What is the Basic Problem of International taxation law
I.T.L. includes all standards that regulates cross border matters
“Which state is allowed to tax which income?” “Which standards give rise to the right of taxation?”
3 Reasons why international Tax Law is growing in importance
international integration of the economy
increase in Cross Border relationship
unfair competition caused by different tax laws
Fundamentals of international Law
Customary international law (Internationales Gewohnheitsrecht)
Double Taxation Agreements
Decision of international courts
In the broader sense, international tax law also includes provisions of domestic tax law (e.g. Individual provisions of the German Income Tax Act (EStG), Corporation Tax Act (KStG), Value Added Tax Act (UStG) and Foreign Tax Act))
sovereignty principle (a. important)
Due to the sovereignty principle, every country is autonomous in its territorial sov-ereignty when it comes to defining its tax claims and exercising its tax autonomy. However, every country is obliged to recognise and respect the territorial sovereignty of other countries (“Non‐Intervention in Domestic Affairs”
Universality principle
When the entirety of the revenue earned by a person both at home and abroad is subject to taxation (global income), this is what is known as the universality principle. As such, the person in question is subject to unlimited tax liability.
Territoriality principle
When applying the territoriality principle, a country’s tax claim only includes those events taking place in its own territory. This is what is known as limited tax liability.
Basic Issues of International Tax Law
Generally speaking, taxable persons are subject to double taxation when they simultaneously meet the conditions for unlimited or limited tax liability in more than one country. A distinction is made here between legal and economic double taxation.
Economic double taxation
Economic double taxation is when the income of different taxable persons is subject to taxation. Such is the case in particular if the profits earned by a foreign corporation, which are taxed in that corporation’s jurisdiction and which are distributed to the shareholder are once again subject to taxation (dividend taxation).
Criteria for legal double taxation
•Taxation by at least two national tax jurisdictions
•Same tax subject
•Same tax object
•Same tax period
•Similarity of taxes
Generally speaking, legal double taxation is when taxable persons simultaneously meet the conditions for unlimited or limited tax liability in more than one state.
Tax Evasion (Steuerhinterziehung)
Cross‐border tax‐related matters that result in under‐taxation at home
This generally refers to the improper and abusive reduction of tax by abusing international differences in tax burdens: Under‐taxation is therefore the result of a structure that does not match the actual economic situation. E.g.: A resident taxpayer changes their residence to a low‐tax state without abandoning their economic interests at home.
cross‐border tax‐related matters that result in a reduction of the domestic tax burden
– Cross‐border activities between related persons
– Relocation
– Shifting income to foreign corporations
Double taxation
DT can result in an extra financial burden; the net earnings decrease. The taxable person may ask whether they should limit their deployment to only one jurisdiction. In this case, only one instance of taxation would take place and returns would increase
Under‐taxation
UTby contrast, grants the taxable person a measure of financial alleviation(Erleichterung) and a tax advantage
Cause of Double Taxation
Example 1: Unlimited tax liability in the country of residence and limited tax liability in the source country. Thomas Mustermann is resident in Ulm and receives income on a flat situated in Switzerland. Legal consequences – Thomas Mustermann has unlimited income tax liability in Germany (universality principle). – In Switzerland, he has limited income tax liability on his rental income (territoriality principle).
Cause of double taxation:
Example 2: Two taxable persons with unlimited tax liability in different countries Colt Dickson, a US citizen, has lived and worked in Stuttgart for a number of years. Legal consequences – Since, as a subjective connecting criterion, the taxable person has chosen Germany as his country of residence, Colt Dickson has unlimited income tax liability in Germany. – The USA is built on nationality; as a result, all citizens, regardless of their country of residence, are subject to unlimited income tax liability.
Causes of Double Taxation:
Measures aimed at Eliminating or Reducing Double Taxation
Unilateral measures
Bilateral measures
Supranational measures (EU)
Multilateral measures
Unilateral measures (domestic law)
Measures taken by a state that are aimed at eliminating or reducing double taxation: § 34 c and § 32b EStG
Exemption method (resulting from the respective DTT)
Tax credit method (§ 34c para. 1; § 32d para. 5 EStG; § 26 para. 1 KStG)
Deduction method (§ 34c para. 2, 3 EStG)
Lump sum payment (§ 34c para. 5 EStG; lump‐sum remission; foreign activity remission)
Remission (Erlass) (§ 34c para. 5 EStG)
Measures taken by two countries that are aimed at eliminating or reducing double taxation:
Double Tax Treaty (DTT) Via Tax credit method or Exemption method
Tax credit method
The domestic taxation level shall apply, irrespective (ungeachtet) of where the income originates Competitiveness in accordance with capital export neutrality (Neutrality with regard to the country of residence)
Exemption method (Freistellungsmethode)
Income earned abroad is taxed abroad at the level of taxation of the country in question Competitiveness in accordance with capital import neutrality (neutrality with regard to the country where the economic activity is exercised)
Foreign Tax Act (Außensteuergesetz) 4 important paragraphs
Cross‐border relationships § 1 AStG
Extended limited tax liability § 2 AStG
Exit taxation § 6 AStG
Controlled foreign corporation rules § 7 AStG
The European Union
The EU is currently made up of 28 Member States with a total of around 500 million inhabitants. The founding treaties form the basis for cooperation between the Member States. The European Union does not collect taxes!
Fundamentals of European Law
Legal bases Treaty on the Functioning of the European Union
The legal bases do not contain a dedicated section on taxation polic
Tax harmonisation is not an independent objective of the EU The EU’s objectives are only affected if required in order to comply with the Fundamental Freedoms.
However: The harmonisation requirement for all indirect taxes (VAT, excise duties) is based on article 110 TFEU (Ban on Tax Discrimination in respect of Imports).
Legal bases
“Internal Market”
The Fundamental Freedoms and the Competition Rulesform the basis
Fundamental freedoms are subjective rights of the individual
Competition Rules:
Ban on restriction of competition (articles 101‐106 TFEU)
Special taxation‐related anti‐discrimination clauses (articles 110 – 113 TFEU)
Fundamental prohibition of state aid that distorts competition (articles 107 – 109 TFEU)
Consequences for corporate taxation in the EU
The EU does not have exclusive jurisdiction
Intergovernmental tax differential influences businesses’ choice of location, investment behaviour and financing methods
Taxation can trigger unfair competition, running counter to the concept of the single internal market being an area of free competition.
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