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CHAP JURISDICTION TO TAX LECTURER: Dang Thi Bach Van(MA) Email: bachvan@ueh.edu.vn 5/9/18 Dang Thi Bach Van CONTENT • The right to tax individuals • The right to tax companies 5/9/18 Dang Thi Bach Van Introduction • Tax resident • Residence jurisdiction • Source jurisdiction 5/9/18 Dang Thi Bach Van GIỚI THIỆU • Income may be taxable under the tax laws of a country because of a nexus between that country and the activities that generated the income According to international usage, a jurisdictional claim based on such a nexus is called “source jurisdiction” • All countries imposing an income tax exercise source jurisdiction; that is, they tax income arising or having its source in their country • Thu nhập phát sinh quốc gia bị đánh thuế quốc gia  đánh thuế theo nguồn phát sinh thu nhập GIỚI THIỆU • A country also may impose a tax on income because of a nexus between the country and the person earning the income A jurisdictional claim over income based on a nexus between the country making that claim and the person subject to tax is called “ residence jurisdiction” • Persons subject to the residence jurisdiction of a country generally are taxable on their worldwide income, without reference to the source of the income That is, the person is typically taxable on both domestic-source income and foreignsource income • Một quốc gia áp thuế thu nhập mối quan hệ quốc gia cá nhân tạo thu nhập  đánh thuế theo nơi cư trú GIỚI THIỆU • Quyền đánh thuế theo nguyên tắc cư trú chồng chéo lên quyền đánh thuế quốc gia khác họ đánh thuế nguồn phát sinh thu nhập • When a resident of a country earns income from outside the country (foreign-source income), the claim of that country to tax the income based on its residence jurisdiction may overlap the claim of a foreign country for tax revenue based on source jurisdiction • The claim of governments for tax revenue based on residence jurisdiction also may overlap claims of other countries based on citizenship or, in the case of so-called “dual-resident taxpayers”, on the residence claims of other countries SOURCE JURISDICTION - Được ưu tiên sử dụng hiệp định thuế quốc gia nguồn (source country) - Thường áp dụng đối với: * Thu nhập từ việc làm cung cấp dịch vụ cá nhân * Thu nhập từ hoạt động kinh doanh * Thu nhập từ hoạt động đầu tư • By international custom, a country has the primary right to tax income that has its source in that country Most tax treaties explicitly give this primacy to the source country, although treaties typically provide that the source country must limit its rate of withholding tax on certain categories of investment income and must not tax certain categories of income at all Source rule employment and personal services income • Nguyên tắc chung hầu hết quốc gia thu nhập từ dịch vụ cá nhân nhân viên, nhà thầu độc lập chuyên gia thực có nguồn gốc nước nơi dịch vụ thực The right to tax individuals • Approaches to determine the tax residence of individuals • Consequences of tax residence • Comparative approaches to determine the residence of individuals 5/9/18 Dang Thi Bach Van Approaches to determine the tax residence of individuals Thuronyi (1998) identifies three principle approaches to determine the tax residence of individuals: • According to time spent in a particular country • According to a person’s connections with a particular country • According to a residence rules adopted for other civil law purposes 5/9/18 Dang Thi Bach Van 10 According to time spent in a particular country • Used in most countries • Fairly objective and easily to determine  The mechanical nature of a timebased test tends to lead to unsatisfactory results (resident in both countries) 5/9/18 Dang Thi Bach Van 11 According to a person’s connections with a particular country • This approach considers tax residence as a personal attribute All the facts relating to a person's residence status are considered together, with no criterion being regarded as definitive • The Netherlands, which makes no mention of time limits in determining the residency status of individuals, places high reliance, however, on personal and economic ties to determine the facts and circumstances of the taxpayer This approach does not lend itself to being laid down in statute law and decisions are taken based on case law precedent and tax authority interpretations and accepted practices 5/9/18 Dang Thi Bach Van 12 According to a residence rules adopted for other civil law purposes • A country might determine that anyone with citizenship status, or perhaps the right to work there, should be considered tax resident  this may be simpler than having different rules for different purposes • Just used in US 5/9/18 Dang Thi Bach Van 13 Consequences of tax residence • Once the fact of tax residence is established, the country concerned has the right to tax the individual on his worldwide income; • Most countries apply the same tax rates to resident and non-resident, although some choose to subject non-residents to a higher rate and/or deny them the benefit of a particular concession, ex: zero rate bands or other entitlements 5/9/18 Dang Thi Bach Van 14 Consequences of tax residence • Often, special rules will apply to temporary residents so as to limit the tax base to particular categories such as employment income and domestic sourced investment income • Ex: In Japan, residents who not intend to live permanently in Japan and not stay for more than five years are treated as temporary residents and are taxed on Japanese-sourced income and foreign sourced income that is remitted to Japan, unlike residents who are taxed on worldwide income and non-residents who are only taxed on Japanese sourced income 5/9/18 Dang Thi Bach Van 15 Comparative approaches to determine the residence of individuals Exercise on LMS • Canada • United States • Germany • Japan • India# 5/9/18 Dang Thi Bach Van 16 The right to tax companies • A company might not trade solely in the country where it is resident; indeed increasingly companies are operating across country boundaries  a company may be liable to tax in two countries on the same profits • Residence of a company for tax purposes can be different from its residence for the purpose of suite 5/9/18 Dang Thi Bach Van 17 Approaches to determine tax residence for companies Two basic approaches: • Legal approach • Economic approach 5/9/18 Dang Thi Bach Van 18 • Under the legal approach, tax residence is determined according to the country of incorporation/registry in the commercial register It is concerned with the legal form of the incorporation process 5/9/18 Dang Thi Bach Van 19 • Under the economic, or commercial connection, approach tax residence is determined according to one or more of these factors: - Place of management* - Principle business location; or - Tax residence of shareholders (not widely used) Note: many countries use a combination of these two approaches 5/9/18 Dang Thi Bach Van 20 How to find the place of “central management and control” • Where its governing body meets; • Where the decision to carry our operations emanates from; • Where strategic control is exercised; and • Where the fundamental policies are conceived and adopted as apposed to the place where they are carried out  The key appears to be to find the group of persons who decide the what, where, when and how of a company’s activities 5/9/18 Dang Thi Bach Van 21 Cases on the right to tax companies • P.81 – p87 5/9/18 Dang Thi Bach Van 22 The right to tax companies: Effect of global communications and e-commerce • The impact of technology such as videoconferencing and other electronic means of communication such that it is no longer necessary for a group of person (such as the board of directors) to be physically in the same place in order to hold discussions and make decisions •  alternative tie-breaker tests is considered: place of incorporation, place of residence of the directors (or shareholders) or the place where the enterprise’s economic links are strongest 5/9/18 Dang Thi Bach Van 23 Company residence and double tax treaties: the tie-breaker tests • The OECD does not define company tax residence: that is a matter for each country under its domestic law • However, for a DTT to operate, only one of the countries can be designated as the country of residence • For this reason, the OECD provides rules to decide which of the two countries will be treated as the country of residence This is only for the purposes of applying the treaty It does not necessarily mean that the company stops being a resident of one of the two countries under domestic law We call these rules "tiebreaker" 5/9/18 Dang Thi Bach Van 24