ch 2 jurisdiction to tax 税收管辖权（凤山书屋）

1、2. Jurisdiction to Tax 1凌云书屋A. Introduction 1. Two kinds of jurisdictionA country may impose a tax on income because of a nexus between:(1)The countrythe activities that generate the income(2) The countrythe person earning the income2凌云书屋Source jurisdictionAll countries, that impose an income tax, t

2、ax income arising or having its source in their countries.Residence jurisdictionPersons are taxable on their worldwide income, without reference to the source of income. (Here, residents include individuals and legal entities. )3凌云书屋(1) Source jurisdiction+ residence jurisdiction(2) Source jurisdict

3、ion(3) Source jurisdiction+ residence jurisdiction+ citizen jurisdiction, ex. U.S., Liberia What can you conclude?All countries imposing an income tax exercise source jurisdiction.(p15,p1) 4凌云书屋What if different countries exercise different tax jurisdictions?(1)For individual(2)For legal entity5凌云书屋

4、residence jurisdictionsource jurisdictioninvestCountry ACountry BincomeTax 1Tax 26凌云书屋The competing claims for tax revenue based on residence and source would stifle international investment and commerce.In addition, the tax burdens imposed on persons earning income from cross-border transaction wou

5、ld be unfair under traditional tax equity.7凌云书屋3. For persons engaging in transnational activities, (1) They face some risks of double taxation.(2) They have some possibilities for international tax avoidance. (Why?)A:These opportunities result from certain gaps in the residence and source jurisdict

6、ions of most countries.8凌云书屋Q: Whats the results of under-taxation of income from cross-border transactions?A: Under-taxation is inefficient because it induces taxpayer to engage in the under-taxed activities instead of taxable activities producing a higher before-tax rate of return.Under-taxation i

7、s unfair because taxpayers earning equal amount of income do not pay equal taxes. 9凌云书屋 Today as in 1934 “Anyone may arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase

8、 ones taxes.Judge Learned Hand in Gregory vs. Helvering10凌云书屋Over and over again the Courts have said that there is nothing sinisterin so arranging affairs as to keep taxes as low as possible. Everyonedoes it, rich and poor alike and all do right, for nobody owes anypublic duty to pay more than the

9、law demands.11凌云书屋Learned Hand(1872-1961), Judge, U. S. Court of AppealsGregory v. Helvering, 293 U.S. 465 (1935), was a landmark decision by the United States Supreme Court concerned with U.S. income tax law. The case is cited as part of the basis for two legal doctrines: the business purpose doctr

10、ine and the doctrine of substance over form./wiki/Gregory_v._Helvering12凌云书屋The business purpose doctrine is essentially that where a transaction has no substantial business purpose other than the avoidance or reduction of Federal tax, the tax law will not regard the transaction.13凌云书屋The doctrine o

11、f substance over form is essentially that, for Federal tax purposes, a taxpayer is bound by the economic substance of a transaction where the economic substance varies from its legal form.14凌云书屋B. Defining Residence1. Residence of Individuals（1）a broad facts-and-circumstances test :dwelling or domic

12、ile abode or residence15凌云书屋For exampleAccording to the law of Greece, if one person intend to settle down in Greece, he will become the resident of Greece.According to the law of England, an adults domicile is decided by his willingness of permanent living.16凌云书屋A caseOne man was born in Canada in

13、1910. He joined in the British air force in 1932. He worked in England until he retired in 1961. He still lived in England with his English wife. During his time in England, he kept his Canadian citizenship and passport and had some financial relationship with the persons in Canada. He wished to spe

14、nd his rest life in Canada with his wife. He said even if his wife died before him, he would still return to Canada.Did he have a domicile in England? 17凌云书屋So the judge determined that though the man lived in England for 44 years, he did not have a domicile in England. He only had a residence.18凌云书

