Le Sujet: Impot International (April 22, 2003)
John D. Schoonenberg, LLM* 7910 la rue de Main, numero 307 Houma , Lousiana 70360 firstname.lastname@example.org www.worldtaxlawyer.com
Bonjour et bienvenu en Louisiane, Nouvelle Orleans et le monde de l’impôt international. C’est pour moi un plaisir de m’adresser à un groupe si prestigieux.
Adam Smith, who is often called the “father of economics devoted over one-third of his masterpiece “An Inquiry into the Nature and Causes of the Wealth of Nations”, to discussing the subject of government revenue and the methods by which it may be best collected, including new taxes.
When examining the different forms of taxation, Smith adhered to four maxims which a good tax should conform to:
• “The subject of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.”
• “The tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to ever other person.”
• “Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.”
• “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.”
The subject of international tax is extremely broad and covers many specific issues of taxation. that arise under a country’s tax laws that include some foreign element. The term “international tax” may be considered a misnomer. What we refer to here for convenience as international tax is more correctly referred to as the international aspects of the tax laws of particular countries. With minor exceptions, tax laws are not “international”. They are creations of sovereign states. Nor is there an overriding international law of taxation, arising either from the customary practice of sovereign states or from the actions of some international body such as the United Nations (UN) or the Organization for Economic Co-Operation and Development (OECD).
Perhaps the most obvious “international” aspect of a country’s tax system are tax treaties. Many developed countries and some developing countries have tax treaties with their trading partners. Expressed another way “international tax” law refers to the rules that deal with tax conflicts involving cross border transactions. It is derived primarily from public international law. Public international law governs the economic relations between states and determines their mutual rights and obligations. It comprises of customary international law and international agreements, and refers to the principles of state jurisdiction, the law of treaties, international economic law and dispute settlement.
The sources of international tax law include:
- Multilateral international agreements: Vienna Convention on the Law of Treaties (VC LT), secondary law of international communities of states (Example:Treaty of Rome), mutual agreement procedures for equitable settlement of conflict of legal systems.
- Comprehensive Double Tax Treaties:Treaties and protocols, exhange of letters and notes, memoranda of understanding, and supplementary administrative agreements.
- Limited Double Tax Treaties:Reciprocal declarations, specific treaties on shipping and airlines, death duties and gift taxes.
- Customary international law and general principles of law: The principles of law recognised by civilised nations in their national legal systems, statutory law, customary law and judicial decisions, and the practices of international organisations .
International tax law governs the taxing rights of sovereign nations. These rights depend on their fiscal jurisdiction. The “term” fiscal jurisdiction referst to both (i) the right of legislation and (ii) the right of enforcement. A state cannot enforce what it cannot legislate. However, the reverse may be true. A state may legislate, even when it is unable to enforce. The substance of state sovereignty is jurisdiction, or the scope within which the effective and acceptable power of the state can be exercised. It is the “right to exercise (in regard to a portion of the globe) to the exclusion of any other state the functions of a state.
It is generally accepted that “connecting factors” give a state the right to tax. These connecting factors link the taxpayer personally to a particular tax jurisdiction. They include personal links with a “home state” due to residence, domicile or citizenship for natural persons, and the place of incorporation or location of a registered office, or management and control for legal persons. An economic activity is also connected with a “host state”, which exercises its taxing rights due to the territorial link.
Thus, the domestic laws in various countries normally apply the following taxing principles:
- Full or unlimited taxation rights are given to the country of residence due to the “personal attachment” of persons. The country of residence (or citizenship) may impose its taxes on the worldwide income due to the protection it offers to the tax subject. (“Residence rule”)
- Limited taxation rights are given to the country of source due to the “economic attachment” of persons. The country of source reserves the right to tax the income that is derived from the economic activities within its territory. (“Source rule”).
Goals of International Tax Rules
In the design of its international tax rules, a country should seek to advance the following four goals. Some of these goals can be pursued effectively through unilateral action. To achieve all of these goals, however, a country must cooperate with its major trading partners.
Getting its fair share of revenue from cross-border transactions –
A major goal of international tax rules should be to provide each country of the world with its fair share of the tax revenues available from income generated by transnational activities of domestic and foreign taxpayers. To achieve this goal of inter-nation equity, a country must protect its domestic tax base. That is, it must develop good domestic tax rules, and it must avoid entering into tax treaties that inappropriately limit its right to tax its domestic-source income.
