International Taxation

There are at least 80 different tax conventions that affect how income is taxed in an international environment. This helps to eliminate double taxation. If companies do hold assets in other countries, they will be required to fill out a tax form.

 

The first level of tax is based on residency. Some countries allow for a foreign tax credit for taxes paid on foreign income, if they are a local resident receiving foreign income.

 

Citizens foreign to a country normally are taxed first on income, child care expenses, spousal or support payments and pension plan contributions. Allowable deductions consist of employee stock options, capital gain exemptions, and losses carried forward.

 

Residents who leave a country may have to pay taxes based on accumulated gains on property they own. That means that accrued gains are deemed to be sold. This may have some restrictions if one can prove they are leaving only temporarily. Normally, this applies to those leaving a country permanently. Deemed disposition rules applies to various types of property.

 

Although the property becomes taxable, it may happen that no interest is charged and the tax payer may pay once the property is actually sold. Personal use property may have ceiling amounts which are not taxable.

 

Planning the timing of an exit, may have tax benefits.

 

Non-residents may be not entitled to all offsetting of income with the use of reserves.

 

Upon entering a new country, assets may be revalued to FMV. In such case, they would endure a capital gain.

 

Amounts paid out to non-residents due to having a tax refund may be reduced with a withholding tax. This withholding tax would be determined based on the existence of an offsetting foreign tax convention.

 

Companies normally structure their share capital to allow for shareholders to be residents and non-residents. One reason for this is the benefit of not having to pay tax on behalf of all tax payers, especially, if dividends are tax free to residents.

 

Internal Transfer Pricing also plays a role in the realm of international taxation. That is to encourage investment in poorer countries.

 

For example, products and services might be billed to high tax countries at inflated prices. There are of course other reasons to do business in these countries, such as access to shareholders, human capital or currency rates, but nonetheless, they are also important.

 

Transfer pricing in the international arena is becoming more of an issue since trade is increasing in terms of volume of goods and services. Legal and administrative practices are moreorless determined by the OECD. As this happens, income is moved and taxed. Transfer pricing rules should be designed to create prices that are fair as though parties doing the transactions were not known to one another.

 

In financing loans between various countries there are thin capitalization rules. That means, interest is not deductable if debts exceed shareholder equity or some other criteria not being fullfilled.

 

Based on the percentage ownership of shares in a company, the entity may be required to file additional tax reports.

These reports may be consolidated or non-consolidated, that would depend on the percent ownership.

 

Doing business with a foreigner also has consquences. One must consider the following:

 

1. Purchase of Tangible Property
2. Payments made on income received
3. Fees paid for services rendered
4. Beginning and ending balances of amounts accrued
5. Transactions not involving monetary value
6. Amounts paid- or received by way of:
   • commissions
   • interest
   • insurance premiums
   • or transportation expenses