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1、2.JurisdictiontoTax1凌云书屋A.Introductionl1. Two kinds of jurisdictionlA country may impose a tax on income because of a nexus between:l(1)The countrythe activities that generate the incomel(2) The countrythe person earning the income2凌云书屋lSource jurisdiction-All countries, that impose an income tax, t
2、ax income arising or having its source in their countries.lResidence jurisdiction-Persons 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l(1) Source jurisdiction+ residence jurisdictionl(2) Source juris
3、dictionl(3) Source jurisdiction+ residence jurisdiction+ citizen jurisdiction, ex. U.S., Liberial What can you conclude?lAllcountriesimposinganincometaxexercisesourcejurisdiction.(p15,p1)l 4凌云书屋2.What if different countries exercise different tax jurisdictions?(1)For individual(2)For legal entity5凌云
4、书屋residence jurisdictionsource jurisdictioninvestCountry ACountry BincomeTax 1Tax 26凌云书屋lThe competing claims for tax revenue based on residence and source would stifle international investment and commerce.lIn addition, the tax burdens imposed on persons earning income from cross-border transaction
5、 would be unfair under traditional tax equity.7凌云书屋l3. For persons engaging in transnational activities, l(1) They face some risks of double taxation.l(2) They have some possibilities for international tax avoidance. (Why?)lA:These opportunities result from certain gaps in the residence and source j
6、urisdictions of most countries.8凌云书屋lQ: Whats the results of under-taxation of income from cross-border transactions?lA: 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.lUnder
7、-taxation is unfair because taxpayers earning equal amount of income do not pay equal taxes.l 9凌云书屋“Anyonemayarrangehisaffairsthathistaxesshallbeaslowaspossible;heisnotboundtochoosethatpatternwhichwillbestpaytheTreasury;thereisnotevenapatrioticdutytoincreaseonestaxes.Judge Learned Hand in Gregory vs
8、. Helvering10凌云书屋lOverandoveragaintheCourtshavesaidthatthereisnothingsinisterinsoarrangingaffairsastokeeptaxesaslowaspossible.Everyonedoesit,richandpooralikeandalldoright,fornobodyowesanypublicdutytopaymorethanthelawdemands.11凌云书屋lLearned Hand(1872-1961), Judge, U. S. Court of AppealslGregory v. Hel
9、vering, 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 businesspurpose doctrine and the doctrine of substanceoverform.lhttp:/en.wikipedia.org/wiki/Gregory_v._Helve
10、ring12凌云书屋lThe 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lThe doctrine of substance over form is essentially that, for Federal tax purpo
11、ses, 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.DefiningResidencel1. Residence of Individualsl（1）a broad facts-and-circumstances test :ldwelling or domicile labode or residence15凌云书屋ForexamplelAccording to the law of
12、 Greece, if one person intend to settle down in Greece, he will become the resident of Greece.lAccording to the law of England, an adults domicile is decided by his willingness of permanent living.16凌云书屋AcaselOne man was born in Canada in 1910. He joined in the British air force in 1932. He worked i
13、n 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 spend his rest life in Canada with his wife. He said even if his
14、 wife died before him, he would still return to Canada.lDid he have a domicile in England? 17凌云书屋lSo 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凌云书屋lU.S.A.lBefore 1984 tax reform, a taxpayers domicile is de
15、cided by his willingness of living.lBut after 1984, it changed to green card standard.lIf a foreign taxpayer holds a green card, he should be regarded as the tax resident of U.S.lTax resident citizen?19凌云书屋lA Green Card or Permanent Resident Card serves as proof of a persons lawful permanent residen
16、t 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 immigration law. 20凌云书屋lU.S. Citizenship is one step beyond
17、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 acquired citizenship by birth, but persons born in ot
18、her countries may apply to become U.S. citizens. This process is called Naturalization.21凌云书屋l(2) an arbitrary test : lthe number of days of presence in the countrylCommon rule: 183 days in a tax year22凌云书屋lExceptions:lPakistan, India, Malaysia: 182 dayslThailand:180 dayslNew Zealand, Vietnam: 183 d
