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Economic double taxation -> two different persons are taxable in respect of the same income or capital
Juridical double taxation -> the same income or capital is taxable in the hands of the same taxpayer by
more than one State
o International juridical double taxation: the imposition of comparable taxes in two (or more)
States on the same taxpayer in respect of the same subject manner and for identical periods.
There are 3 situations in which JDT may arise:
1) Residence – residence conflict
- Two countries each assert, under their domestic laws, that it is the country of residence
of the taxpayer -> the taxpayer can be deemed to be a ‘dual resident’
Under the OECD MC this is generally solved by Article 4 -> hence, the situation
will become a ‘Residence – source’ conflict.
2) Residence source conflict
- One country asserts the right to tax a taxpayer’s income as the taxpayer’s country of
residence and the other country asserts its right to tax the taxpayer’s income as the
country of source.
- Most common conflict in international taxation
- This conflict is solved by unilateral (domestic) or bilateral measures
3) Source – source conflict
- Each country contends that it is entitled to impose tax on the taxpayer’s income
derived from the source, which is in dispute
- Importantly, in these cases a DTC between the two countries is not applicable since the
taxpayer is not a resident
- This conflict is solved by unilateral (domestic) measures
Methods to avoid juridical double taxation
Policy considerations (CIN v CEN)
o Every state adopts measures (unilateral or bilateral) so as to achieve certain policy objectives.
In this regard, a distinction of policy objective exists between:
1) Capital Import Neutrality (CIN)
- All investors in a country (whether foreign or domestic investors) face the same
effective tax rate on income from their investments, which is sourced in the country
hence, CIN implies a system of exemption, that is, of source-based taxation.
Import neutrality means that capital funds originating in various countries
should compete at equal terms in the capital market of any country”
It focuses on ensuring that a country imposes the same amount of tax on the
income of foreign and local investors from equal investments made in the
country.
- Designed to achieve neutrality between the way that income derived from imported
capital from foreign investors is taxed and the way that income derived from capital
invested by local investors is taxed
2) Capital Export Neutrality (CEN)
- Export neutrality means that the investor should pay the same total (domestic plus
foreign) tax, whether he receives a given investment income from foreign or from
, domestic sources -> investors face the same effective domestic tax rate whether they
invest at home or abroad export neutrality consequently implies a system of
worldwide taxation with a foreign tax credit
- It ensures that the tax regime is neutral in the way that it taxes income derived from
exported capital vis-à-vis the way that it taxes income derived from capital that is
invested domestically
Measures to avoid juridical double taxation (unilateral v bilateral)
o Unilateral measures -> measures taken domestically by a state
- These include: (i) exemptions methods (CIN); (ii) credit methods (CEN); deduction
method
o Bilateral measures -> measures prescribed under a DTC treaty
- The OECD MC includes: (i) exemption method (CIN); credit method (CEN)
Exemption methods (CIN)
o Under the principle of exemption, the State of residence R does not tax the income which
according to the Convention may (or shall only) be taxed in State E or S.
o This means that if the convention does NOT allow the Source state to tax (ie exempts
the source income from source taxation) then the Residence state can disregard the
obligation to exempt the income -> state R will be able to tax such income
o The principle of exemption may be applied by two main methods:
1) Full exemption
- State R is not entitled to take the exempted income into consideration when
determining the tax to be imposed on the rest of the income
2) Exemption with progression
- The exempt income is taken into consideration when determining the tax to be
imposed on the rest of the income
The foreign income is only taken into account to determine the tax rate to be
applied on the domestic sourced income. The ratio of this mechanism is that in
doing so, the domestic income is taxed at a rate that reflects the actual/total
wealth generated by the resident taxpayer.
- IMPORTANT: in taking the exempt income into consideration, 3 ways of calculating the
applicable tax rate exist (this is because there is no specific indication as to how to
specifically use the exempt income to calculate the applicable tax rate, so states can
decide):
- IMPORTANT: for the exemption at the top/bottom, it is always the foreign income that
is to be exempted at the top/bottom.
1. Exemption with progression -> top exemption
Here, the income is allocated to the various brackets of the domestic tax
system (starting with the DOMESTIC income!!). when it is then the turn to
allocate the foreign income to the top brackets -> it is exempt. Effectively, the
result is the same as the full exemption method.
2. Exemption with progression -> bottom exemption
Here, the FOREIGN income is allocated first to the bottom brackets. THEN, the
domestic income is allocated to the top ones -> this is obviously more
expensive for the taxpayer since the tax rate will be higher compared to the
top exemption mechanism.
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