International taxation Introduction

• 1 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  1
  International Taxation
  1st part: Introduction
  Prof. Dr. Gerrit Frotscher
  International Tax Institute
  University of Hamburg
  Associate Prof. Stepan Lyubavskiy, Unecon
  

• 2 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  2
  Basics of Tax System
  Typical taxes are:
  Customs
  Indirect taxes
  Consumption taxes
  Taxes on mineral oil, cigarettes, coffee, alcohol, beer, energy
  Value Added Tax (VAT)/Sales Tax
  Direct taxes
  Income Tax (for individuals)
  Corporate Income Tax (CIT – for corporations)
  Surcharges (in Germany: Solidarity surcharge)
  Net value tax (not in Germany)
  Municipal Taxes (in Germany – trade tax)
  Other Taxes
  

• 3 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  3
  Basics of Tax System
  Basic distinction between
  Taxation of individuals
  applicable taxes: income tax, trade tax, solidarity surcharge
  Taxation of partnerships
  applicable taxes: trade tax, but not income tax (if treated as transparent)
  In Russia: treated as corporations
  Taxation of corporations
  Applicable taxes: corporate income tax, trade tax, solidarity surcharge
  
  
  

• 4 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  4
  Basic of Tax System
  Partnerships
  Partnerships treated as transparent
  In Russia: intransparent
  Therefore not subject to income tax
  Income of partnerships is allocated to participants
  Participants are taxed with part of partnership income allocated to them
  income stream: business profits
  Interests, rents, remuneration of services paid to participants are not deducted from income of partnership, but treated as part of partnership income (“Special remunerations”)
  

• 5 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  5
  Basics of Tax System
  Corporations
  Treated as intransparent
  Only one income stream (business income)
  Interests only partly deductible (30 % of EBIDTA), but carry forward
  No tax free zone
  Germany: Flat tax rate of 15 % (plus solidarity surcharge)
  Dividend taxed as income of shareholder; withholding tax 25 %
  Therefore double taxation of distributed profits, but normally relieved
  Different relief systems:
  Germany: Dividends tax free if shareholder is a corporation (same in Russia); Dividends taxed with 60 % if shareholder is an individual
  Reduced CIT rate for distributed profits
  Tax credit systems
  

• 6 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  6
  Basics of International Taxation
  Scope of income tax/CIT:
  Most countries operate a system of “worldwide income” for their residents
  Some countries operate a “territorial regime”: Only income from sources of the own state are taxed
  Some countries in Middle/South America
  Some countries do not impose direct taxes on income
  Kuwait, Qatar, Saudi Arabia, United Arab Emirates, Tax havens
  Some countries operate a “remittance system”: Foreign-based income from individuals not having their domicile in the country is only taxed if remitted in the country
  UK, Ireland, Singapore
  

• 7 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  7
  Basics of International Taxation
  Scope of income tax/CIT:
  Individuals are subject to unlimited taxation in state of residence/substantial presence (taxation of worldwide income)  residence rule;
  Otherwise individuals and corporations are subject to limited taxation with source income only  source rule
  Therefore basic distinction: State of residence – state of source
  Residence/physical presence of an individual means:
  Living home in a country, or
  physical presence during a certain period of time (Germany: more than 6 month; Russia: 183 days or more)
  Citizenship (USA)
  Domicile (UK)
  

• 8 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  8
  Basics of International Taxation
  Example: USA
  Unlimited taxation rule is applied if taxpayer
  Has the nationality of the US (irrespective where he is resident)
  Holds a Green Card
  Meets the physical presence test
  Physical presence if tax payer on a weighted average of the last 3 years was more than 183 days present in the US
  weighted average:
  days present of the running year plus 1/3 of previous year plus 1/6 of year before previous year
  
  

• 9 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  9
  Basics of International Taxation
  Unlimited taxation of Corporations
  Place of central (effective) management
  Place of registered office
  Established in accordance with national law
  Place where general meeting of shareholders is held
  Place where books and records are maintained
  
  

• 10 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  10
  Basics of International Taxation
  Limited taxation:
  Genuine links: Country can tax income of non-residents if
  from sites situated in that country
  from permanent establishments located in that country
  from employment carried out in that country
  from capital, if debtor/payer is resident in that country
  from sales of shares if the corporation whose shares are sold has its registered office or place on management in Germany (if shareholder is resident in that country: unlimited taxation)
  Benefits covering basic needs of individuals not granted
  System of withholding taxes largely used
  
  
  

• 11 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  11
  Basics of International Taxation
  Withholding tax system:
  Taxes in case of limited taxation in the source state is raised by withholding taxes normally for the following income streams:
  Employment (PAYE)
  Dividends (German withholding tax rate: 25 %)
  Interests (Germany: not subject to limited taxation)
  Royalties (German withholding tax rate: 15 %)
  Payments to sportsmen, artists etc (German withholding tax rate: 15 %)
  No withholding tax on (depending on national tax laws):
  Permanent establishments
  Professional services
  Agriculture
  Rent from sites
  