19、ays in any 12 monthslJapan, Korea, Argentina: one yearlPeru: 2 years23凌云书屋lIn practice, l1. Most popular: + or + l2. only : Bengal, Colombia, Denmark, India, Singapore, Thailand, Vietnaml3. only or : Belgium, Greece24凌云书屋lQ:lExplain the taxpayer of Chinas IIT law.lOverviewofPRCTaxationSystemlhttp:/
20、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 outside China in accordance with the provisions of this Law.26凌云书屋lAn Individual having residence in China ref
21、ers to any individual habitually residing in China on account of domiciliary registration, family ties or economic interests. lHaving resided in China for one year or more refers to the state of residing in China for 365 days in a tax year. The days on a temporary trip away from China shall not be d
22、educted. 27凌云书屋lA 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 within one tax year. 28凌云书屋l2.ResidenceofLegalEntitieslThe residence of a corporation is generally dete
23、rmined either by reference to its place of incorporation or its place of management. 29凌云书屋l(1) The place-of-incorporation test:l(Legal domicile)lAdvantage: provides simplicity and certainty to the government and the taxpayer. lE.g. Countries that market themselves as tax havens typically offer conv
24、enient and inexpensive arrangements for incorporation under their laws.30凌云书屋lDisadvantage: places some limits on the ability of corporations to shift their country of residence for tax avoidance (?)purposes. lBecause a corporation should first liquidate its assets before it change its place of inco
25、rporation. Then it should pay the tax on value added of its assets i.e. capital gain.31凌云书屋l(2) The place-of-management test:l(fiscal domicile)lDisadvantage: It is less certain in its application.lPractical tests include the location of the companys head office or the place where the board of direct
26、ors meet.lAdvantage: It is easily exploited for tax avoidance reasons. ( Case on page 19)32凌云书屋lAnother example:l Jacob Schick, the inventor of the Schick disposable razor, transferred his razor patent to a Bermuda corporation that accumulated the royalties; Schick later proceeded to give up his U.S
27、. citizenship and retire to Bermuda, where he lived on the accumulated tax-free profits.33凌云书屋lOne opinion: lThe proper purpose of the corporate tax is to impose tax burden on the corporations shareholders. Assuming that purpose, the test of residence of a corporation might properly be determined by
28、 reference to the residence of its shareholders.lBut it is difficult to determine in fact, why?34凌云书屋lInpractice,l(1) Only place-of-incorporation test:lDenmark, Egypt, France, Sweden, Thailand, U.S.l(2) Only place-of-management test:lMalaysia, Mexico, Singaporel(3) Both the two tests:lCanada, German
29、y, India, England, Switzerland,lSpain, Portugal, Norway, New Zealand35凌云书屋lCorporations may also be dual residents. Under the American rule, a corporation that is incorporated in the United States but managed and controlled from England is considered a dual-resident corporation of the United States
30、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lIn particular, if a corporation is expected to incur losses for tax purposes for several years, being a dual resid
31、ent 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AnothercaselDe Beers Consolidated Mines Limited was a corporation of South Africa in 1906.Its head office was in South Africa and the shareholders met in Sout
32、h Africa. The mining activities were in South Africa too. But the board of directors met in London.lSuppose you are the judge, how would you judge the resident status of De Beers Consolidated Mines Limited ? 38凌云书屋lThe Upper House of the British Parliament judged that the meeting of the board of dir
33、ectors was the most important, because it resulted in the actual control of the corporation. lTherefore, it should be the tax resident of England, but not South Africa . lForward 39凌云书屋lThink:lWhat test does Chinas Enterprise Income Tax law adopt?40凌云书屋EnterpriseIncomeTaxLawoftheP.R.ofChinalArticle2
34、Enterprisesareclassifiedasresidententerprisesandnonresident.lAresidententerprise,asreferredtointhisLaw,isanenterpriseestablishedunderthelawsandregulationsofChinainChinaoranenterpriseestablishedunderthelawsandregulationsofanothercountry(region)whoserealmanagementbodiesarelocatedinChina.41凌云书屋lA nonre
35、sident 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 established entities or sites in China, or an enterprise which has not established entities or sites in China but has China-sourced incom
