International Tax Primer 3rd Edition Brian Arnold – eBook

254 Pages·2017·13.05 MB·English

International Tax Primer
Third Edition
Brian J. Arnold
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Table of Contents
Preface xi
CHAPTER 1
Introduction
1.1 Objectives of This Primer
1.2 What Is International Tax? 2
1.3 Goals of International Tax Rules 4
1.4 The Role of the Tax Adviser in Planning International Transactions 7
CHAPTER 2
Jurisdiction to Tax 15
2.1 Introduction 15
2.2 Defining Residence 17
2.2. l Residence of Individuals 17
2.2.2 Residence of Legal Entities 19
2.2.3 Treaty Issues Relating to Residence 21
2.3 Source Jurisdiction 22
2.3. l Introduction 22
2.3.2 Employment and Personal Services Income 23
2.3.3 Business Income 24
2.3.4 Investment Income 26
CHAPTER 3
Taxation of Residents 29
3.1 Introduction 29
3.2 Taxation of Residents on Their Worldwide Income 30
3 .2.1 Tax Policy Considerations 30
3.2.2 The Tax Consequences of Residence 31
3.2.3 Double Taxation 32
3.2.4 Computation of the Foreign Source Income of Residents 32
3.2.4.1 In General 32
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Table of Contents
3.2.4.2 Foreign Exchange Gains and Losses 33
3.2.4.3 The Treatment of Losses 35
3.2.5 Tax Administration Issues 35
3.3 Exceptions to Worldwide Taxation 36
3.3. l Nonresident Companies and Other Legal Entities 36
3.3.2 Temporary Residents 37
3.4 Special Issues 38
3.4.1 Exit or Departure Taxes 38
3.4.2 Trailing Taxes 40
3.4.3 Resident for Part of a Year 41
CHAPTER 4
Double Taxation Relief 43
4.1 Introduction 43
4.2 International Double Taxation Defined 45
4.3 Relief Mechanisms 46
4.3.1 Deduction Method 47
4.3.2 Exemption Method 48
4.3.2.1 Participation Exemption 51
4.3.3 Credit Method 53
4.3.3.1 General Rules 54
4.3.3.2 Types of Limitations 56
4 .3 .3 .3 Indirect or Underlying Credit 59
4.3.4 Comparison of the Exemption and Credit Methods 61
4.3.5 Treaty Aspects 64
4.4 Allocation of Expenses 64
4.5 Tax Sparing 66
CHAPTER 5
Taxation of Nonresidents 71
5.1 Introduction 71
5.2 Tax Policy Considerations in Taxing Nonresidents 72
5.3 Threshold Requirements 74
5.4 Source Rules 75
5.5 Double Taxation 75
5.6 Excessive Taxation of Nonresidents 76
5.7 Computation of the Domestic Source Income of Nonresidents 76
5.8 Taxation of Various Types of Income of Nonresidents 77
5.8. l Business Income 77
5.8.1.1 In General 77
5.8.1.2 Branch Taxes 79
5.8.2 Income from Immovable Property 80
5.8.3 Income from Employment 80
5.8.4 Investment Income: Dividends, Interest, and Royalties 81
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Table of Contents
5.8.5 Capital Gains 82
5.9 Administrative Aspects of Taxing Nonresidents 83
5.9.1 Introduction 83
5.9.2 Obtaining Information about Domestic Source Income of
Nonresidents 83
5.9.3 Collection of Tax from Nonresidents 84
CHAPTER 6
Transfer Pricing 89
6.1 Introduction 89
6.2 The OECD Transfer Pricing Guidelines 91
6.3 United Nations, Practical Manual on Transfer Pricing for Developing
Countries 92
6.4 The Arm's-Length Standard 92
6.4.1 Introduction 92
6.4.2 Comparability Analysis 93
6.4.3 Comparable Uncontrolled Price Method 94
6.4.4 Resale-Price Method 95
6.4.5 Cost Plus Method 96
6.4.6 Comparison of Traditional Methods 96
6.4.7 Profit-Split Method 97
6.4.8 Transactional Net Margin Method 98
6.5 Sharing of Corporate Resources 100
6.5.1 Introduction 100
6.5.2 Loans or Advances 100
6.5.3 Performance of Services 101
6.5.4 Use of Tangible Property 101
6.5.5 Use or Transfer of Intangible Property 101
6.6 Cost-Contribution Arrangements 102
6.7 Disregarded Transactions 104
6.8 Transfer Pricing Documentation Requirements 105
6. 9 Treaty Aspects of Transfer Pricing 106
6.10 Tax Policy Considerations: Formulary Apportionment and the
Future of the Arm's-Length Method 107
CHAPTER 7
Anti-avoidance Measures Ill
7.1 Introduction 111
7.2 Restrictions on the Deduction of Interest: Thin Capitalization and
Earnings-Stripping Rules 114
7.2.1 Introduction 114
7.2.2 The Structural Features of Thin Capitalization and
Earnings-Stripping Rules 116
7.3 CFC Rules 118
7 .3. I Introduction 118
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Table of Contents
7.3.2 Structural Features of CFC Rules 120
7.3.2.1 Definition of a CFC 120
7.3.2.2 Designated Jurisdiction or Global Approach 122
7.3.2.3 Definition and Computation of Attributable Income 124
7.3.2.4 Nature and Scope of Exemptions 126
7.3.2.5 Resident Taxpayers Subject to Tax 127
7.3.2.6 Relief Provisions 128
7.3.3 Tax Treaties and CFC Rules 129
7 .4 Nonresident Trusts 130
7 .5 Foreign Investment Funds 131
CHAPTER 8
An Introduction to Tax Treaties 135
8.1 Introduction 135
8.2 Legal Nature and Effect of Tax Treaties 136
8.2.1 Vienna Convention on the Law of Treaties 136
8.2 .2 The Relationship between Tax Treaties and Domestic Law 13 7
8.3 The OECD and UN Model Tax Treaties 139
8.4 The Process of Negotiating and Revising Tax Treaties 143
8.5 Objectives of Tax Treaties 144
8.6 Interpretation of Tax Treaties 147
8.6.1 Introduction 147
8.6.2 The Interpretive Provisions of the Vienna Convention on the
Law of Treaties 148
8.6.3 The Interpretation of Undefined Terms in Accordance with
Domestic Law - Article 3 (2) 1S O
8.7 Summary of the Provisions of the OECD and UN Model Treaties 152
8.7.1 Introduction 152
8.7.2 Coverage, Scope, and Legal Effect 152
