International taxation

Taxation
An aspect of fiscal policy
Policies Government revenue Tax revenue Non-tax revenue Tax law Tax bracket Tax threshold Exemption Credit Deduction Tax shift Tax cut Tax holiday Tax advantage Tax incentive Tax reform Tax harmonization Tax competition Double taxation Representation Unions Medical savings account Tax, tariff and trade
Economics Price effect Excess burden Tax incidence Laffer curve Optimal tax Theory Optimal capital income taxation
Collection Revenue service Revenue stamp Tax assessment Taxable income Tax lien Tax refund Tax shield Tax residence Tax preparation Tax investigation Tax shelter Private tax collection Tax farming
Noncompliance Tax avoidance Tax evasion Tax resistance Tax haven Smuggling Black market Transfer mispricing Unreported employment Tax shelter
Distribution Tax rate Progressive Regressive Proportional
Types Direct Indirect Per unit Ad valorem In rem Capital gains Carbon Consumption Dividend Ecotax Excise Fuel Georgist Gift Gross receipts Income Inheritance (estate) Land value Payroll Pigovian Property Sales Sin Single Stamp Steering Turnover Value-added (VAT) Corporate profit Excess profits Windfall profits Negative (income) Flat Wealth
International Financial transaction tax Currency transaction tax Tobin tax Spahn tax Tax equalization Tax treaty European Union FTT
Trade Custom Duty Tariff Import Export Tariff war Free trade Free trade zone Trade agreement
Religious Church tax Eight per thousand Teind Tithe Fiscus Judaicus Leibzoll Temple tax Tolerance tax Jizya Kharaj Khums Nisab Zakat
By country List of countries by tax rates Tax revenues as %GDP Albania Algeria Argentina Australia Azerbaijan Bangladesh Bhutan Bulgaria Canada China Colombia France Germany Greece Iceland India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Lithuania Malta Namibia Netherlands New Zealand Norway Pakistan Palestinian territories Peru Philippines Poland Russia Singapore South Africa Sweden Switzerland Tanzania United Kingdom United States Uruguay

International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries or the international aspects of an individual country's tax laws as the case may be. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residency, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more.

Many governments tax individuals and/or enterprises on income. Such systems of taxation vary widely, and there are no broad general rules. These variations create the potential for double taxation (where the same income is taxed by different countries) and no taxation (where income is not taxed by any country). Income tax systems may impose tax on local income only or on worldwide income. Generally, where worldwide income is taxed, reductions of tax or foreign credits are provided for taxes paid to other jurisdictions. Limits are almost universally imposed on such credits. Multinational corporations usually employ international tax specialists, a specialty among both lawyers and accountants, to decrease their worldwide tax liabilities.

With any system of taxation, it is possible to shift or recharacterize income in a manner that reduces taxation. Jurisdictions often impose rules relating to shifting income among commonly controlled parties, often referred to as transfer pricing rules. Residency based systems are subject to taxpayer attempts to defer recognition of income through use of related parties. A few jurisdictions impose rules limiting such deferral ("anti-deferral" regimes). Deferral is also specifically authorized by some governments for particular social purposes or other grounds. Agreements among governments (treaties) often attempt to determine who should be entitled to tax what. Most tax treaties provide for at least a skeleton mechanism for resolution of disputes between the parties.

Introduction

Systems of taxation vary among governments, making generalization difficult. Specifics are intended as examples, and relate to particular governments and not broadly recognized multinational rules. Taxes may be levied on varying measures of income, including but not limited to net income under local accounting concepts (in many countries this is referred to as 'profit'), gross receipts, gross margins (sales less costs of sale), or specific categories of receipts less specific categories of reductions. Unless otherwise specified, the term "income" should be read broadly.

Jurisdictions often impose different income based levies on enterprises than on individuals. Entities are often taxed in a unified manner on all types of income while individuals are taxed in differing manners depending on the nature or source of the income. Many jurisdictions impose tax at both an entity level and at the owner level on one or more types of enterprises.^[1] These jurisdictions often rely on the company law of that jurisdiction or other jurisdictions in determining whether an entity's owners are to be taxed directly on the entity income. However, there are notable exceptions, including U.S. rules characterizing entities independently of legal form.^[2]

In order to simplify administration or for other agendas, some governments have imposed "deemed" income regimes. These regimes tax some class of taxpayers according to tax system applicable to other taxpayers but based on a deemed level of income, as if earned by the taxpayer. Disputes can arise regarding what levy is proper. Procedures for dispute resolution vary widely and enforcement issues are far more complicated in the international arena. The ultimate dispute resolution for a taxpayer is to leave the jurisdiction, taking all property that could be seized. For governments, the ultimate resolution may be confiscation of property, incarceration or dissolution of the entity.

Other major conceptual differences can exist between tax systems. These include, but are not limited to, assessment vs. self-assessment means of determining and collecting tax; methods of imposing sanctions for violation; sanctions unique to international aspects of the system; mechanisms for enforcement and collection of tax; and reporting mechanisms.