The primary advantage of an income tax over other potential taxes is fairness. In general, fairness is achieved by imposing equal tax burdens on taxpayers with equal income, without reference to the source of the income, and by making those burdens commensurate with the ability to pay of taxpayers. For a group of related corporations, the goal should be to impose on the entire business enterprise the same burden that would be imposed on a single corporation engaging in comparable activities.
Enhancing the competitiveness of the domestic economy
Every country should care about the welfare of nonresidents. Each has a primary duty, nevertheless, to advance the economic interests of its citizens and residents. To this end, it should avoid tax measures that undermine its competitive position in the world economy. In the international tax context, a country’s competitiveness is best enhanced by removing the provisions of the tax law that tend to draw capital and jobs out of the country or that discourages the importation of capital and jobs. In the medium and long run, a country’s competitiveness is not enhanced by tax incentive policies (much debated in the international tax community) that invite a retaliatory response by foreign governments to impose fair and effective taxes on income from movable capital.
Capital export and capital import neutrality
The goals presented above do not rely on the so-called principles of capital export neutrality or capital import neutrality , notwithstanding the usual prominence of these principles in international tax literature. These goals incorporate, however, the aspects of capital export neutrality and capital import neutrality that have received wide acceptance among tax analysts. According to the principle of captital export neutrality, a country should design its international tax rules so as to neither encourage nor discourage outflows of capital. In practice, policy makers typically treat capital export neutrality as at best a secondary goal. In virtually every country of the world, capital inflows generally are considered desirable and are encouraged through tax and other economic policies. Capital outflows are generally thought to diminish national wealth. Many countries adopt measures designed to discourage capital outflows, although they may also have provisions in their tax laws that have the unintended effect of encouraging outflows. Prudent policymakers exercise caution in discouraging outflows because because limitation on capital outflows may discourage capital inflows. For example, if a country imposes high withholding taxes on dividends, interest, and royalties paid to nonresidents, investments by nonresidents is likely to be discouraged.
According to the principles of capital import neutrality, a country should avoid international tax rules that might cause its multinational companies to bear a higher effective tax burden in foreign markets than the multinational companies of other countries. To implement this principle fully, residence countries would need to exempt all foreign source income from domestic tax. Most countries have adopted international tax rules that contain some features that are consistent with capital export neutrality. For example, most developed countries tax residents on their worldwide income. Other features are consistent with capital import neutrality. For example, most countries do not tax foreign source income earned by foreign corporations controlled by residents except in special circumstances. No consensus has been reached by tax analysts on the proper balance between these principles in the design of international tax rules.
Another principle of international taxation is ensure that income is fully taxed once (not more, not less) and is not taxed twice. There should be no need for these principles if every person or source of income were subject to tax in one state, and in state only. However, under various domestic laws, the tax revenues on the same activity may be shared or the same income taxed in many cases by two countries. The sharing of income differs from tax overlaps. Double or multiple taxation issues arise only when the connecting factors grant competing tax powers to tow or more states on the same income. The term “double taxation” implies “over taxation” due to conflicting tax rights. The primary purpose of tax treaties is to avoid double taxation. Many countries also grant foreign tax credits on a unilateral basis for taxes paid abroad. However, the foreign tax credit usually will not be allowed to exceed the maximum rate owed in the home country.
Juridical and Economic Double Taxation
Double taxation may be economic or juridical. Economic double taxation refers to a double tax on the same income in the hands of different persons (Examples:husband and wife, partnership and partners, company and shareholders, parent and subsidiary, etc). The same tax object is taxed on different but economically similar or connected subjects (“economic identity of subject”). Juridical double taxation deals with the same tax object and the same tax subject when they are taxed in tow (or more) tax jurisdictions. It is the imposition of comparable taxes by two or more States on the same taxpayer in respect of the same subject matter and for identical periods (“legal identity of subject”). Juridical double taxation is the result of a conflict between two tax systems. It arises due to the overlapping claims of tax jurisdictions on interrelated economic activities. The competing powers of fiscal sovereignty lead to double or multiple taxation in tow or more jurisdictions: alternatively, it can lead to double tax exemption, i.e. non taxation. International tax law is primarily concerned with juridical (i.e. based on jurisdiction) double taxation.
The Role of the International Tax Advisor
Contrary to popular belief, the role of the international tax adviser is not to evade tax or even to avoid tax. The primary role of the international tax advisor is to insure that the client’s decision to enter into a cross border transaction, will not result in any greater tax liability than if the client were engaged in a domestic transaction. Probably the most important role of the international tax advisor is to insure that the client might not fall into any “traps” or anomalies that would result in higher levels of tax that the client would ordinarily be expected to pay. This is often referred to as “defensive tax planning” and often puts the advisor in the same role as the policy tax maker. , who should also be seeking to impose appropriate tax burdens on taxpayers. Domestic and international tax advisers are also expected to be acquainted with international tax schemes. These schemes often involve the use of tax havens.