15、屋U.S.A.Before 1984 tax reform, a taxpayers domicile is decided by his willingness of living.But after 1984, it changed to green card standard.If a foreign taxpayer holds a green card, he should be regarded as the tax resident of U.S.Tax resident citizen?19凌云书屋A Green Card or Permanent Resident Card

16、serves as proof of a persons lawful permanent resident status in the United States. An individual with a Green Card has the right to live and work permanently in the United States. A persons valid Green Card also means that he or she is registered in the U.S. in accordance with United States immigra

17、tion law. 20凌云书屋U.S. Citizenship is one step beyond permanent residence (Green Card). US Citizenship gives the individual the maximum rights available in the United States. United States citizens may also find it advantageous to use a U.S. passport when traveling abroad.Most United States citizens a

18、cquired citizenship by birth, but persons born in other countries may apply to become U.S. citizens. This process is called Naturalization.21凌云书屋(2) an arbitrary test : the number of days of presence in the countryCommon rule: 183 days in a tax year22凌云书屋Exceptions:Pakistan, India, Malaysia: 182 day

19、sThailand:180 daysNew Zealand, Vietnam: 183 days in any 12 monthsJapan, Korea, Argentina: one yearPeru: 2 years23凌云书屋 In practice, 1. Most popular: + or + 2. only : Bengal, Colombia, Denmark, India, Singapore, Thailand, Vietnam3. only or : Belgium, Greece24凌云书屋Q:Explain the taxpayer of Chinas IIT la

20、w.Overview of PRC Taxation System/home/eng/prctax_corp_overview_taxation.html25凌云书屋IIT law of P.R. ChinaAn individual having residence in China or having resided in China for one year or more although without a permanent residence therein shall pay individual income tax on income from inside and out

21、side China in accordance with the provisions of this Law.26凌云书屋An Individual having residence in China refers to any individual habitually residing in China on account of domiciliary registration, family ties or economic interests. Having resided in China for one year or more refers to the state of

22、residing in China for 365 days in a tax year. The days on a temporary trip away from China shall not be deducted. 27凌云书屋A temporary trip away from China refers to a trip from China not exceeding 30 days on one trip or the combined number of days on several trips away from China not exceeding 90 days

23、 within one tax year. 28凌云书屋2. Residence of Legal EntitiesThe residence of a corporation is generally determined either by reference to its place of incorporation or its place of management. 29凌云书屋(1) The place-of-incorporation test:(Legal domicile)Advantage: provides simplicity and certainty to the

24、 government and the taxpayer. E.g. Countries that market themselves as tax havens typically offer convenient and inexpensive arrangements for incorporation under their laws.30凌云书屋Disadvantage: places some limits on the ability of corporations to shift their country of residence for tax avoidance (?)

25、purposes. Because a corporation should first liquidate its assets before it change its place of incorporation. Then it should pay the tax on value added of its assets i.e. capital gain.31凌云书屋(2) The place-of-management test:(fiscal domicile)Disadvantage: It is less certain in its application.Practic

26、al tests include the location of the companys head office or the place where the board of directors meet.Advantage: It is easily exploited for tax avoidance reasons. ( Case on page 19)32凌云书屋Another example: Jacob Schick, the inventor of the Schick disposable razor, transferred his razor patent to a

27、Bermuda corporation that accumulated the royalties; Schick later proceeded to give up his U.S. citizenship and retire to Bermuda, where he lived on the accumulated tax-free profits.33凌云书屋One opinion: The proper purpose of the corporate tax is to impose tax burden on the corporations shareholders. As

28、suming that purpose, the test of residence of a corporation might properly be determined by reference to the residence of its shareholders.But it is difficult to determine in fact, why?34凌云书屋In practice,(1) Only place-of-incorporation test:Denmark, Egypt, France, Sweden, Thailand, U.S.(2) Only place

29、-of-management test:Malaysia, Mexico, Singapore(3) Both the two tests:Canada, Germany, India, England, Switzerland,Spain, Portugal, Norway, New Zealand35凌云书屋Corporations may also be dual residents. Under the American rule, a corporation that is incorporated in the United States but managed and contr