Taxation systems

Systems of taxation on personal income

  No income tax on individuals

  Territorial

  Residential

  Citizenship-based

Countries that tax income generally use one of two systems: territorial or residential. In the territorial system, only local income – income from a source inside the country – is taxed. In the residential system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. In addition, a very small number of countries, notably the United States, also tax their nonresident citizens on worldwide income.

Countries with a residential system of taxation usually allow deductions or credits for the tax that residents already pay to other countries on their foreign income. Many countries also sign tax treaties with each other to eliminate or reduce double taxation. In the case of corporate income tax, some countries allow an exclusion or deferment of specific items of foreign income from the base of taxation.

Individuals

The following table summarizes the taxation of local and foreign income of individuals, depending on their residence or citizenship in the country. It includes 244 entries: 194 sovereign countries, their 40 inhabited dependent territories (most of which have separate tax systems), and 10 countries with limited recognition.

	Taxes local income of			Taxes foreign income of
Country or territory							Notes and sources
	nonresident individuals	resident citizens	resident foreigners	resident citizens	resident foreigners	nonresident citizens
Bahamas	no	no	no	no	no	no	No personal income tax.[3]
Bahrain	no	no	no	no	no	no	No personal income tax.[3]
Bermuda	no	no	no	no	no	no	No personal income tax.[3]
British Virgin Islands	no	no	no	no	no	no	No personal income tax.[3]
Brunei	no	no	no	no	no	no	No personal income tax.[3]
Cayman Islands	no	no	no	no	no	no	No personal income tax.[3]
Kuwait	no	no	no	no	no	no	No personal income tax.[3]
Maldives	no	no	no	no	no	no	No personal income tax.[3]
Monaco	no	no	no	no	no	no	No personal income tax.[4]
Nauru	no	no	no	no	no	no	No personal income tax.[5]
Norfolk Island	no	no	no	no	no	no	No personal income tax.[6][7]
Oman	no	no	no	no	no	no	No personal income tax.[3]
Pitcairn Islands	no	no	no	no	no	no	No personal income tax.[8]
Qatar	no	no	no	no	no	no	No personal income tax.[3]
Saint Barthelemy	no	no	no	no	no	no	No personal income tax.[9][Note 1]
Saint Kitts and Nevis	no	no	no	no	no	no	No personal income tax.[12]
Somalia	no	no	no	no	no	no	No personal income tax.[13]
Turks and Caicos Islands	no	no	no	no	no	no	No personal income tax.[14]
United Arab Emirates	no	no	no	no	no	no	No personal income tax.[3]
Vanuatu	no	no	no	no	no	no	No personal income tax.[15]
Vatican City	no	no	no	no	no	no	No personal income tax.[16]
Wallis and Futuna	no	no	no	no	no	no	No personal income tax.[17]
Western Sahara	no	no	no	no	no	no	No personal income tax.[18]
Angola	yes	yes	yes	no	no	no	Territorial taxation.[3]
Anguilla	yes	yes	yes	no	no	no	Territorial taxation.[19]
Bhutan	yes	yes	yes	no	no	no	Territorial taxation.[20]
Botswana	yes	yes	yes	no	no	no	Territorial taxation.[3]
Costa Rica	yes	yes	yes	no	no	no	Territorial taxation.[3]
Democratic Republic of the Congo	yes	yes	yes	no	no	no	Territorial taxation.[3]
Djibouti	yes	yes	yes	no	no	no	Territorial taxation.[21]
French Polynesia	yes	yes	yes	no	no	no	Territorial taxation.[22]
Georgia	yes	yes	yes	no	no	no	Territorial taxation.[3]
Gibraltar	yes	yes	yes	no	no	no	Territorial taxation.[23]
Guatemala	yes	yes	yes	no	no	no	Territorial taxation.[3]
Hong Kong	yes	yes	yes	no	no	no	Territorial taxation.[3]
Lebanon	yes	yes	yes	no	no	no	Territorial taxation.[3]
Macau	yes	yes	yes	no	no	no	Territorial taxation.[3]
Malawi	yes	yes	yes	no	no	no	Territorial taxation.[3]
Malaysia	yes	yes	yes	no	no	no	Territorial taxation.[3]
Marshall Islands	yes	yes	yes	no	no	no	Territorial taxation.[24]
Micronesia	yes	yes	yes	no	no	no	Territorial taxation.[25]
Namibia	yes	yes	yes	no	no	no	Territorial taxation.[3]
Nicaragua	yes	yes	yes	no	no	no	Territorial taxation.[3]
Palau	yes	yes	yes	no	no	no	Territorial taxation.[26]
Palestinian Authority	yes	yes	yes	no	no	no	Territorial taxation.[3]
Panama	yes	yes	yes	no	no	no	Territorial taxation.[3]
Paraguay	yes	yes	yes	no	no	no	Territorial taxation.[3]
Saint Helena	yes	yes	yes	no	no	no	Territorial taxation.[27]
San Marino	yes	yes	yes	no	no	no	Territorial taxation.[28]
Seychelles	yes	yes	yes	no	no	no	Territorial taxation.[3]
Singapore	yes	yes	yes	no	no	no	Territorial taxation.[3]
Somaliland	yes	yes	yes	no	no	no	Territorial taxation.[29]
Syria	yes	yes	yes	no	no	no	Territorial taxation.[3]
Tokelau	yes	yes	yes	no	no	no	Territorial taxation.[30]
Tuvalu	yes	yes	yes	no	no	no	Territorial taxation.[31]
Zambia	yes	yes	yes	no	no	no	Territorial taxation.[3]
Cuba	no	yes	yes	yes	no	no	Residential taxation of citizens, territorial taxation of foreigners. Does not tax nonresidents.[32][33]
Philippines	yes	yes	yes	yes	no	no	Residential taxation of citizens, territorial taxation of foreigners.[3]
Saudi Arabia	yes	yes	yes	yes	no	no	Residential taxation of citizens, territorial taxation of foreigners.[3][Note 2]
North Korea	yes	no	yes	no	yes	no	Residential taxation of foreigners, territorial taxation of nonresidents.[34] Does not tax income of resident citizens.[35]
Abkhazia	yes	yes	yes	yes	yes	no	Residential taxation.[36]
Afghanistan	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Akrotiri and Dhekelia	yes	yes	yes	yes	yes	no	Residential taxation.[37]
Albania	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Algeria	yes	yes	yes	yes	yes	no	Residential taxation.[38]
American Samoa	yes	yes	yes	yes	yes	no	Residential taxation.[39]
Andorra	yes	yes	yes	yes	yes	no	Residential taxation.[40]