International tax advisers are likely to spend much more of their time engaging in defensive tax planning than their domestic counterparts. The reason is that taxpayers engaged in international transactions frequently confront serious risks of having to pay excessive levels of tax. These risks typically arise when two or more countries claim the right to impose tax on the same items of income. Many of the most important international tax rules are designed to mitigate or eliminate such double taxation.
Although highly visible and au courant, the offensive tax planning activities of most international tax advisers occupy a modest part of their practice. These activities, however, are very important and have been the occasion for a great deal of complex anti-avoidance legislation . However, despite the best efforts of the OECD and tax authorities world wide, these rules have not driven the tax havens out of business. Opportunities for international tax avoidance are still widely available to many individual investors and to the multinational enterprises of many countries.
The Caribbean is literally a sea of developing countries offering special tax incentives, free trade zones, tax holidays, and in many cases, complete freedom from the imposition of income, estate, gift, and most other taxes. The Caribbean is the setting for a broad spectrum of international financial institutions and transactions that make use of sophisticated global technology. An analysis of tax laws is a useful lens through which to view the offshore financial centers of the Caribbean .
The “no-tax” havens in the region are The Bahamas, Bermuda, Cayman, and the Turks and Caicos Islands ; they impose no income, estate or gift taxes on either residents or non-residents. The “low-tax” havens include most of the other countries in the region, such as Barbados which offers tax incentives for offshore banks, international business companies, foreign sales corporations, and exempt insurance companies.
In most instances, the absence of such taxes represents part of a formal policy to attract offshore banks and other corporate business. For example, in the Cayman Islands , offshore companies are entitled to a tax-free guarantee of up to thirty years from the date of formation; a twenty-year guarantee is usually granted.
Some particular features include the following: strict confidentiality or non-disclosure requirements; minimal annual reporting requirements; a dual currency control system that distinguishes between both residents and non- residents and also between local and foreign currency; extremely low and competitive fees for company and investment transactions; tax treaties and mutual legal assistance treaties (MLATs).
CARICOM Multilateral Tax Agreement
Several Carribean countries renegotiated the CARICOM double tax agreement in 1994. It replaced an earlier multilateral tax agreement signed in 1973. The ageement applies to internal transactions within the member countries, and lays down common guidelines for them in their treaty negotiations with non-members. It meets the objectives of the Treaty of Chaguaramas to encourage free trade and movement of capital within the member countries and to harmonize their economic policies. Like the Andean Pact, it relies on the source of territoriality-based taxation in preference to the residence based OECD Model. Therefore, the income is taxable only by the member state where the income arises. Some of the specific treaty provisions include zero withholding on ordinary dividends. The maximum withholding rate on preference share dividends, interest, royalties, and management fees is limited to 15% rate. Management fees (excluding independent professional services) are taxable in the source country at a rate not exceeding 15%. There is no limitation on benefits or beneficial ownership requirements for treaty benefits. Haiti is a member country of the Caricom Agreement along with Antigua, Barbuda, the Bahamas , Barbados , Belize , Dominica , Grenada , Guyana , Jamaica , Montserrat , St. Kitts and Nevis , St. Lucia , St. Vincent and the Grenadines , Surinam , and Trinidad and Tobago .
Offshore Financial Centers (Les Paradis Fiscale)
As mentioned above, offshore financial centers have become quite popular over the past twenty years. A report in the early nineties mentioned that over half of the world’s financial transactions take place in international offshore financial centers. They hold roughly USD 5 trillion in overseas funds, as follows:
- USD 1 trillion-asset protection funds
- USD 1 trillion-other offshore trusts
- USD 1 trillion-shipping
- USD 1 trillion- bank deposits
- USD 1 billion-captive insurance companies
- USD 250 billion-mutual funds
There are nearly seventy recognized international offshore financial centers in the world today. Six of them account for half the world’s international banking, corporate finance and investments. In terms of offshore deposits, they are Hong Kong , Switzerland , Singapore , Cayman Islands, Luxembourg and the Bahamas . Other major centers include the Channel Islands, Liechenstein, The British Virgin Islands and Panama . The above figures exclude the several high-tax international financial centers, such as London , New York and Zurich that act as onshore centers for offshore business activities. The term “offshore” includes onshore jurisdictions that are used for conducting business activities or keeping assets overseas. They can be anywhere outside one’s own country of residence.