30、olled from England is considered a dual-resident corporation of the United States and England. Dual residency for corporations may actually be a good thing from a taxpayer perspective, and some corporations may deliberately act to obtain dual-residency status. 36凌云书屋In particular, if a corporation i

31、s expected to incur losses for tax purposes for several years, being a dual resident may allow it to take off the same losses against its taxable income from other profitable enterprises in more than one jurisdiction.37凌云书屋Another caseDe Beers Consolidated Mines Limited was a corporation of South Af

32、rica in 1906.Its head office was in South Africa and the shareholders met in South Africa. The mining activities were in South Africa too. But the board of directors met in London.Suppose you are the judge, how would you judge the resident status of De Beers Consolidated Mines Limited ? 38凌云书屋The Up

33、per House of the British Parliament judged that the meeting of the board of directors was the most important, because it resulted in the actual control of the corporation. Therefore, it should be the tax resident of England, but not South Africa . Forward 39凌云书屋Think:What test does Chinas Enterprise

34、 Income Tax law adopt?40凌云书屋Enterprise Income Tax Law of the P. R. of ChinaArticle 2 Enterprises are classified as resident enterprises and nonresident.A resident enterprise, as referred to in this Law, is an enterprise established under the laws and regulations of China in China or an enterprise es

35、tablished under the laws and regulations of another country (region) whose real management bodies are located in China.41凌云书屋A nonresident enterprise is an enterprise established under the laws and regulations of another country (region) whose real management body is not in China but which has estab

36、lished entities or sites in China, or an enterprise which has not established entities or sites in China but has China-sourced income.42凌云书屋Article 22 The tax payable by an enterprise is its taxable income multiplied by the applicable tax rate, minus tax reductions and tax credits prescribed by the

37、provisions of this Law on preferential tax treatment.43凌云书屋3. Treaty Issues Relating to ResidenceAccording the OECD Model Treaty, a resident of a country is a person taxable in that country “by reason of his domicile, residence, place of management or any other criterion of a similar nature.” The UN

38、 Model Treaty adds “place of incorporation” to that list.44凌云书屋How to avoid situations in which a person is considered resident in both countries? 45凌云书屋For individual:Tie-breaker rules of residence jurisdiction:(1) the place where an individual has a permanent home;(2) the country in which the cent

39、er of the individuals vital interests is located;(3) the place of the individuals habitual dwelling;(4) the country of citizenship.46凌云书屋Tie-breaker:If these tie-breaker rules are ineffective, certain tax officials of the two countries are mandated to determine residence by mutual agreement.47凌云书屋Fo

40、r legal entity: Place-of-management test is preferred.i.e. where the effective management is located.48凌云书屋C. Source Jurisdiction By international custom, a country has the primary right to tax income that has its source in that country. But the concept of source is rather poorly developed in the ta

41、x literature and in domestic tax legislation.The tax treaties following the OECD Model Treaty limit the exercise of source jurisdiction, so many developing countries object them.49凌云书屋1. Employment and Personal Services IncomeFor most countries, income derived from personal services has its source i

42、n the country where the services are performed.If an individual performs services in more than one country, allocation is based on the amount of time spent by him in performing services in each country.50凌云书屋Examples: China, U.S.According to Regulations for the Implementation of the Individual Incom

43、e Tax Law of the Peoples Republic of China,51凌云书屋Article 5 The incomes cited below, irrespective of whether the payment thereof is made in China or not, shall be deemed income from sources in China:1.Income derived from service provided in China on account of appointment, employment or contract,2. I

44、ncome from leasing a property to the lessee to be used in China,52凌云书屋3. Income from a transfer of a structure, land use right or other assets in China,4. Income from the use of all types of franchise in China,5. Income from interests, dividends and bonuses from companies, enterprises and other econ