Antigua and Barbuda	yes	yes	yes	yes	yes	no	Residential taxation.[41]
Argentina	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Armenia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Aruba	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Australia, including:[6]  Christmas Island  Cocos Islands	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Austria	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Azerbaijan	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Bangladesh	yes	yes	yes	yes	yes	no	Residential taxation.[42]
Barbados	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Belarus	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Belgium	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Belize	yes	yes	yes	yes	yes	no	Residential taxation.[43]
Benin	yes	yes	yes	yes	yes	no	Residential taxation.[44]
Bolivia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Bosnia and Herzegovina	yes	yes	yes	yes	yes	no	Residential taxation.[45]
Brazil	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Bulgaria	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Burkina Faso	yes	yes	yes	yes	yes	no	Residential taxation.[46]
Burundi	yes	yes	yes	yes	yes	no	Residential taxation.[47]
Cambodia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Cameroon	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Canada	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Cape Verde	yes	yes	yes	yes	yes	no	Residential taxation.[48]
Central African Republic	yes	yes	yes	yes	yes	no	Residential taxation.[49]
Chad	yes	yes	yes	yes	yes	no	Residential taxation.[50]
Chile	yes	yes	yes	yes	yes	no	Residential taxation.[3]
China	yes	yes	yes	yes	yes	no	Residential taxation.[3][51][52]
Colombia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Comoros	yes	yes	yes	yes	yes	no	Residential taxation.[53]
Congo	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Cook Islands	yes	yes	yes	yes	yes	no	Residential taxation.[54]
Côte d'Ivoire	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Croatia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Curaçao	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Cyprus	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Czech Republic	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Denmark	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Dominica	yes	yes	yes	yes	yes	no	Residential taxation.[55]
Dominican Republic	yes	yes	yes	yes	yes	no	Residential taxation.[3]
East Timor	yes	yes	yes	yes	yes	no	Residential taxation.[56]
Ecuador	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Egypt	yes	yes	yes	yes	yes	no	Residential taxation.[3]
El Salvador	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Equatorial Guinea	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Estonia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Ethiopia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Falkland Islands	yes	yes	yes	yes	yes	no	Residential taxation.[57]
Faroe Islands	yes	yes	yes	yes	yes	no	Residential taxation.[58]
Fiji	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Finland, including:[59]  Åland	yes	yes	yes	yes	yes	no*	Residential taxation.[3] * except former residents, temporarily
France	yes	yes	yes	yes	yes	no*	Residential taxation.[3] * except in Monaco
Gabon	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Gambia	yes	yes	yes	yes	yes	no	Residential taxation.[60]
Germany	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Ghana	yes	yes	yes	yes	yes	no	Residential taxation. Foreign income of residents is taxed only if it is moved to Ghana.[3]
Greece	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Greenland	yes	yes	yes	yes	yes	no	Residential taxation.[61]
Grenada	yes	yes	yes	yes	yes	no	Residential taxation.[62]
Guam	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Guernsey	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Guinea-Bissau	yes	yes	yes	yes	yes	no	Residential taxation.[63]
Guinea	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Guyana	yes	yes	yes	yes	yes	no	Residential taxation.[64]
Haiti	yes	yes	yes	yes	yes	no	Residential taxation.[65]
Honduras	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Hungary	yes	yes	yes	yes	yes	no*	Residential taxation.[3] * with another nationality or tax treaty
Iceland	yes	yes	yes	yes	yes	no	Residential taxation.[3]
India	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Indonesia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Iran	yes	yes	yes	yes	yes	no	Residential taxation.[66]
Iraq	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Ireland	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Isle of Man	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Israel	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Italy	yes	yes	yes	yes	yes	no*	Residential taxation.[3] * except in tax havens
Jamaica	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Japan	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Jersey	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Jordan	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Kazakhstan	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Kenya	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Kiribati	yes	yes	yes	yes	yes	no	Residential taxation.[67]
Kosovo	yes	yes	yes	yes	yes	no	Residential taxation.[68]
Kyrgyzstan	yes	yes	yes	yes	yes	no	Residential taxation.[69]
Laos	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Latvia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Lesotho	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Liberia	yes	yes	yes	yes	yes	no	Residential taxation.[70]
