INTERNATIONAL TAXATION
Introduction:
International taxation is regarded as the determination of tax on the extraterritorial income earned by a person or business, subject to the tax laws or the international taxation aspects of different countries. Under this regime, Governments systemizes either limiting the scope of their tax collections or providing for offsets for taxes paid pertaining to extraterritorial income. Often, where international income is taxed, deductions of tax or tax credits are provided for taxes paid to other jurisdictions. With either system of taxation, the Government aims at reducing the burden of doubly taxed income on the taxpayer. In order to make this tax system effective, the Governments of different jurisdictions enter into agreements (tax treaties) to attempt to determine who should be entitled to tax and how the burden is to be reduced from the head of the taxpayer. Most of the tax treaties provide for a skeleton mechanism for resolution of disputes between the parties to the agreement. Since the tax laws in India are becoming more and more complex influenced by globalization of economies, increased number of cross border transactions, free trade agreements, tax treaties, mergers & acquisitions, transfer pricing etc. have been adding to these complexities, it has become important for the taxpayers to intensely understand the different aspects of international taxation for availing due benefits laid out by the Government.
Challenges in International Taxation:
Few key issues faced by the taxpayers with respect to international taxation include the following:
- Knowledge about the subject:
Possession of good appreciation and understanding of the systems of international taxation which include the different theories and philosophies of taxation, the different classes of taxes, the various tax treaties and prospective tax havens, is a must at the time of determining the true taxable amount to be paid or claimed back.
- Choosing amongst the transfer pricing methods:
Transfer pricing norms are applicable when a taxpayer enters into a transaction with a non-resident associated person and enforces an Arm’s length price rule as if the transaction had been entered between two unassociated persons. Since there are various methods to compute Arm’s length price, it becomes a matter of knowledge and rationale pick up to choose the best method amongst all depending upon the nature of the transaction.
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- Digital businesses:
The businessman indulged in digital business face vexing challenge in determining the value their digital business, and addressing the issues created by the intangible assets that underpin the various taxability norms.
International Tax Reform:
Over 130 countries and jurisdictions, including India, are a part of the new two-pillar reform international taxation rules ensuring that international enterprises pay a fair share of tax wherever they operate. Government policymakers around the world are continuously working together on various tax reforms that could significantly alter the overall international tax structure under which international businesses operate.
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The two-pillar raft focuses to ensure that scaled multinational Businesses pay taxes where they operate and at the same time earn real profits, alongside adding essential stability to the international tax system.
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Pillar One of the package ensures a equitable distribution of profits and allocating a greater share of taxing rights with respect to the multinational Businesses, including digital companies. The second Pillar seeks to ensure that all international business income is subject to at least an agreed minimum rate of tax.?
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The doubly pillared package will give much-needed bracing up to governments requiring increasing the necessary revenues to restore their balance sheets and budgets while investing in essential infrastructure and public services, globally.
The Participants in the negotiation altogethor finalised the technical work on the two-pillar approach, as well as planned for its effective implementation in 2023. “After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,†OECD Secretary-General Mathias Cormann said. “This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year,†Mr Cormann said.
Tax Effects on Foreign Direct Investment:
Practically, all the governments are determined to raise Foreign Direct Investment (FDI) as it can lead to creation of new jobs, updation of technologies and, more generally, boosting employment and growth. The government charges thereon, taxes on resulting increased wages and profits of foreign-owned companies making FDI a source of raising its revenues. FDI may have a positive effect on domestic income through deluge effects including the introduction of human capital and skills and inducement of new technologies. More to these possible benefits, policy makers repeatedly re-analyze their tax regimes in order to ensure that they are captivating to inbound investment.?
Surveys suggest that on an average, FDI drowns by 3 percentile points following a 1 percentile point raise in the tax rate on the FDI brought inwards. Moreover, there is a wide range of evaluations, with most surveys detecting downfalls in the range of 0% to 5%. This variation partly mirrors the differences between the industries and countries being examined, or the time periods concerned. As supported by the recent analysis, the sensitivity of FDI to tax and the mobility of business activities underlying the tax base depend on the host country. Also, some studies evidenced that FDI has been increasingly sensitive to the subject of international taxation, showcasing an increased potency of capital as the non-tax roadblocks to FDI were removed. In order to estimate the long-run impact on FDI of corporate tax reform, such estimates may be looked out for. Particularly, where the businesses benefit from locating production in largely marketed areas in order to reduce the trading costs, such as delivery or insurance costs, a certain level of dormancy is foreseen in the location choice of businesses. New descriptive versions also move that the optimal rate of tax on business falls as cost of trade falls and capital is comparatively more mobile. A number of countries impose a lower tax burden on more mobile business activities such as head-office activities or film production.?
Conclusion:
As a whole, Governments have been continuously inculcating regimes in order to make it easier for the taxpayers to understand and pay the due taxes and save them from evading taxes for a reason of their belief that they are earning more but retaining less. International taxation systems and relief mechanisms have been evidenced for providing tax credit relief, avoiding Double Taxation, preventing Tax Discrimination, bringing certainty of tax treatment to investors, better exchange of information between two jurisdictions, easing the recovery of tax dues, promoting investment & mutual relation and preventing Fiscal Evasion.
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