45、omic institutions or individuals in China,53凌云书屋Exceptions:Where the service income is paid：Britain，BrazilWhere the contract is signed：Ireland54凌云书屋(1)Dependent services: being employed where he is employed (2)Independent services: without employment where his fixed base is located. Ex, clinic, offi

46、ce (accounting firm, architectural firm, design office, office of legal affairs)55凌云书屋Both the OECD and UN Model Treaty limit source country taxation of income derived from dependent services if certain conditions as follows are met: (detail in chapter 6)56凌云书屋(1) The person performing the services

47、must be present in the source country for no more than 183 days.(2) The compensation must be paid by or on behalf of a nonresident employer.(3) A PE located in the source country must not claim a tax deduction for the compensation paid.Review: relevant regulations of IIT law of China57凌云书屋2. Busines

48、s Income(1) The most common pattern is that business income is taxable by a country, only if the income is attributable to a PE in the country. (countries with continental legal system)Countries with legal system of Britain and America: where the transactions take place.58凌云书屋A PE is a fixed place o

49、f business, such as an office, branch, factory, or mine. (p22,p2)Q: If a non-resident corporation has a PE in the source country, but the business income isnt attributable to the PE, can the source country tax the income?59凌云书屋In practice, two principles:(1) attribution principle(2) force of attract

50、ion ruleHows Chinas EIT law? Article 360凌云书屋A Co. sold a machine to B Co. and got sales profit 500,000$. Analyze the tax ability of A Co.(1) A has a PE in China (2) without a PEA Co. of U.S. B Co. of China61凌云书屋(2) The other pattern is that the PE rules are used as a threshold requirement for taxati

51、on of nonresidents but explicit source rules are used for defining the extent of source taxation.The U.S. is the most prominent exemplar of the source rule approach.But most countries lack sophisticated source rules with respect to income and deductions. 62凌云书屋3. Investment IncomeGenerally, investme

52、nt income derived by nonresidents, such as dividends, interest and royalties, is taxable through a withholding tax imposed by the source country.Capital gains typically are no subject to withholding tax.Q: Is withholding tax an independent tax?63凌云书屋Withholding tax is income tax withheld from payees

53、 income and paid directly to the government by the payer, which is levied on passive investment income, such as dividend, interest, royalty.64凌云书屋(1) interest and dividend the residence country of the payer(2) royalty the country where the royalties ariseThere is no source rule for royalties in the

54、OECD Model Treaty because exclusive jurisdiction to tax royalty is given to the residence country.65凌云书屋(3) rent derived from the use of movable propertythe country where the property is used(4)capital gains: under article 13 of the OECD Model Treaty, capital gains are sourced in the country of resi

55、dence of the seller unless the gains arise from the sale of business property or immovable property.66凌云书屋Most countries entering into tax treaties agree to some limitations on the withholding tax rates in order to provide for some sharing of tax revenue between the source country and the residence

56、country.For instance, according to the tax treaties between China and many countries, the withholding tax rate is 10%.67凌云书屋Some tax treaties go so far as to eliminate source taxation for some types of investment income entirely by mandating a zero rate of withholding.Almost all of these treaties ar

57、e between developed countries.Forward to68凌云书屋Source of Income The source state always has the primary right to tax income from a transaction.TaxpayerDomesticDomesticForeignForeignIncome69凌云书屋Some commentators favor residence taxation of investment income over source taxation on the grounds that a w

58、ithholding tax at source may operate as an excise tax on the payer, whereas a residence tax generally operates as an income tax on the payee.70凌云书屋Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. Th

59、ere are also excise taxes on activities, such as on wagering or on highway usage by trucks. Excise Tax has several general excise tax programs. One of the major components of the excise program is motor fuel.71凌云书屋Assuming the principal is 1000, interest rate is 10% and the withholding tax rate is 20%.Lending bank(payee)Borrower(payer)moneyinterest72凌云书屋Obviously the lending bank will only get 80 $ interest after paying 20 $ tax to the source country.If the lending bank require the borrower pay himself the net int