Libya	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Liechtenstein	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Lithuania	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Luxembourg	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Macedonia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Madagascar	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Mali	yes	yes	yes	yes	yes	no	Residential taxation.[71]
Malta	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Mauritania	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Mauritius	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Mexico	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Moldova	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Mongolia	yes	yes	yes	yes	yes	no	Residential taxation.[72]
Montenegro	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Montserrat	yes	yes	yes	yes	yes	no	Residential taxation.[73]
Morocco	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Mozambique	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Myanmar	yes	yes	yes	yes	yes	no	Residential taxation.[74]
Nagorno-Karabakh	yes	yes	yes	yes	yes	no	Residential taxation.[75]
Nepal	yes	yes	yes	yes	yes	no	Residential taxation.[76]
Netherlands	yes	yes	yes	yes	yes	no	Residential taxation.[3]
New Caledonia	yes	yes	yes	yes	yes	no	Residential taxation.[77]
New Zealand	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Niger	yes	yes	yes	yes	yes	no	Residential taxation.[78]
Nigeria	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Niue	yes	yes	yes	yes	yes	no	Residential taxation.[79]
Northern Cyprus	yes	yes	yes	yes	yes	no	Residential taxation.[80]
Northern Mariana Islands	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Norway	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Pakistan	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Papua New Guinea	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Peru	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Poland	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Portugal	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Puerto Rico	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Romania	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Russia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Rwanda	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Saint Lucia	yes	yes	yes	yes	yes	no	Residential taxation.[81]
Saint Martin	yes	yes	yes	yes	yes	no	Residential taxation.[82][Note 3]
Saint Pierre and Miquelon	yes	yes	yes	yes	yes	no	Residential taxation.[84]
Saint Vincent and the Grenadines	yes	yes	yes	yes	yes	no	Residential taxation.[85]
Samoa	yes	yes	yes	yes	yes	no	Residential taxation.[86]
São Tomé and Príncipe	yes	yes	yes	yes	yes	no	Residential taxation.[87]
Senegal	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Serbia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Sierra Leone	yes	yes	yes	yes	yes	no	Residential taxation.[88]
Sint Maarten	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Slovakia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Slovenia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Solomon Islands	yes	yes	yes	yes	yes	no	Residential taxation.[89]
South Africa	yes	yes	yes	yes	yes	no	Residential taxation.[3]
South Korea	yes	yes	yes	yes	yes	no	Residential taxation.[3]
South Ossetia	yes	yes	yes	yes	yes	no	Residential taxation.[90]
South Sudan	yes	yes	yes	yes	yes	no	Residential taxation.[91]
Spain	yes	yes	yes	yes	yes	no*	Residential taxation.[3] * except in tax havens, temporarily
Sri Lanka	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Sudan	yes	yes	yes	yes	yes	no	Residential taxation.[92]
Suriname	yes	yes	yes	yes	yes	no	Residential taxation.[93]
Svalbard	yes	yes	yes	yes	yes	no	Residential taxation.[94]
Swaziland	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Sweden	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Switzerland	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Taiwan	yes	yes	yes	yes	yes	no	Territorial taxation in general, but residential taxation under the alternative minimum tax.[3]
Tajikistan	yes	yes	yes	yes	yes	no	Residential taxation.[95]
Tanzania	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Thailand	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Togo	yes	yes	yes	yes	yes	no	Residential taxation.[96]
Tonga	yes	yes	yes	yes	yes	no	Residential taxation.[97]
Transnistria	yes	yes	yes	yes	yes	no	Residential taxation.[98]
Trinidad and Tobago	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Tunisia	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Turkey	yes	yes	yes	yes	yes	no*	Residential taxation.[99] * except income not taxed by other countries of employees of Turkish government or companies
Turkmenistan	yes	yes	yes	yes	yes	no	Residential taxation.[100]
Uganda	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Ukraine	yes	yes	yes	yes	yes	no	Residential taxation.[3]
United Kingdom	yes	yes	yes	yes	yes	no	Residential taxation.[3]
United States Virgin Islands	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Uruguay	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Uzbekistan	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Venezuela	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Vietnam	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Yemen	yes	yes	yes	yes	yes	no	Residential taxation.[101]
Zimbabwe	yes	yes	yes	yes	yes	no	Residential taxation.[3]
Eritrea	yes	yes	yes	yes	yes	yes	Residential and citizenship-based taxation.[102] Foreign income of nonresident citizens is taxed at a reduced flat rate.[103]
United States	yes	yes	yes	yes	yes	yes	Residential and citizenship-based taxation. Citizens are taxed in the same manner as residents.[3]

