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Basic International Taxation
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Roy Rohatgi
BASIC
INTERNATIONAL
TAXATION
Second Edition Volume I: Principles
Second Edition Volume I: Principles
Roy Rohatgi BASIC INTERNATIONAL TAXATION -
Roy Rohatgi
BASIC
INTERNATIONAL
TAXATION
Second Edition Volume I: Principles
Second Edition Volume I: Principles
Roy Rohatgi BASIC INTERNATIONAL TAXATION -
August 22, 2005 Time: 15:11 Project: INTRODUCTION.tex
Basic International
Taxation
i
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ii
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Basic International
Taxation
(Second Edition)
By Roy Rohatgi
Volume One
Principles of International Taxation
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Published by:
Richmond Law & Tax Ltd.
12-14 Hill Rise
Richmond TW10 6UA
United Kingdom
Tel: +44 (0) 20 8614 7650
Fax: +44 (0) 20 8614 7651
www.richmondlawtax.com
Hardbound ISBN 1 904 501 346, Softbound ISBN 1 904 501 575
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Copyright © Roy Rohatgi 2005
This publication is protected by international copyright law. All rights reserved. No part of this
publication may be reproduced, stored in a retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission
of the publisher.
Cover design by Bill Anderson Associates
Typeset by SR Nova Private Limited, Bangalore, India
Printed and bound by Antony Rowe Ltd
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TABLE OF CONTENTS – VOLUME ONE
Prefaces xvi
About the Author xx
VOLUME ONE – PRINCIPLES OF INTERNATIONAL TAXATION
CHAPTER 1
AN OVERVIEW OF INTERNATIONAL TAXATION 1
1. What is International Taxation? 1
2. International Tax Conflicts and Double Taxation 2
3. Double Tax Treaties 3
4. Domestic Tax Systems 4
5. International Offshore Financial Centres 4
6. Anti-avoidance Measures 5
7. International Tax Planning 6
8. Structure of the Book 7
9. Suggested Further Reading 8
9.1. Books 8
9.2. OECD Publications 8
9.3. Journals and Periodicals 9
9.4. Websites 10
CHAPTER 2
PRINCIPLES OF INTERNATIONAL TAX LAW 13
1. International Tax Law 13
1.1. Definition 13
1.2. Double Taxation 14
1.3. Connecting Factor Conflicts 16
1.4. Dual Role of Treaties 17
1.5. Country Examples 18
1.6. Is International Tax Law Enforceable 21
1.7. International Tax Principles and Tax Treaties – Comments 22
2. Application of Tax Treaties 27
2.1. Vienna Convention on the Law of Treaties 27
2.2. How International Treaties Come into Force 31
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2.3. Limitations of Double Tax Treaties 32
2.4. Can Domestic Law Override a Tax Treaty 34
2.5. Remedies against Treaty Overrides 37
3. Interpretation of Tax Treaties 38
3.1. General 38
3.2. Interpretation under the VCLT 39
3.3. Model Conventions and Commentaries 43
3.4. Other Extra-textual Material 47
3.5. Interpretative Rule under OECD MC Article 3(2) 48
3.6. Conflicts of Qualification 53
4. Some Legal Decisions on Treaty Interpretations 56
4.1. Legal Interpretations 56
4.2. Reference to the VCLT 57
4.3. Reference to the OECD MC and Commentaries 58
4.4. Other Judicial Decisions 59
4.5. Country Examples 60
5. Model Tax Conventions 64
5.1. Historical Background 64
5.2. How do Model Tax Treaties Work 68
5.3. Relief against Juridical Double Taxation 70
5.4. Benefits of the Model Tax Treaties – Some Examples 72
5.5. OECD and UN Model Conventions – Comments 73
6. Multilateral Tax Agreements 75
6.1. General 75
6.2. Andean Pact 75
6.3. CARICOM Multilateral Tax Agreement 76
6.4. Nordic Convention 76
6.5. Council for Mutual Economic Assistance Agreement (“CMEA”) 77
6.6. Others 77
7. European Union 77
7.1. General 77
7.2. Business Code of Conduct 80
7.3. European Union Tax Directives 80
7.4. Other Multilateral Agreements 83
7.5. European Human Rights Convention 83
7.6. Comments 84
8. Harmful Tax Competition 85
8.1. Background 85
8.2. Historical Development 85
8.3. Guidance (Application Note) Report 90
8.4. Comments 93
9. Suggested Further Reading 94
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CHAPTER 3
MODEL TAX CONVENTIONS ON DOUBLE TAX AVOIDANCE 97
1. OECD Model Convention on Income and Capital (OECD MC) 97
1.1. General 97
1.2. Other Contents of the Model Convention 98
1.3. Distributive Rules under the Model Convention 100
1.4. Attribution Rules under the Model Convention 103
2. UN Model Convention (UN MC) 103
2.1. General 103
2.2. Significant Differences between the OECD and the UN MC 105
3. US Model Convention (US MC) 108
3.1. General 108
3.2. Significant Differences between OECD and US MC 109
4. Articles in the Model Conventions 112
5. Bilateral Tax Treaties 193
6. Suggested Further Reading 194
CHAPTER 4
IMPACT OF DOMESTIC TAX SYSTEMS 195
1. Introduction 195
1.1. General 195
1.2. Connecting Factors 196
1.3. Resident v Nonresident 196
1.4. Full v Limited Taxation 197
2. Tax Residence or Fiscal Domicile 199
2.1. General 199
2.2. Residence of Individuals 199
2.3. Residence of Companies 209