The role of “offshore financial centers”
Offshore financial centers exist because they provide economic benefits that outweigh their costs. Their role includes a wide range of business activities. For example:
- They allow businesses to reduce costs and increase revenues through centralized group services with a multinational enterprise.
- The assist in the efficient and effective movement of capital and resources and provide opportunities for global investment.
- They provide facilities to manage financial afffairs confidentially and ensure legal protection from unjustified claims through trusts.
- They permit the use of intermediary entities to overcome cumbersome regulations at home.
- They assist in international tax planning.
Offshore financial centers usually, but not always, act as tax havens.
They fall into three major categories:
- nil or very low tax on corporate or business income and few or not treaties(“base havens”). Examples, Antigua, Barbuda, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar,Guernsey, Jersey, Hong Kong, Isle of Man, Liechenstein, Panama and Uruguay.
- Countries with reasonable domestic tax rates but with special tax regimes that allow the use of their treaty network for offshore activities (“treaty havens”). Examples, Barbados , Cyprus , Hungary , Labuan( Malaysia ), Madeira( Portugal ), Malta , Mauritius , Netherland Antilles
- Countries with special incentives or benefits that may be exploited for a particular international transaction or activity to gain a tax or non tax advantage, usually with the help of tax treaties (“special concession havens”). Examples, Australia, Austria, Belgium, Canada, Denmark, France,Germany, Ireland, Italy, Japan, Luxembourg, Malaysia, Netherlands, Portugal, Singapore, South Africa, Spain, Switzerland, United Kingdom and the United States.
Believe it or not, the United States is considered to be one of the largest “tax havens” in the world. The benefits apply mainly to non residents and foreign corporations. Some examples are:
Foreign Sales Corporation . Due to the recent WTO ruling, the United States has countered by substituting instead the “ Extra Territorial Income Exclusion”(ETI) which basically accomplishes the same thing as the FSC. The ETI exclusion basically grants a partial tax exemption in the U.S. on certain income derived from its foreign trade income. The foreign trade income is the gross income from any export related transaction. It includes the sale or lease of exported goods and related services outside the US , the income from engineering or architectural services on overseas projects, and certain managerial services for unrelated foreign sales corporations. The exempt portion of the foreign trade income must be determined on an arm’s length basis or by using certain administrative formula that approximate an arm’s length price. The exempt foreign trade income is treated as foreign source income, which is not effectively connected with a US trade or business, and, therefore, not taxable in the US . No foreign tax credit is given for foreign taxes paid on the exempt income. The non exempt income is effectively connected and taxed currently with credit for foreign taxes. The dividends received by a US corporate shareholder from the income of an FSC are tax exempt (e.g. 100% dividend received deduction). The foreign company must make an election to be treated as an FSC/ETI. Typically, an FSC/ETI is a wholly owned subsidiary of a US corporation. To qualify, it must meet certain foreign management and economic process requirements. There must be a genuine foreign presence and the income must be attributable to a substantial commercial presence outside the U.S. Another example of a “special tax concession” in the US is the “Limited Liability Company” or LLC. The laws in all of the US states allow limited liability companies that have limited liability tax status for the shareholders but are granted flexible tax treatment under the federal tax system. Unlike a US corporation, a limited liability company (“LLC”) may be classified often either as a taxable entity or as a fiscally transparent entity for tax purposes. Under the tax rules, certain organizations are automatically taxable as corporations, while others can make an election for tax purposes. In the latter case, the classification follows the default rules unless an election is made. The election is normally irrevocable for five years. An entity with only one equity holder is treated as a branch of the owner. The US tax laws provide the “check the box rules” for the taxpayer to select the classification of an entity for tax purposes either as a company or as a partnership. These recognition rules apply to both US and foreign entities. Therefore, it is possible to form “hybrid” entities where the LLC is a company for tax purposes abroad but it is a fiscally transparent entity in the US, or vice versa. Moreover, if a LLC has foreign source income and is owned wholly by nonresidents, it is not taxable.
Finally, the US is known for its “Ring fenced income” regime. Like many traditional tax havens, several onshore jurisdictions also provide special benefits to nonresidents for certain types of income. For example, the bonds and deposits with US banks and insurance companies. There is no tax on interest earned by nonresidents on portfolio debt. These debt obligations may be in bearer or registered form. Moreover, foreign investors are not taxed on securities transactions in the US . In addition, several states such as Alaska , Delaware , Arkansas and Rhode Island have recently passed asset protection laws. Montana and Colorado have recently created “offshore centers” within the United States for non US persons, the success of which still remains to be seen. It has been suggested by many commentators that the US “ring fenced regime” in favor of nonresidents was at least partially responsible for the stock market boom of the nineties.