Residency

Residential systems face the daunting tasks of defining "resident" and characterizing the income of nonresidents. Such definitions vary by country and type of taxpayer, but usually involve the location of the person's main home and number of days the person is physically present in the country. Examples include:

• The United States taxes its citizens as residents, and provides lengthy, detailed rules for individual residency of foreigners, covering:
  • Periods establishing residency (including a formulary calculation involving three years);
  • Start and end date of residency;
  • Exceptions for transitory visits, medical conditions, etc.^[104]
• The United Kingdom establishes three categories: non-resident, resident, and resident but not ordinarily resident.^[105]
• Switzerland residency may be established by having a permit to be employed in Switzerland for an individual who is so employed.^[106]

Territorial systems usually tax local income regardless of the residence of the taxpayer. The key problem argued for this type of system is the ability to avoid taxation on portable income by moving it outside of the country. This has led governments to enact hybrid systems to recover lost revenue.

Citizenship

Almost all countries tax foreign income only of residents, if at all. Only two countries tax the worldwide income of nonresidents who are citizens of the country:^[107][108]

•  Eritrea taxes its nonresident citizens on their foreign income at a reduced flat rate of 2% (income tax rates for residents are progressive from 2 to 30%).^[103] It has been reported that Eritrea enforces this tax on its citizens abroad through denial of passports, denial of entry or exit from the country, confiscation of assets in Eritrea, and even harassment of relatives living in Eritrea, until the tax is paid.^[109] In 2011, the United Nations Security Council passed a resolution condemning the collection by illegal means of the Eritrean 'diaspora tax',^[110] and in 2013, the Canadian government expelled the Eritrean consul for collecting the tax.^[111] The Parliament of Sweden has also expressed its intention to prohibit the practice there.^[112]

•  The United States taxes its citizens and resident foreigners on their worldwide income, and nonresident foreigners on their local income. US citizens residing in other countries may exclude some of their foreign income from US taxation, and take credit for income tax paid to other countries, but they must file a US tax return to claim the exclusion or credit even if they result in no tax liability.^[113] "US persons" abroad, like US residents, are also subject to various reporting requirements regarding foreign finances, such as FBAR, FATCA, and IRS forms 3520, 5471, 8621 and 8938. The penalties for failure to file these forms on time are often much higher than the penalties for not paying the tax itself.^{[114][115][116][117]}

A few other countries tax based on citizenship in limited situations:

•  Finland continues taxing its citizens who move from Finland to another country as residents of Finland, for the first three years after moving there, unless they demonstrate that they no longer have any ties to Finland. After this period, they are no longer considered residents of Finland for tax purposes.^[118]

•  France taxes its citizens who reside in Monaco as residents of France, according to a treaty signed between the two countries in 1963.^[10] However, in 2014, the French supreme administrative court ruled that the treaty only applies to those who actually moved to Monaco, so French citizens by descent who were born and have always lived in Monaco, who form the vast majority of the French citizens in Monaco,^[119] would not be subject to taxation as residents of France. The decision is awaiting implementation by the fiscal administration.^[120] Other than this case, France does not tax the foreign income of its nonresident citizens.

•  Hungary taxes its nonresident citizens as residents of Hungary, unless they also have another nationality or reside in a country which has a tax treaty with Hungary.^{[121][122][Note 4]}

•  Italy continues taxing its citizens who move from Italy to a tax haven^{[Note 5]} as residents of Italy, unless they demonstrate that they no longer have any ties to Italy.^[126] Other than this case, Italy does not tax the foreign income of its nonresident citizens.

•  Spain continues taxing its citizens who move from Spain to a tax haven^{[Note 6]} as residents of Spain, for the first five years after moving there. After this period, they are no longer considered residents of Spain for tax purposes.^[127] Other than this case, Spain does not tax the foreign income of its nonresident citizens.

•  Turkey taxes its citizens who are residing abroad to work for the Turkish government or Turkish companies as residents of Turkey, but exempts their income that is already taxed by the country where it is earned.^[99] Other than this case, Turkey does not tax the foreign income of its nonresident citizens.

A few other countries used to tax the foreign income of nonresident citizens, but have abolished this practice:

•  Romania used to tax the worldwide income of its citizens regardless of where they resided, but abandoned this practice some time between 1933 and 1954.^[128][129]

•  Mexico used to tax its citizens in the same manner as residents, on worldwide income. A new income tax law, passed in 1980 and effective 1981, determined only residence as the basis for taxation of worldwide income.^[130]

•  Bulgaria used to tax its citizens on worldwide income regardless of where they resided.^[131] A new income tax law, passed in 1997 and effective 1998, determined residence as the basis for taxation of worldwide income.^[132]

•  The Philippines used to tax the foreign income of nonresident citizens at reduced rates of 1 to 3% (income tax rates for residents were 1 to 35% at the time).^[133] It abolished this practice in a new revenue code in 1997, effective 1998.^[134]

•  Vietnam used to tax its citizens in the same manner as residents, on worldwide income. The country passed a personal income tax law in 2007, effective 2009, removing citizenship as a criterion to determine residence.^[135]

•  Myanmar used to tax the foreign income of its nonresident citizens at a flat rate of 10% (income tax rates for residents range from 3 to 40%). As part of a series of reforms, the country abolished this practice in 2011, effective 2012.^[136]

