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International Taxation
Temple University School of Law
Previtera, Paul

International Taxation, Spring 2012 – Previtera

Residency vs. Source Based Income

Source Basis = Where income is earned

Residency Basis = Where resident/citizen is

Inbound: Investment by foreign entity into Japan

Japan Inbound Taxation

– Earning income from investments in Japan

– Doing business directly in Japan, or

Outbound: US taxation of a US entity doing business in a foreign country (e.g. Japan)

US taxation of a US entity operating abroad

– US Co. earning income from investments in Japan

– Doing business directly in Japan

Double Taxation

Def: Where both source and residence jurisdiction impose tax

Ex:

US Co. owns real estate in Japan

US Co. sells the real estate for profit

The IRS taxes US Co.’s income on residence basis

Japan (NTA) taxes US Co.’s income on source basis (real estate is located in Japan)

PROBLME: Same income potentially taxed twice

Worldwide

– Resident taxpayers subject to tax irrespective of source

– Relies on credit relief to mitigate double tax

– Relies on CFC rules to prevent tax avoidance

Territorial

– Tax on income derived within borders

– Territorial system relies on exemptions

– Double taxation arises where income is resourced

NOTE: Some countries use a hybrid of both models (ex: Singapore)

Tax Systems

Classical (two levels of tax)

Entity pays corporate tax on its income and distribution is taxed in the hands of the investors (e.g. as a dividend)

Pass-Thru (one level of tax

Entity is disregarded for tax purposes

Income is only taxed in the hands of the investor

Relief from double tax?

Tax rules may:

1. Provide tax credit

2. Exclude the dividend from shareholder’s taxable income

1. As activities outside the home jurisdiction increase, so too does the likelyhood of being exposed to taxes in a foreign jurisdiction

2. It may not make sense to reproduce the activities of the parent company in every jurisdiction

3. The issue of Permanent Establishment (PE) may arise.

STEP 1: Define the Transaction/Activities

Key first step is to define the activities.

Activities in a foreign jurisdiction increase, so too does the likelihood of being exposed to taxes there

TIP: It may not make sense to reproduce Parent company activities in every jurisdiction

Permanent Establishment (PE) becomes a possibility.

Analysis

– What ACTIVITIES are performed in EVERY jurisdiction?

– What operations/activities are perform

se. In planning, always considered what activities you want/need in a foreign jurisdiction

Keep In Mind

1. Companies will want to avoid earning profits in jurisdictions where tax rates are high

a. Asia, Singapore, and Hong Kong are popular jurisdictions for regional HQs

2. Company wants to avoid making a (un-utilizable) loss in jurisdiction 1 while making a profit in jurisdiction 2

STEP 2: Define the Entities

Different types of entities (ex: a representative office/liaison office, Branch of a foreign company, subsidiary, etc…) have different legal and tax consequences, both in the home jurisdiction and in the foreign jurisdiction

Forms of Doing Business Internationally

(1) Nothing/Simple export

(2) Distributor

(3) Representative Office/Liaison Office

a. very restricted activities (see Treaty and Domestic law)

(4) Branch

a. the same legal entity as the company which holds it; typically an indirect branch structure is used

(5) Subsidiary

a. a separate legal entity

(6) Partnership