36、e.42凌云书屋lArticle 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 provisions of this Law on preferential tax treatment.43凌云书屋l3.TreatyIssuesRelatingtoResidencelAccording the OECD Model Treaty, a re
37、sident 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.”l The UN Model Treaty adds “place of incorporation” to that list.44凌云书屋lHow to avoid situations in which a person is considered resident in b
38、oth countries?l 45凌云书屋lFor individual:lTie-breaker rules of residence jurisdiction:l(1) the place where an individual has a permanent home;l(2) the country in which the center of the individuals vital interests is located;l(3) the place of the individuals habitual dwelling;l(4) the country of citize
39、nship.46凌云书屋lTie-breaker:lIf 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lFor legal entity: lPlace-of-management test is preferred.li.e. where the effective management is located.48凌云书屋C.SourceJuris
40、dictionl By international custom, a country has the primary right to tax income that has its source in that country.l But the concept of source is rather poorly developed in the tax literature and in domestic tax legislation.lThe tax treaties following the OECD Model Treaty limit the exercise of sou
41、rce jurisdiction, so many developing countries object them.49凌云书屋l1. Employment and Personal Services IncomelFor most countries, income derived from personal services has its source in the country where the services are performed.lIf an individual performs services in more than one country, allocati
42、on is based on the amount of time spent by him in performing services in each country.50凌云书屋lExamples: China, U.S.lAccording to Regulations for the Implementation of the Individual Income Tax Law of the Peoples Republic of China,51凌云书屋Article5lThe incomes cited below, irrespective of whether the pay
43、ment thereof is made in China or not, shall be deemed income from sources in China:l1.Income derived from service provided in China on account of appointment, employment or contract,l2. Income from leasing a property to the lessee to be used in China,52凌云书屋l3. Income from a transfer of a structure,
44、land use right or other assets in China,l4. Income from the use of all types of franchise in China,l5. Income from interests, dividends and bonuses from companies, enterprises and other economic institutions or individuals in China,53凌云书屋lExceptions:lWhere the service income is paid：Britain，BrazillW
45、here the contract is signed：Ireland54凌云书屋l(1)Dependent services: being employedl- where he is employed l(2)Independent services: without employment l- where his fixed base is located. Ex, clinic, office (accounting firm, architectural firm, design office, office of legal affairs)55凌云书屋lBoth the OECD
46、 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l(1) The person performing the services must be present in the source country for no more than 183 days.l(2) The compensation must be paid
47、 by or on behalf of a nonresident employer.l(3) A PE located in the source country must not claim a tax deduction for the compensation paid.lReview: relevant regulations of IIT law of China57凌云书屋l2. Business Incomel(1) The most common pattern is that business income is taxable by a country, only if
48、the income is attributable to a PE in the country. (countrieswithcontinentallegalsystem)lCountrieswithlegalsystemofBritainandAmerica: where the transactions take place.58凌云书屋l lA PE is a fixed place of business, such as an office, branch, factory, or mine. (p22,p2)lQ: lIf a non-resident corporation
49、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lIn practice, two principles:l(1) attribution principlel(2) force of attraction rulelHows Chinas EIT law? Article 360凌云书屋lA Co. sold a machine to B Co. and got sales profi
50、t 500,000$. Analyze the tax ability of A Co.l(1) A has a PE in China (2) without a PEA Co. of U.S. B Co. of China61凌云书屋l(2) The other pattern is that the PE rules are used as a threshold requirement for taxation of nonresidents but explicit source rules are used for defining the extent of source tax
51、ation.lThe U.S. is the most prominent exemplar of the source rule approach.lBut most countries lack sophisticated source rules with respect to income and deductions. 62凌云书屋l3. Investment IncomelGenerally, investment income derived by nonresidents, such as dividends, interest and royalties, is taxabl
