Fundamentals of double taxation
Generally speaking, double taxation is when taxable persons are subject to double taxation when they simultaneously meet the conditions for unlimited or limited tax liability in more than one state!
Example 3: Two individuals subject to limited tax liability in different countries Josef Matula, who lives in Frankfurt, sets up a permanent establishment in Foreign Country (1).
As part of its capital, the permanent establishment holds shares in a corporation that falls under the jurisdiction of Foreign Country (2). Double taxation takes place if Foreign Country (1) levies withholding taxes (capital gains tax) on the corporation’s dividends and Foreign Country (1) assigns the profits from the participation in the corporation to the permanent establishment’s income.
Beispiel 3: Zwei in verschiedenen Ländern beschränkt steuerpflichtige Personen Josef Matula, der in Frankfurt wohnt, gründet eine Betriebsstätte im Ausland (1).
Die Betriebsstätte hält als Teil ihres Kapitals Anteile an einer Kapitalgesellschaft, die der Rechtsprechung des ausländischen Staates (2) unterliegt. Zu einer Doppelbesteuerung kommt es, wenn das Ausland (1) auf die Dividenden der Kapitalgesellschaft Quellensteuern (Kapitalertragsteuer) erhebt und das Ausland (1) die Gewinne aus der Beteiligung an der Kapitalgesellschaft dem Einkommen der Betriebsstätte zurechnet.
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What are the 3 measures aiming at elimination double taxation?
Unilateral measures
bilateral measures
suranational & multinational measures
Why is it important to reduce the risk for double taxation?
Double taxtation reduces the profitability of foreign investements. Therefor it is important to reduce them. It hampers the profitabilty and enlarge the Lock in effect of companies and investement.
From a macroeconomic perspective, double taxation hampers the efficient inter‐governmental allocation of production factors.
Also, for purely fiscal reasons, it is desirable to implement measures aimed at eliminating double taxation since, in the short term, higher long‐term tax revenue can be overcompensated by reduced economic growth and the resulting reduced taxable profits.
What are the bilateral measures aimed at eliminating double taxation?
DTT —> Double Taxation treaties
DTT are treaties between two countries. They use a system of distribution or waver rules (Verteilungs oder Verzichtsregelungen)
What are the most import regulations of DTT (bilateral method) to reduce double taxation?
If the source country is assigned the unlimited right of taxation, then the exemption procedure generally applies (subject to the progression clause) (article 23 A OECD MTC).
If the source country’s right of taxation is partially limited, then the country of residence shall apply the tax credit method (article 23 B OECD MTC).
Testing schema for DDT
What was the objective of the OECD MTC
The objective of the model agreement was to achieve greater harmonisation of the bilateral agreements of the member states by using standard definitions, systems, principles and interpretation with regard to the conclusion and application of DTT.
What are the differences between the OECD Model and the UN Model in relation to DTT´s
OECD:
Broad restriction of withholding taxation right
Basis for negotiations between industrialised nations
UN:
Enhanced withholding taxation right
Preferential fiscal treatment of developing countries
Do DTT outweigh domestic Taxation Law?
The rules of the DTT have the status of a statutory law i.e. they have the same status as domestic taxation laws. However, as “lex specialis”, DTT enjoy priority over domestic taxation laws.
Only a more specialised successor law can override the DBA rules (“treaty override”). Such treaty overrides breach the general rules of contract compliance. The contracting partner is granted a right of termination.
In which Section is the OECD MTC devided and what is their content?
Section I: Scope of the Convention (articles 1 and 2) This section defines the personal and objective scope, thereby answering the question of which persons and which tax types are subject to the Convention
Section II: Definitions (articles 3‐5) In this section, the Convention, in accordance with its function as an independent set of rules, defines the terms used in the Convention using its own terminology.
Section III: Assignment of Income Taxation Rights (articles 6‐21) This section constitutes the main body of the DTT. The provisions of this section stipulate the extent to which the source country’s taxation right with regard to the types of income listed is maintained or restricted. These are what are known as “barrier provisions”.
Section IV: Assignment of Capital Taxation Rights (article 22) In terms of its function, Section IV corresponds with Section III, referring however to the taxation of capital.
Section V: Methods for Eliminating Double Taxation(article 23)
Assuming that articles 6‐22 themselves do not eliminate double taxation, Section V sets out both methods that can be used to eliminate double taxation: the credit or the exemption method.
Section VI: Special Provisions (articles 24‐29) Section VI governs certain special circumstances such as mutual agreement procedures or the exchange of information between the authorities.
Section VII: Final Provisions (articles 30 and 31) The two last articles of the Convention regulate its entry into force and termination options
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