Corporations

Countries do not necessarily use the same system of taxation for individuals and corporations. For example, France uses a residential system for individuals but a territorial system for corporations,^[137] while Singapore does the opposite,^[138] and Brunei taxes corporate but not personal income.^[139]

Exclusion

Many systems provide for specific exclusions from taxable (chargeable) income. For example, several countries, notably Cyprus, Luxembourg, Netherlands and Spain, have enacted holding company regimes that exclude from income dividends from certain foreign subsidiaries of corporations. These systems generally impose tax on other sorts of income, such as interest or royalties, from the same subsidiaries. They also typically have requirements for portion and time of ownership in order to qualify for exclusion. The Netherlands offers a "participation exemption" for dividends from subsidiaries of Netherlands companies. Dividends from all Dutch subsidiaries automatically qualify. For other dividends to qualify, the Dutch shareholder or affiliates must own at least 5% and the subsidiary must be subject to a certain level of income tax locally.^[140]

Some countries, such as the United States and Singapore,^[141] allow deferment of tax on foreign income of resident corporations until it is remitted to the country.

Individuals versus enterprises

Many tax systems tax individuals in one manner and entities that are not considered fiscally transparent in another. The differences may be as simple as differences in tax rates,^[142] and are often motivated by concerns unique to either individuals or corporations. For example, many systems allow taxable income of an individual to be reduced by a fixed amount allowance for other persons supported by the individual (dependents). Such a concept is not relevant for enterprises.

Many systems allow for fiscal transparency of certain forms of enterprise. For example, most countries tax partners of a partnership, rather than the partnership itself, on income of the partnership.^[143] A common feature of income taxation is imposition of a levy on certain enterprises in certain forms followed by an additional levy on owners of the enterprise upon distribution of such income. For example, the U.S. imposes two levels of tax on foreign individuals or foreign corporations who own a U.S. corporation. First, the U.S. corporation is subject to the regular income tax on its profits, then subject to an additional 30% tax on the dividends paid to foreign shareholders (the branch profits tax). The foreign corporation will be subject to U.S. income tax on its effectively connected income, and will also be subject to the branch profits tax on any of its profits not reinvested in the U.S. Thus, many countries tax corporations under company tax rules and tax individual shareholders upon corporate distributions. Various countries have tried (and some still maintain) attempts at partial or full "integration" of the enterprise and owner taxation. Where a two level system is present but allows for fiscal transparency of some entities, definitional issues become very important.

Source of income

Determining the source of income is of critical importance in a territorial system, as source often determines whether or not the income is taxed. For example, Hong Kong does not tax residents on dividend income received from a non-Hong Kong corporation.^[144] Source of income is also important in residency systems that grant credits for taxes of other jurisdictions. Such credit is often limited either by jurisdiction or to the local tax on overall income from other jurisdictions.

Source of income is where the income is considered to arise under the relevant tax system. The manner of determining the source of income is generally dependent on the nature of income. Income from the performance of services (e.g., wages) is generally treated as arising where the services are performed.^[145] Financing income (e.g., interest, dividends) is generally treated as arising where the user of the financing resides.^[146] Income related to use of tangible property (e.g., rents) is generally treated as arising where the property is situated.^[147] Income related to use of intangible property (e.g., royalties) is generally treated as arising where the property is used. Gains on sale of realty are generally treated as arising where the property is situated.

Gains from sale of tangible personal property are sourced differently in different jurisdictions. The U.S. treats such gains in three distinct manners: a) gain from sale of purchased inventory is sourced based on where title to the goods passes;^[148] b) gain from sale of inventory produced by the person (or certain related persons) is sourced 50% based on title passage and 50% based on location of production and certain assets;^[149] c) other gains are sourced based on the residence of the seller.^[150]

In specific cases, the tax system may diverge for different categories of individuals. U.S. citizen and resident alien decedents are subject to estate tax on all of their assets, wherever situated. The nonresident aliens are subject to estate tax only on that part of the gross estate which at the time of death is situated in the U.S. Another significant distinction between U.S. citizens/RAs and NRAs is in the exemptions allowed in computing the tax liability.^[151]

Where differing characterizations of an item of income can result in differing tax results, it is necessary to determine the characterization. Some systems have rules for resolving characterization issues, but in many cases resolution requires judicial intervention.^[152] Note that some systems which allow a credit for foreign taxes source income by reference to foreign law.^[153]

Definitions of income

Some jurisdictions tax net income as determined under financial accounting concepts of that jurisdiction, with few, if any, modifications. Other jurisdictions determine taxable income without regard to income reported in financial statements.^[154] Some jurisdictions compute taxable income by reference to financial statement income with specific categories of adjustments, which can be significant.^[155]

A jurisdiction relying on financial statement income tends to place reliance on the judgment of local accountants for determinations of income under locally accepted accounting principles. Often such jurisdictions have a requirement that financial statements be audited by registered accountants who must opine thereon.^[156] Some jurisdictions extend the audit requirements to include opining on such tax issues as transfer pricing. Jurisdictions not relying on financial statement income must attempt to define principles of income and expense recognition, asset cost recovery, matching, and other concepts within the tax law. These definitional issues can become very complex. Some jurisdictions following this approach also require business taxpayers to provide a reconciliation of financial statement and taxable incomes.^[157]