• 12 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  12
  Basics of International Taxation
  Withholding tax system:
  Withholding tax is levied on gross income
  Therefore no deduction of expenses, no refund
  Withholding tax covers full tax liability
  No additional tax assessment
  Example: Dividend Royalty
  Gross amount 100 100
  Tax of payer 15 0
  Net amount 85 100
  Withholding tax 20 % 17 20
  Costs of payee 1 75
  Net amount 67 5
  Taxable (Div: 60 % of 84) 50,4 25
  Tax of payee 40 % 20,2 10
  Tax credit 17 20
  Net amount after tax 63,8 5
  

• 13 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  13
  Basics of International Taxation
  Avoidance of double Taxation
  Unilateral method: tax credit
  Method in Double Taxation Agreements (DTA):
  Exemption method
  Tax credit method
  Fictious tax credit/economic development zones
  Effects:
  Tax credit method: Neutrality of capital export (Income of investments is taxed with the tax rate of state of residence of investor: no difference if he invests in his own or in a foreign state)
  Exemption method: Neutrality of capital import (Income of investments is taxed with the tax rate of the state of investment: no difference if the invested funds come from the state of investment or from abroad)
  

• 14 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  14
  Basics of International Taxation
  Aim: Neutrality of tax systems
  Tax system is “neutral” if it has no effect on costs of investments/costs of financing
  Complete neutrality of tax systems cannot be achieved; politicians have to make a choice taking into account the political preferences
  System of neutrality of capital exports (tax credit method) achieves tax neutrality in the state of residence, but not in the state of investment
  System of neutrality of capital import (exemption method) achieves tax neutrality in the state of investment, but not in the state of residence
  Exemption method is therefore preferred by states where investment in foreign states has priority (eg Germany; West European States)
  Tax credit method is preferred by states who concentrate more on domestic markets (eg US, UK, Russia)
  

• 15 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  15
  Basics of International Taxation
  Exemption method
  Only in DTA, not unilaterally
  Advantages:
  Tax benefits of source state remain effective
  Administratively not complex
  Does not involve two tax authorities
  Eliminates actual and potential double taxation
  Disadvantages:
  No tax revenue for state of residence
  Losses may be disallowed by state of residence
  Encourages use of tax havens
  Calculation of effects on progression may be difficult
  

• 16 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  16
  Basics of International Taxation
  Tax Credit Method
  Direct tax credit: Taxes paid by the taxpayer in another country on foreign based income are credited
  What is “foreign based income”? Conflict of Qualifications
  Advantages:
  Deduction of foreign losses in country of residence
  Discourages use of tax havens
  Disadvantages
  Possibility of excess foreign tax credit, tax bill therefore higher
  Eliminates tax relief given in source state
  Eliminates only actual double taxation
  Can be complicated
  

• 17 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  17
  Basics of International Taxation
  Tax Credit Method
  Excess tax credit can result from
  Limitation of tax credit to domestic tax liability, if source tax is higher
  Tax credit system
  Per country limitation
  overall limitation
  per-category-limitation
  Germany: per country limitation
  Russia: unclear
  Domestic losses
  Difference in calculation of tax base
  Timing differences
  Excess tax credit: carry-forward, carry-back or deduction as expense
  

• 18 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  18
  Basics of International Taxation
  Special forms of tax credit method:
  Indirect tax credit (credit of underlying taxes):
  Credit of taxes not paid by the tax payer (but by the company he has invested in)
  How deep can the company chain be?
  Not granted in Russia (in Germany not applicable since dividend is tax-free)
  Fictitious tax credit (Tax sparing credit)
  Credit of taxes which have not been paid
  In case of less developed countries only
  Has mostly the effect of an exemption
  

• 19 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  19
  Basics of International Taxation
  Tax Credit Method
  Effects of per country limitation
  Income from state X: 10.000 €, withholding tax 25 %
  Income from state Y: 10.000 €, withholding tax 15 %
  Tax rate in state of residence: 20 %.
  
  StateXY Sum
  Income 10.000 10.000 20.000
  Tax 2.000 2.000 4.000
  Tax credit -2.500 -1.500 - 4.000
  Remaining tax 0 500
  
  Germany and Russia: No carry-forward of unused tax credit;
  therefore problem of timing/tax base differences
  

• 20 слайд

  Master of International Business
  21 -23 October, 2014 St Petersburg
  20
  Basics of International Taxation
  The unrestricted taxation in the country of residence
  (“residence rule”) of the taxpayer collides with the
  restricted taxation of the same income in the source
  country (“source rule”) therefore causing double
  taxation.
  
  International Tax Planning deals with 2 questions:
  How to make sure, that the profit of a transaction/an investment is only taxed once?  “defensive” tax planning
  How to make sure that the profit is taxed at the lowest possible rate?  “offensive” tax planning