Chapter 5: International Taxation

Question 1

Baseline case: “Deduction method”

Answer 1

*No tax treaties
*Tax payments in country A are tax deductible in country B.
*Still some double taxation remains.

Question 2

“Exemption method”

Answer 2

Territorial tax system; source principle.
* capital import neutrality
–>Wherever you invest you are competitive in that country. Everyone pays the same tax abroad.
*Idea: the source of investment does not affect the tax burden.

Issue: Tax haven operations
Solution: Anti-avoidance rules (as CFC) that are strictly enforced on passive income.

Question 3

CFC

Answer 3

Controllable Foreign Company rule (CFC):

Required:
*Controlled company
*Located in tax haven
*Need to generate passive income from activity in tax haven

—> immediate tax at home, no exemption

Question 4

“Credit method”

Answer 4

Worldwide tax system
*capital export neutrality
–>Wherever you invest you will always pay the tax at home.

Issue: incentive to hold cash abroad.

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Question 5

Group’s ETR. What is it used for?

Answer 5

ETR= (tax expense)/EBT
–>used to measure corporate tax avoidance.
–>measure success of group’s tax policy and tax planning by effective tax rate (ETR).

Question 6

Who cares about ETR?

Answer 6

*investors
*policymakers
*tax authority
*competitors
*managers
*media & public

Question 7

How to decrease ETR?

Answer 7

1. Financing structures
   (ex. debt shifting to high tax countries)
2. Transfer pricing
3. Shifting of real activities
   (ex. production, functions etc.)

Question 8

Why do not all firms aim to avoid taxes? Costs of tax avoidance…

Answer 8

1. Reputation risk/ bad press
2. Complexity (especially for small firms)
3. Business model (tangible vs. intangible, if we relay on tangible assets it is hard to shift, but for intangible is hard to value)
4. Legal risks
5. Potential law changes (short-term thinking)