Question

Part I. Comprehensive Questions (50%) Provide comprehensive answer for each question. 1. Please explain why the e-commerce / industrial revolution can create more International tax-related problems. Provide an example if you wish to. 2. Double taxation might reduce the investor's interest in conducting cross border transactions. Please provide an illustration to show the negative effect of double taxation 3. A tax treaty is an international law that bound the countries, and need to be respected. However, the domination of developed countries toward the developing countries might affect a tax treaty. Please explain and describe the meaning of this statement. 4. Please provide a logical argumentation of why the active income shall be taxable in the source country, and why the passive income shall be taxable in the domicile country. 5. Please explain why in the tax treaty concerning dividend and interest, the limited taxation rights can only be applied if the recipient of the dividend is the beneficial owner. Illustrate if needed.

Answer 1

Answer 1: With the advent of internet world has become a small village and e-commerce has become a norm of business.

Tax authorities are having a having a tough time to identify the person on whom tax to be levied. The concept of physical presence to do business in a country has vanished and income is generated by virtual presence.

For example you are based at US and sourcing a product manufactured in china, which is serviced by a Indian Company(India based internet server) . Now we need to determine who is going to pay tax and to which country is really difficult. Logically Chinese entity has to pay tax on profit made on sale of product and Indian has to pay tax on income generated from service.

But practically its difficult to segregate the profit made on product and service as the pricing is generally composite.

The could so many such circumstances

Answer 2:As the name denotes double taxation, an income suffers tax in two countries just because of having a place of establishment/business in two countries.

Say a Investor  based at New York (XYZ LTD) is having a place of business/establishment at India. Now when it comes to taxation , the global income of XYZ Ltd is taxed in United States .

XYZ Ltd also needs to  pay tax to Indian Government for the income generated in India, by the establishment situated in India.

Hence income generated from India is taxed both at India and United States

Unless there is proper Double Taxation avoidance agreement,the investor will not be interested in cross border transaction

Answer 3

The developed nation attracts the developing nation with capital investment and in turn negotiates for tax holiday/lesser taxes etc. Thus the developing nations in spite of giving space and skilled labor also sacrifices on the taxable income . The real economic benefit is reaped by developed nation which mostly developing nation is not aware of..

Say a Company from United states establishes a car manufacturing at South Africa. The United States will exploit all resources including water ,air, manpower etc and ultimately export the car to some other developed country.

In long run the developing country will lose economically.

Answer 4:The active income involves utilization  of material, labour and involvement of various resources which a country has to provide and hence country providing such resources has right to levy tax.

However in passive income, its made out of an investment like immovable property or paper securities and hence has to taxed based out place where the property is situated(domicile)

Answer 5:The benefit of tax treaty has to go to beneficial owner as the very purpose of tax treaty is to provide concession in tax to the person who is having significant influence.

This is also to track and trace money laundering by nefarious elements.

Lots of companies are operating from tax havens and unless the beneficial ownership is established the tax treaty should between the countries should not be applied.