A 1987 OECD report suggested that “any country might be a tax haven to a certain extent, as there are many instances where high tax countries provide opportunities or devise policies to attract economic activities of certain types or in certain locations.
Useful Tax Sites on the Internet
There is an abundance of free information on the internet pertaining to “international tax”. One only need to go to “google” or “yahoo” and type in the words “international tax” in the search window and it will yield over two thousand hits. Some of the most useful sites are:
- Almost all developed countries, especially those that are members of the OECD have official web sites. Some examples are:
- www.irs.gov (US)
- www.ccra.com ( Canada );
- http://www.inlandrevenue.gov.uk ( UK )
- http://www.finances.gouv.fr ( France )
- http://www.ato.gov(Australia )
LLM Program at St. Thomas University School of Law
In closing, I would like to share information with you regarding the two LLM programs at St. Thomas University School of Law. St. Thomas is a small law school in Miami , Fla. sponsored by the Arch Diocese of Miami. It is sanctioned by the American Bar Association and the Southern Regional Conference of Law Schools. The first program, in international taxation and offshore financial centers, is non resident based . All class instruction occurs via the internet through Lexis-Nexis (Server) under the software program known as Black Board. Course materials are also offered on line and down loaded and/or printed from the course documents. All instructional materials are provided as part of the tuition. As part of your tuition you are granted full access to Westlaw and LexisNexis legal data bases, the two largest legal publications in the world. The tax resources provided are abundant. The faculty is world class and professors live and teach in venues such as the UK , France , Isle of Man , New Zealand and the United States . The program is known as the Walter and Dorothy Diamond International Tax Institute.(The Diamonds are prolific authors in the field of taxation and offshore finance and they are benefactors of the program). Professor William Byrnes, IV is the Director of the program which has received ABA approval. Students participate from all over the globe. Graduate requirements are 28 hours including an approved master’s thesis which counts for 2 of the 28 hours. The program is cutting edge and I am proud to say that I will soon receive my LLM from St. Thomas . I would highly recommend it to any of you who may be interested in the subject of international taxation and cannot leave their occupations and family commitments to receive advanced training. The next program at St. Thomas is the LLM degree in Intercultural Human Rights. This is a residency based program and classes cannot be taken over the internet as in the International Tax Curriculum. If any of you are interested in either program, you may find more information at the St. Thomas University web site at http://www.stu.edu .
Merci Beaucoup pour votre attention et Soignez-vous.
John D. Schoonenberg, LLM International Taxation (Candidate, 2003)
International Tax Primer, Kluwer Law International, Brian J. Arnold and Michael J. McIntyre,1995
Basic International Taxation, Kluwer Law International, Roy J. Rohatgi, 2000.
The purpose of a tax system is normally two fold:
1. To raise revenue and
2. To promote certain policies that are important to the government and/or its citizens).
A tax haven is often a jurisdiction that imposes little or no income tax and has banking laws that promote privacy and confidentiality of its depositors and/or investors. Tax havens are also known noted also in promoting trust regimes that enhance confidentiality and thus, in many cases, the protection of assets from creditors.
Some examples of anti avoidance activities are, for example, thin capitalization rules that prevent the excessive use of interest write offs; transfer pricing rules that require that transactions between related taxpayers ,i.e. parent-subsidiary be conducted at “arm’s length; and controlled foreign corporation rules that prevent deferral of income by foreign corporations in which the majority of the shares are .owned by resident taxpayers. The United States is considered the leader in promulgating and enforcing controlled foreign corporation (CFC) rules and transfer pricing (TP) rules
- Corruption and Money Laundering in the Carribean with Special Reference to the Bahamas, Peter D. Maynard, University of Miami Press, 1998.
- Roy Rohatgi, Basic International Taxation, Kluwer International Publishing, 2000
- Financial Times (20 September, 1994)
- Barry Spitz, International Tax Havens Guide
- Roy Rohatgi, Basic International Taxation, Kluwer Law International (2000)
- Foreign Sales Corporations have recently been held by the WTO to be an “illegal export subsidy”
- Roy Rohatgi, supra, chapter 5, page 335.
- Delaware does not have a corporate income tax
- The rising stock market is often referred to as the “bull market”. The current stock decline is referred to as the “bear market”
- Committee on Fiscal Affairs:Tax Haven Report, para. 27.1 (OECD, 1987).