2.4. Residence of Other Entities 220
2.5. Domicile under Common Law 221
3. Source of Income or Gain 222
3.1. General 222
3.2. Basic Source Rules 223
3.3. Taxing Source Rules 225
3.4. Conflicts in Source Rules 226
4. Basis of Tax Computation 227
4.1. General 227
4.2. Tax Rate 228
4.3. Tax Base 233
4.4. Accounting Policies 238
4.5. Tax Allowances and Disallowances 243
4.6. Tax Incentives 246
4.7. Assessment and Withholding Taxes 248
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5. Treatment of Tax Losses 250
5.1. General 250
5.2. Revenue or Trading Losses 252
5.3. Capital Losses 254
5.4. Foreign Branch Losses 255
5.5. Group Taxation 256
6. Advance Tax Rulings 257
6.1. General 257
6.2. Country Examples 259
7. Passive Income 264
7.1. Dividend Income 264
7.2. Interest Income and Expense 268
7.3. Royalty Income and Payments 272
7.4. Capital Gains 275
8. Foreign Tax Relief 278
8.1. General 278
8.2. Expense Deduction 279
8.3. Exemption Method 279
8.4. Foreign Tax Credit 280
8.5. Country Examples 287
9. Suggested Further Reading 295
APPENDIX - GLOSSARY OF INTERNATIONAL TAX TERMS 297
EXHIBITS – MODEL TAX TREATIES 341
1. OECD Model Tax Convention on Income and on Capital (January 28, 2003) 341
2. United Nations Model Double Taxation Convention between Developed and
Developing Countries January 11, 2001 357
3. United States Model Income Tax Convention of September 20, 1996 374
4. League of Nations Model Bilateral Convention (with Commentaries) for the
Prevention of Double Taxation in the Special Matter of Direct Taxes
Presented in Geneva, October 1928 (1928 Draft) 394
5. League of Nations Revised Text of the Convention for the Allocation of
Business Income between States for the Purposes of Taxation, Geneva,
June 1935 (1935 Draft) 411
6. League of Nations Model Bilateral Convention for the Prevention of the
Double Taxation of Income presented in Mexico City, July 1943
(Mexico Draft) 416
7. League of Nations Model Bilateral Convention for the Prevention of the
Double Taxation of Income and Property presented in London, March 1946
(London Draft) 424
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8. Commentaries on Mexico Draft (Exhibit 6) and London Draft (Exhibit 7) of
the League of Nations 433
9. Model Convention for the Avoidance of Double Taxation between Member
Countries and Other Countries outside the Andean Subregion (Andean Model) 451
Index to Volume One 457
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TABLE OF CONTENTS – VOLUME TWO
Note: The contents of Volume Two below are provisional and may be subject to changes
when published. They have been included in Volume One (without page references) to
provide the readers with an overview of the contents of the entire book.
VOLUME TWO – PRACTICE OF INTERNATIONAL TAXATION
CHAPTER 5
BASIC PRINCIPLES OF INTERNATIONAL TAX PLANNING
1. International Tax Planning
1.1. What is International Tax Planning
1.2. Need for International Tax Planning
1.3. Opportunities for International Tax Planning
1.4. International Tax Planning Techniques
1.5. International Tax Planning – a Methodology
1.6. Role of International Tax Planner
2. International Tax Structures
2.1. General
2.2. Examples of Tax-beneficial Structures
2.3. Forms of Business Entity
2.4. Financing of Overseas Entities
3. Tax Planning for Cross-border Transactions – Some Examples
3.1. Conversion of a Foreign Branch to a Foreign Subsidiary
3.2. Mergers and Acquisitions
3.3. Repatriation of Profits
3.4. Liquidation of Companies
3.5. Cross-border Leasing
3.6. Foreign Direct Investment
4. International Tax Planning for Expatriate Individuals
4.1. General
4.2. Treaty Provisions
4.3. Tax Planning Considerations
4.4. Tax Planning Measures
4.5. Country Examples
4.6. Social Security Contributions
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5. Avoidance of Economic Double Taxation of Dividends
5.1. General
5.2. Imputation System v Shareholder Relief System
5.3. Participation Exemption
5.4. European Union Parent-Subsidiary Directive
6. Tax Consolidation Rules ("Group Taxation")
6.1. General
6.2. Country Examples
7. Suggested Further Reading
CHAPTER 6
ANTI-AVOIDANCE MEASURES
1. General
1.1. What is Tax Avoidance
1.2. Common Anti-avoidance Provisions
2. Judicial Anti-avoidance Doctrines
2.1. Common Law
2.2. Civil Law
2.3. Country Examples
3. Anti-treaty Shopping Measures
3.1. General
3.2. Impact of Treaty Shopping
3.3. OECD Report on the Use of Conduit Companies
3.4. Beneficial Ownership Requirement
3.5. Treaty Shopping under the OECD Model Treaty and Commentary
3.6. Country Examples
3.7. Comments
4. Controlled Foreign Corporation
4.1. General
4.2. Anti-deferral or CFC Legislation
4.3. Country Examples
4.4. Comments
5. Thin Capitalisation
5.1. General
5.2. What is Thin Capitalisation
5.3. Thin Capitalisation Rules
5.4. Tax Treatment of Interest Costs
5.5. Impact of Tax Treaties
5.6. Country Examples
5.7. Comments
6. Transfer Pricing
6.1. General
6.2. Transactions Involving Transfer Pricing Issues
xii