52、e through a withholding tax imposed by the source country.lCapital gains typically are no subject to withholding tax.lQ: Is withholding tax an independent tax?63凌云书屋lWithholding tax is income tax withheld from payees income and paid directly to the government by the payer, which is levied on passive
53、 investment income, such as dividend, interest, royalty.64凌云书屋l(1) interest and dividend -the residence country of the payerl(2) royalty -the country where the royalties ariselThere is no source rule for royalties in the OECD Model Treaty because exclusive jurisdiction to tax royalty is given to the
54、 residence country.65凌云书屋l(3) rent derived from the use of movable property-the country where the property is usedl(4)capital gains: under article 13 of the OECD Model Treaty, capital gains are sourced in the country of residence of the seller unless the gains arise from the sale of business propert
55、y or immovable property.66凌云书屋lMost 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 country.lFor instance, according to the tax treaties between China and many
56、 countries, the withholding tax rate is 10%.67凌云书屋lSome tax treaties go so far as to eliminate source taxation for some types of investment income entirely by mandating a zero rate of withholding.lAlmost all of these treaties are between developed countries.lForward to68凌云书屋SourceofIncomeThesourcest
57、atealwayshastheprimaryrighttotaxincomefromatransaction.TaxpayerDomesticDomesticForeignForeignIncome69凌云书屋lSome commentators favor residence taxation of investment income over source taxation on the grounds that a withholding tax at source may operate as an excise tax on the payer, whereas a residenc
58、e tax generally operates as an income tax on the payee.70凌云书屋lExcise taxes are taxes paid when purchases are made on a specific good, such as gasoline.l Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by
59、trucks. lExcise Tax has several general excise tax programs. One of the major components of the excise program is motor fuel.71凌云书屋lAssuming 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lObviously the lending ban
60、k will only get 80 $ interest after paying 20 $ tax to the source country.lIf the lending bank require the borrower pay himself the net interest, the withholding tax becomes an additional cost of borrowing. So the borrower will ask the lending bank to lower its interest rate.73凌云书屋lIn theory, zero r
61、ates of withholding simplify administration and promote business efficiency by allowing intercompany transfers to be made without tax consequences. 74凌云书屋l lExplain Chinas application of source jurisdiction, taking the new EIT law for instance.l lCase analysis75凌云书屋supplementlthe difference between
62、resident and nonresident:lResident: a person who has sufficient close connections to a country to be liable to tax there on worldwide income.lNonresident: a person who does not have sufficient connection with a country to be liable to there on worldwide income and who is taxable only on the income f
63、rom sources in that country.76凌云书屋lIn practice, individual residents are divided into two types in some countries. l(1) long-term residents: unconditional tax liabilityl (2) short-term residents: conditional tax liabilitylTake China for instance, 77凌云书屋Article6lAn individual without a permanent resi
64、dence but having resided in China for a period ranging from one year to five years and with income from sources abroad may, upon approval by the tax authorities, pay individual income tax on the part paid by companies, enterprises and other economic institutions or individuals established in China;
65、78凌云书屋land in the case of having resided in China for more than five years, shall pay individual income tax on all of its income from overseas sources beginning from the sixth year.79凌云书屋ChapterReviewl1. residence jurisdiction source jurisdictionl2. defining residence:l(1) individual: ldomicile, res
66、idence, the number of days of residencel(2) legal entity: lThe place-of-incorporation testlThe place-of-management test 80凌云书屋l3. treaty issues relating to residence:lFor individual: tie-breaker ruleslFor legal entity: place-of-management test is preferred.81凌云书屋l4. the source rules:lEmployment and personal serviceslBusiness incomelInvestment income82凌云书屋