8.7.3 The Distributive Rules: Articles 6 through 21 154
8.7.3.1 Introduction 154
8.7.3.2 Business Income 154
8.7.3.3 Employment and Personal Services Income 161
8.7.3.4 Income and Gains from Immovable Property 163
8.7.3.5 Reduced Withholding Rates on Certain Investment
Income 164
8.7.3.6 Other Types of Income 165
8.7.4 Administrative Cooperation 165
8.8 Special Treaty Issues 166
8.8.1 Nondiscrimination 166
8.8.2 Treaty Abuse 167
8.8.2.1 Introduction 167
8.8.2.2 Treaty Shopping 169
8.8.2.3 OECD BEPS Action 6: Preventing Treaty Abuse 171
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Table of Contents
8.8.3 Resolution of Disputes 174
8.8.4 Administrative Cooperation 175
8.8.5 Attribution of Profits to Permanent Establishments 178
CHAPTER 9
Emerging Issues 183
9.1 Introduction 183
9.2 Base Erosion and Profit Shifting (BEPS) 183
9.2.1 Introduction 183
9.2.2 The 1998 OECD Harmful Tax Competition Report 184
9.2.3 The G20/ BEPS Project 185
9.3 Hybrid Arrangements 189
9.3.1 What Is a Hybrid Arrangement? 189
9 .3 .2 Hybrid Entities 190
9.3.3 Hybrid Financial Instruments 194
9.3.4 OECD BEPS Proposals for Hybrids 195
9.4 Fees for Management, Technical, and Consulting Services 196
9.4.1 Introduction 196
9.4.2 The Taxation of Income from Management, Technical, and
Consulting Services under Tax Treaties 198
9.4.3 Proposed Article on Fees for Management, Technical, and
Consulting Services in the UN Model Treaty 199
9.5 Arbitration 200
9.6 The Digital Economy - Electronic Commerce 204
9 .6.1 Introduction 204
9.6.2 Tax Challenges Posed by the Digital Economy 205
Glossary of International Tax Terms 209
Index 217
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Preface
The first edition of the International Tax Primer began in the 1990s as a project to
develop materials for the OECD to use in its outreach activities with emerging
economies in Europe after the breakup of the Soviet Union. I recruited Mike Mcintyre
of Wayne State University to work with me in preparing those materials. Unfortunately,
the materials we prepared proved to be unacceptable to the OECD largely because, in
our view at least, it did not adhere sufficiently to the OECD positions on several
international tax issues. However, the OECD generously permitted us to use those
materials as the foundation for what became the International Tax Primer.
Much to my surprise and delight, the first two editions of the Primer were well
received by students of international tax from all over the world. I hope that a new
generation of students will find this third edition to be helpful in the increasingly
challenging task of understanding international tax.
The third edition does not have the benefit of Mike Mcintyre's insight and
wisdom. Mike passed away in 2013 after a long illness. We discussed the need for a
third edition on several occasions, so I know that Mike would have approved of a third
edition in principle; but I also know that his involvement would have made it a better
book.
The third edition of the International Tax Primer has been expanded substan
tially. A lot has happened in the international tax world since the second edition was
published in 2004. The chapters on transfer pricing, anti-avoidance rules, and tax
treaties have been substantially revised to reflect the changes of the last decade.
Similarly, the chapter dealing with recent developments has been changed significantly
to deal with the OECD's Base Erosion and Profit Shifting project, arbitration of tax
disputes, and the proposed article in the United Nations Model Treaty dealing with fees
for technical services, none of which were dealt with in the second edition. In addition,
new chapters have been added dealing with basic aspects of the taxation of residents
on their foreign source income and nonresidents on their domestic source income.
Large ongoing projects, such as BEPS, pose a special challenge for authors.
Obviously, BEPS is so important that it cannot simply be ignored. However, when we
do not know what the final recommendations will be and whether countries will act on
them, it is difficult to decide how much detail to provide on the draft proposals. I have
xi
Preface
opted to provide a somewhat detailed discussion of the BEPS project in general in
Chapter 9 dealing with Emerging Issues, and at least a brief mention of each BEPS
action item at places in the book where a particular topic is dealt with. Needless to say,
I anticipate that a fourth edition of the Primer will be necessary in a few years once the
full impact of the BEPS project is clearer.
Readers will quickly notice that the Primer does not contain any footnotes or a
selected bibliography. Given the basic nature and purpose of the Primer, I concluded
that footnotes were unnecessary and would make the text less readable; however, any
references that I considered to be necessary are provided in the text. I also concluded
that a selected bibliography was unnecessary, largely because there is an extensive
literature dealing with international tax and, with the Internet, it is relatively easy to
find relevant sources.
I wish to thank my assistant, Carol Hargreaves, who edited and proofread the
manuscript with her customary skill more than once.
The manuscript is up to date as of September, 2015.
Brian J. Arnold
Ailsa Craig, Ontario, Canada
September 2015
xii