Chapter 3: International Taxation Flashcards
What is Corporate Residence?
Where can a Company be resident for tax purposes?
A company normally pays taxation on its worldwide income on the country where it is resident.
A company can be resident for tax purposes in either:
• The country of incorporation
• The country of control / central management
What are the types of Double Taxation Relief?
Exemption – countries agree on certain types of income which will be exempt or partially exempt from tax in one country or the other
Tax Credit – tax paid in one country may be deducted as a credit from the tax due in the other country
Deduction – tax relief is gained by deducting the foreign tax from the foreign income so that only the net amount will be subject to tax in the country of residency
What is the purpose of the EOCD Model Tax Convention?
States that business profits of a company can be taxed in a state if a company has a permanent establishment in that country
What are classes as permanent establishments in the EOCD Model Tax Convention?
A factory, a workshop, an office, a branch, a place of management, a mine, an oil or gas well, or a place of extraction of natural resources, a construction project or building site if it lasts more than 12 months
What are the differences between an overseas branch and subsidiary?
Subsidiary – Separate entity for tax purposes, loss relief not available for the group, cannot claim the same tax depreciation as the parent, assets transferred from the parent may result in capital gains tax
Branch – Extension of the UK activity and subject to UK taxation, loss relief available for the group, can claim tax depreciation on all assets, assets can be transferred between the branch and the holding company at no gain/loss
What is Withholding Tax and what is the equation?
Tax the payer needs to withhold from the payment before it reaches the recipient.
Net amount received / (100 – tax rate deducted) x tax rate
What is Underlying Tax and what is the equation?
If a company receives a dividend from an overseas subsidiary, the dividend will have been taxed once in the overseas country as part of normal tax on profits, and then again in the country of receipt, as income on dividends
(Tax on foreign profits / foreign profits after tax) x gross dividend
What is transfer pricing?
Applies to group situations when either goods are sold inter-company, or loans take place at favorable rates.
Results in transactions not taking place at “arm’s length” and profits being affected by group members.
What are the rules for transfer pricing?
Goods and services - adjustment will be made in the corporate tax computation for the entity gaining the tax advantage to reflect profit that would have been achieved
Provision of loan finance – thin capitalization – any interested charged on this excess is not allowable for tax purposes and will be disallowed