Deductions

Systems that allow a tax deduction of expenses in computing taxable income must provide for rules for allocating such expenses between classes of income. Such classes may be taxable versus non-taxable, or may relate to computations of credits for taxes of other systems (foreign taxes). A system which does not provide such rules is subject to manipulation by potential taxpayers. The manner of allocation of expenses varies. U.S. rules provide for allocation of an expense to a class of income if the expense directly relates to such class, and apportionment of an expense related to multiple classes. Specific rules are provided for certain categories of more fungible expenses, such as interest.^[158] By their nature, rules for allocation and apportionment of expenses may become complex. They may incorporate cost accounting or branch accounting principles,^[158] or may define new principles.

Thin capitalization

Most jurisdictions provide that taxable income may be reduced by amounts expended as interest on loans. By contrast, most do not provide tax relief for distributions to owners.^[159] Thus, an enterprise is motivated to finance its subsidiary enterprises through loans rather than capital. Many jurisdictions have adopted "thin capitalization" rules to limit such charges. Various approaches include limiting deductibility of interest expense to a portion of cash flow,^[160] disallowing interest expense on debt in excess of a certain ratio, and other mechanisms.

Enterprise restructure

The organization or reorganization of portions of a multinational enterprise often gives rise to events that, absent rules to the contrary, may be taxable in a particular system. Most systems contain rules preventing recognition of income or loss from certain types of such events. In the simplest form, contribution of business assets to a subsidiary enterprise may, in certain circumstances, be treated as a nontaxable event.^[161] Rules on structuring and restructuring tend to be highly complex.

Credits for taxes of other jurisdictions

Systems that tax income earned outside the system's jurisdiction tend to provide for a unilateral credit or offset for taxes paid to other jurisdictions. Such other jurisdiction taxes are generally referred to within the system as "foreign" taxes. Tax treaties often require this credit. A credit for foreign taxes is subject to manipulation by planners if there are no limits, or weak limits, on such credit. Generally, the credit is at least limited to the tax within the system that the taxpayer would pay on income earned outside the jurisdiction.^[162] The credit may be limited by category of income,^[163] by other jurisdiction or country, based on an effective tax rate, or otherwise. Where the foreign tax credit is limited, such limitation may involve computation of taxable income from other jurisdictions. Such computations tend to rely heavily on the source of income and allocation of expense rules of the system.^[164]

Withholding tax

Many jurisdictions require persons paying amounts to nonresidents to collect tax due from a nonresident with respect to certain income by withholding such tax from such payments and remitting the tax to the government.^[165] Such levies are generally referred to as withholding taxes. These requirements are induced because of potential difficulties in collection of the tax from nonresidents. Withholding taxes are often imposed at rates differing from the prevailing income tax rates.^[166] Further, the rate of withholding may vary by type of income or type of recipient.^[167][168] Generally, withholding taxes are reduced or eliminated under income tax treaties (see below). Generally, withholding taxes are imposed on the gross amount of income, unreduced by expenses.^[169] Such taxation provides for great simplicity of administration but can also reduce the taxpayer's awareness of the amount of tax being collected.^[170]

Treaties

  OECD members

  Accession candidate countries

  Enhanced engagement countries

Ratio of German assets in tax havens to German GDP.^[171] Havens in countries with tax information sharing allowing for compliance enforcement have been in decline. The "Big 7" shown are Hong Kong, Ireland, Lebanon, Liberia, Panama, Singapore, and Switzerland.

Tax treaties exist between many countries on a bilateral basis to prevent double taxation (taxes levied twice on the same income, profit, capital gain, inheritance or other item). In some countries they are also known as double taxation agreements, double tax treaties, or tax information exchange agreements (TIEA).

Most developed countries have a large number of tax treaties, while developing countries are less well represented in the worldwide tax treaty network.^[172] The United Kingdom has treaties with more than 110 countries and territories. The United States has treaties with 56 countries (as of February 2007). Tax treaties tend not to exist, or to be of limited application, when either party regards the other as a tax haven. There are a number of model tax treaties published by various national and international bodies, such as the United Nations and the OECD.^[173]

Treaties tend to provide reduced rates of taxation on dividends, interest, and royalties. They tend to impose limits on each treaty country in taxing business profits, permitting taxation only in the presence of a permanent establishment in the country.^[174] Treaties tend to impose limits on taxation of salaries and other income for performance of services. They also tend to have "tie breaker" clauses for resolving conflicts between residency rules. Nearly all treaties have at least skeletal mechanisms for resolving disputes, generally negotiated between the "competent authority" section of each country's taxing authority.

