International Taxation Exam Questions

• The principle of sovereignity means that a state is not bound by any specifications in its legislation.

• At most, it voluntatrity submits to any legal agreements with other states or international organizations and its decision to comply with these obligations is ultimately also voluntary.

• There is no possibilty of foreign a state to comply with obligations under international law by means of legal proceedings or to comply with any foreign requiremnts in its legislation for other reasons

A state may subject foreign citizens to its law only if they do something that has to do with its territory —> this is the explanation for the fact that persons living abroad are inly laible to tax on “domestic” income or “domestic assets under inheritance tax.

In the case of “foreign” income, the issue at stake is usally not domestic. Then a state may only regulate this income by law if laeast the person acting is located in the country —> this explains why “foreign” income is only subject to taxation within the scope of unlimited tax liability, but this cannot be the case for persons with limited tax liability

• Income tax law: world income principle = principle of universality, territoriality principle

  
  

• Value added tax law: destination country principle, country of origin principle

If a state would proceed differentliy, it would give an incentive to invest their money not in its territory but abroad.

The principle of taxing the income from one´s own territory (also for foreigners)

For natural persons: domicile and habitual residence

For corporations: registered office and place of management

The USA

• unlimited place in one state, limited place in the second state

• doubl e unlimited tax liability

• double limited tax liability

Because this increases the costs!

For the same net profit, a considerably gigher gross profit must be generated. This tends to lead to the fact that each economic operator first of all makes the best possible use of the business opportunitues in his iwn area alone, even if they are in themselves unprofitable compared to other activities- This weakens competition, obsolete and profitable forms of economic activity survive at first until sat some point they are no longer competitve at all.

• Alternative 1: Two residencies

• Alternative 2: Residence and habitual residence in differnet countries

• Economic double taxation= Taxation of an economically identical entity, but which legally consists of several legally different persons. Economic double taxation/ Double taxation uccurs if the profit of a GmbH is subject to corporate income tax when it accrues and the remaining amount is then subject to income tax again after distribution as a dividend to the shareholder

• Usually the term double taxation only ever refers to legal double taxation

• same taxable person

• the same tax object(e.g. same income)

• The same taxable period

• the same type of tax

  
  

An international treaty between two states which aims to avoid or mitigate double taxation.

You can quickly familiarize yourself with any DBA text, because youn only habe to look at which passages do not match the usual pattern - and for the remaining passages you already know what they mean.

Formal reason:

Because according to Art. 1 OECD model tax convention act a DBA applies only to person who are resident on one of the two states and one can only be resident in a state if one is subject to the unlimitied tax liability there Art 4 (1) OECD). So if sd. is only subject to limited tax liability in both states, he cannot invoke the DBA between the two states.

the DTA divides taxation rights between the source state and the state of residence. If there are two source states, but no state of residence at all, the whole concept does not work.

Because the PERSON must be resident on one or another state for the DBA to be applied at all. Thus, in case of a company e.g. with its registeres office in D, but with one of the partners residing in the USA, it depends very much on wheter the company is the perosn within the scope or the person as a real one.

The OECD therefore defines permanent establishment as a fixed place of business through which the activities of an enterprise are wholly or partly carreid on ( Art. 5 (1) OECD)

For the sake of clarity, a list of cases in which the existence of a permanent establishment can be affirmed in any case Art. 5 (2) OECD) and of cases in which a permanent establishment does not exist in any case Art. 5 (3-6) OECD

• Direct method: the profit of the permanent establishment is caculated by creating a separate accounting and balance sheet for the units

• indirect method: The profit is estimated as a certain percentage of the total profit of the company using suitable key figures

Art. 5 OECD

• Source state principle: the principle that income should be taxed where it was earned

• residence state principle: The principle that income should be taxed where the recipient lives

• Active income is essentially that which requires a real activity on the ground to be carreid out in order to obtain it and which therefore cannot be easily be transferred to another place

• passiv income on the other hand is that which results from such activities, which essentially consist in the receipt of funds, so that these activities can be carried out practically anywhere in the world without any change in anything economically important. Examples of passive income

  • interest, dividends, royalties,

  • passive income is income that is in danger of being transferred to a low tax country for tax reasons

a provision that tax advantages of a dta, especially the exemption, should only be granted for active income, not for passive income.

Because it has not yet been possible and is no longer attempted, to draft a uniform text that all governments and all parliaments of the member states would agree to.

• Treaty shopping occurs when a taxpayer who is not entitled to benefit under a particular DTA itself does not engage in business itself, but has the intended activities carried out by a corporation located in a country to which a favourable DTA applies

• … so that the income is treated more favourably in the state in which the business is carried out. Treaty shopping naturally presupposes that the income, after it has been earned by the corporation, can be subsequently be disturbed to the owner of the corporation without any special additioanl tax burdens.

EU directives are instructions from the EU to its subordinates, namely the member states. Since the state consist of legislation, jurisdiction and administration, all these 3 instances are affected by Eu directives

but not the individual citizen( is not parte of the state, but is independent of it)

The citizen can still only be obliged by Law, im many cases, however, EU directives instruct the meber states, i.e. also the parliaments, to create certain legal provisions, so that after the driective has been implemented by the parliament, obligations may very well arise indirectly.