax is 15 (30-15).Qin Luo, School of Public Finance and Taxation,SLUC On tax policy grounds, the credit method is generally recognized to be the best method for eliminating international double taxati

44、on. However, the operation of a foreign tax credit system can be complex from both the government and taxpayer sides. (p38)Qin Luo, School of Public Finance and Taxation,SLUC A foreign tax credit system may encourage a source country to increase its taxes on income earned by nonresidents to the leve

45、l of tax in the country of residence (so-called soak-up taxes). Qin Luo, School of Public Finance and Taxation,SLUC Countries use a variety of types of limitations. 1. overall or worldwide limitation: -The credit is limited to the lesser of the aggregate of foreign taxes paid and the domestic tax pa

46、yable on the total amount of the taxpayers foreign source income. This method permits the averaging of high foreign taxes paid to some countries with low foreign taxes paid to other countries.(p39,p3)Qin Luo, School of Public Finance and Taxation,SLUC 2. country-by-country limitation -the credit is

47、limited to the lesser if the taxes paid to each foreign country and the domestic tax payable on the taxpayers income from each country. This method prevents the averaging of high and low foreign taxes paid to various countries, but it permits the averaging of high and low rates of foreign tax paid t

48、o a particular country on different types of income. (p39,p4)Qin Luo, School of Public Finance and Taxation,SLUC 3. item-by-item limitation -the credit is limited to the lesser of the foreign tax paid on each particular item of income and the domestic tax payable on that item of income. This method

49、prevents averaging and is probably the best method from a theoretical perspective, although few countries use it in practice. Qin Luo, School of Public Finance and Taxation,SLUC Example 6: p40-42 Example 7:Compute the limitation on credit and the tax payable of R Co. to country A using the overall a

50、nd country-by-country limitation methods respectively.countrycompanyincome payabletax rateforeign taxAControlling, R100050%BBranch, S10060%60CBranch, T10040%40Qin Luo, School of Public Finance and Taxation,SLUC Total tax before credit =(1000+100+100)*50%=600 (1) overall limitation: Limitation on cre

51、dit: (100+100)*50%=100 Foreign tax: 60+40=100 Country A tax after credit: 600-100=500Qin Luo, School of Public Finance and Taxation,SLUC (2) country-by-country limitation: Country B limitation: 100*50%=50 Country C limitation: 100*50%=50 Country B tax: 60 Country C tax: 40 Country A tax after credit

52、: 600-50-40=510 Q:Suppose the income taxable of T Co. is -50.Qin Luo, School of Public Finance and Taxation,SLUC Total tax before credit =(1000+100-50)*50%=525 (1) overall limitation: Limitation on credit: 525*(100-50)/1050=25 Foreign tax: 60 Country A tax after credit: 525-25=500Qin Luo, School of

53、Public Finance and Taxation,SLUC (2) country-by-country limitation: Country B limitation: 100*50%=50 Country C limitation: 0 Country B tax: 60 Country C tax: 0 Country A tax after credit: 525-50=475Qin Luo, School of Public Finance and Taxation,SLUC In conclusion, when the foreign branches make a pr

54、ofit, overall limitation method can decrease the tax burden of the taxpayer. When some foreign branches make a loss, country-by-country limitation method can decrease the tax burden of the taxpayer.Qin Luo, School of Public Finance and Taxation,SLUC In practice, more countries adopt the country-by-c

55、ountry limitation method, such as U.K., Germany, Finland. Qin Luo, School of Public Finance and Taxation,SLUC Note: The three methods for limiting the foreign tax credit are not mutually exclusive. For instance, the U.S. uses this type of hybrid method, i.e. separate baskets approach.（p42）Qin Luo, S

56、chool of Public Finance and Taxation,SLUC China: EIT: country-by-country IIT: country-by-country and item-by-itemQin Luo, School of Public Finance and Taxation,SLUC Assignment 3-1: T Co is the resident of China. Its domestic income taxable is 3000,000 in 2008. Its income earned abroad is as follows:

57、Country ABusiness income 1500,00040%Royalty 500,00015%Country BRent 300,00020%Interest 500,000Royalty 200,000Qin Luo, School of Public Finance and Taxation,SLUC All income earned abroad is taxed by local government. Compute the foreign tax credit and the actual tax payable T Co should pay to China.Q

58、in Luo, School of Public Finance and Taxation,SLUC Assignment 3-2: Mr. Li earned income 79,600 from country A in 2010, including payroll 69,600 (average 5,800 per month) from one company and service income 10,000. He paid tax 2100 to country A. Besides, he earned royalty 30,000 from country B and al

59、so paid tax 6,000. Compute the foreign tax credit and the actual tax payable Mr. Li should pay to China.Qin Luo, School of Public Finance and Taxation,SLUC Country A limitation: (1500,000+500,000)*25%=500,000 Country B limitation: (300,000+500,000+200,000)*25%=250,000 Country A tax: 1500,000*40%+500

60、,000*15%=675,000 Country B tax: (300,000+500,000+200,000)*20%=200,000Qin Luo, School of Public Finance and Taxation,SLUC total tax before credit: (3000,000+2000,000+1000,000)*25%=1500,000 Tax after credit: 1500,000-500,000-200,000=800,000Qin Luo, School of Public Finance and Taxation,SLUC (1) countr