Anti-deferral measures

Residency systems may provide that residents are not subject to tax on income outside the jurisdiction until that income is remitted to the jurisdiction.^[175] Taxpayers in such systems have significant incentives to shift income outside its borders. Depending on the rules of the system, the shifting may occur by changing the location of activities generating income or by shifting income to separate enterprises owned by the taxpayer. Most residency systems have avoided rules which permit deferring income from outside its borders without shifting it to a subsidiary enterprise due to the potential for manipulation of such rules. Where owners of an enterprise are taxed separately from the enterprise, portable income may be shifted from a taxpayer to a subsidiary enterprise to accomplish deferral or elimination of tax. Such systems tend to have rules to limit such deferral through controlled foreign corporations. Several different approaches have been used by countries for their anti-deferral rules.^[176]

In the United States, rules provides that U.S. shareholders of a Controlled Foreign Corporation (CFC) must include their shares of income or investment of E&P by the CFC in U.S. property.^[177] U.S. shareholders are U.S. persons owning 10% or more (after the application of complex attribution of ownership rules) of a foreign corporation. Such persons may include individuals, corporations, partnerships, trusts, estates, and other juridical persons. A CFC is a foreign corporation more than 50% owned by U.S. shareholders. This income includes several categories of portable income, including most investment income, certain resale income, and certain services income. Certain exceptions apply, including the exclusion from Subpart F income of CFC income subject to an effective foreign tax rate of 90% or more of the top U.S. tax rate.^[177]

The United Kingdom provides that a UK company is taxed currently on the income of its controlled subsidiary companies managed and controlled outside the UK which are subject to "low" foreign taxes.^[178] Low tax is determined as actual tax of less than three-fourths of the corresponding UK tax that would be due on the income determined under UK principles. Complexities arise in computing the corresponding UK tax. Further, there are certain exceptions which may permit deferral, including a "white list" of permitted countries and a 90% earnings distribution policy of the controlled company. Further, anti-deferral does not apply where there is no tax avoidance motive.^[179]

Rules in Germany provide that a German individual or company shareholder of a foreign corporation may be subject to current German tax on certain passive income earned by the foreign corporation. This provision applies if the foreign corporation is taxed at less than 25% of the passive income, as defined. Japan and some other countries have followed a "black list" approach, where income of subsidiaries in countries identified as tax havens is subject to current tax to the shareholder. Sweden has adopted a "white list" of countries in which subsidiaries may be organized so that the shareholder is not subject to current tax.

Transfer pricing

The setting of the amount of related party charges is commonly referred to as transfer pricing. Many jurisdictions have become sensitive to the potential for shifting profits with transfer pricing, and have adopted rules regulating setting or testing of prices or allowance of deductions or inclusion of income for related party transactions. Many jurisdictions have adopted broadly similar transfer pricing rules. The OECD has adopted (subject to specific country reservations) fairly comprehensive guidelines.^[180] These guidelines have been adopted with little modification by many countries.^[181] Notably, the U.S. and Canada have adopted rules which depart in some material respects from OECD guidelines, generally by providing more detailed rules.

Arm's length principle: It is a key concept of most transfer pricing rules, that prices charged between related enterprises should be those which would be charged between unrelated parties dealing at arm's length. Most sets of rules prescribe methods for testing whether prices charged should be considered to meet this standard. Such rules generally involve comparison of related party transactions to similar transactions of unrelated parties (comparable prices or transactions). Various surrogates for such transactions may be allowed. Most guidelines allow the following methods for testing prices: Comparable uncontrolled transaction prices, resale prices based on comparable markups, cost plus a markup, and an enterprise profitability method.

Tax avoidance

Tax avoidance schemes may take advantage of low or no-income tax countries known as tax havens. Corporations may choose to move their headquarters to a country with more favorable tax environments. In countries where movement has been restricted by legislation, it might be necessary to reincorporate into a low-tax company through reversing a merger with a foreign corporation ("inversion" similar to a reverse merger). In addition, transfer pricing may allow for "earnings stripping" as profits are attributed to subsidiaries in low-tax countries.^[182]

See also

• Public finance
• List of countries by tax rates
• Tax equalization
• Tax haven
• Tax treaty
• Functional currency
• Tariff

Notes

References

Further reading

• Malherbe, Philippe, Elements of International Income Taxation,Bruylant (2015)
• Thruonyi, Viktor, Comparative Tax Law, Aspen Publishers (2003)
• Lymer, Andrew and Hasseldine, John, eds., The International Taxation System, Kluwer Academic Publishers (2002)
• Kuntz, Joel D. and Peroni, Robert J.; U.S. International Taxation

• International Bureau of Fiscal Documentation offers subscription services detailing taxation systems of most countries, as well as comprehensive tax treaties, in multiple languages. Also available and searchable by subscription through Thomson subsidiaries.
• CCH offers shorter descriptions for fewer countries (at a lower fee) as well as certain computational tools.
• At least six international accounting firms (BDO, Deloitte, Ernst & Young, Grant Thornton, KPMG, and PriceWaterhouseCoopers) and several law firms have individual country and multi-country guides available, often to non-clients. See the in-country web sites for each for contact information.

External links

• Hong Kong IRD
• India Income Tax Department
• UK HM Revenue & Customs (formerly Inland Revenue)
• UK International Manual (non-technical guidance)
• U.S. law by code section
• U.S. regs
• USTC post-94 decisions
• USSC cases 1937-1975
• OECD - Centre for Tax Policy and Administration
• United Nations Taxation Committee