CH14 - International Taxation

Jurisdiction to tax: Nationality of persons

US is one of few countries that impose a tax on their nationals (or green card holders), regardless of whether they have set foot in the US or hold any assets there. This causes double taxation issues for every US citizen who lives outside the US though this is largely resolved through double tax treaties. When the US tax is higher than the tax of the country that the US citizen is living in, a US tax balance is owed.

Anti-haven and anti-avoidance measures: 3 domestic anti-avoidance measures for companies

1) Controlled foreign company (CFC, aka foreign affiliates in Canada) rules seek to tax what they regard as the abusive use of foreign companies. Resident shareholders are required to report foreign income as if it were in their own hands. 2) General anti-haven legislation catches anything not covered by the general CFC rules. In Canada, FAPI rules target passive income earned through offshore structures. 3) General Anti Avoidance Rule (GAAR) when the structure complies with domestic tax rules but is regarded as overly aggressive and abusive.

Commonly used offshore entities: 6 potential uses of trusts

1) Cross border estate and succession planning. 2) Tax efficient vehicle for investing in foreign jurisdictions. 3) Maintenance funds for family members. 4) Asset protection from potential creditors. 5) Charitable trusts. 6) Purpose trusts. Canada expects Canadian taxpayers to properly report worldwide income, including from offshore trusts. Canada now looks for information about beneficial ownership of any trust assets located outside of Canada.

3 main sources of international tax law

1) Domestic tax law in the country in which the income is generated. 2) Domestic tax law in the country in which the income recipient is resident. 3) Any income tax treaty that is in place between the 2 countries involved.

Source country taxation: Rules under an income tax treaty

1) Exclusive taxing rights for the country of residence. 1.1) Capital gains not related to immovable property (e.g. real estate) 1.2) Royalties (some income tax treaties may treat this differently) 1.3) Any type of income not covered by specific provisions. 2) Limited tax rights for the country in which the income is sourced. 2.1) Interest income (via withholding tax) 2.2) Dividend income (via withholding tax) 3) Full taxation rights in which the income is sourced. 3.1) Income and capital gains from immovable property in the source country.

3 potential solutions to double taxation

1) Exempting foreign source income from home country taxation. 2) Giving credit for foreign taxes paid to reduce the amount of home country taxation. 3) Making agreements with other countries to determine how the 2 countries will share the right to tax specific income types.

Residence country taxation: 2 methods the residence country can use to reduce the potential of double taxation

1) Exempting foreign source income from taxation. 2) Giving credit to residents for foreign taxes paid to the country from which the income was derived. (Most countries choose this option.)

3 reasons for why the background of international tax treaties matter

1) International tax treaties are almost exclusively bilateral in nature and as such not as effective when 3 or more countries are involved. 2) Main purpose of international tax treaties is to remove double taxation between 2 countries (aka double tax treaties). 3) Many countries (including Canada and US) have implemented several international tax treaties over an extended number of years. This makes the countries and their treaties rather inflexible and difficult to change.

Use of tax havens: 4 main categories of tax havens

1) Investment base havens: Offshore centres with very low or no tax on foreign source income, with no withholding taxes, and few if any international tax treaties. 2) Base havens for business activities: Offshore centres with a more developed business infrastructure and either low tax or exemptions from tax. 3) Treaty havens and special concession havens: Traditional offshore centres with reasonable domestic tax rates or onshore centres with special tax regimes that permit their treaty networks to be used for offshore activities and treaty shopping. 4) Residence havens for individuals: Tax will only ever be one consideration but certain jurisdictions offer great fiscal attractions for wealthy individuals.

Jurisdiction to tax: 2 bases of jurisdiction for corporations

1) Source 2) Residence

Source country taxation: Rules in the absence of an income tax treaty

1) Source and residence countries may levy whatever taxes they wish under domestic laws. 2) Attempts to enforce tax compliance across the border to another country will require that country's cooperation.

Measures to prevent the non-declaration of foreign assets: 3 types of information exchange

1) Spontaneous, where a country exchanges information without receiving a request and actively passes on information it considers to be of interest to a treaty partner. 2) Automatic, where there is an exchange of full computerized records of any transaction that relates to residents of the other country involved in an information sharing agreement. 3) On request, which is by far the most common exchange method adopted within treaties.

Anti-haven and anti-avoidance measures: 3 stage test for applying GAAR in Canada

1) Was the transaction an avoidance transaction? 2) If so, was any tax saved or deferred? 3) If so, were the transactions undertaken primarily for purposes other than to obtain a tax benefit? Based on the answers to these questions, GAAR may apply. In Canada, GAAR is a very broad reaching legislation that gives the CRA broad discretion to adjust taxes payable.

Use of tax havens: Base havens for business activities: Switzerland

A Swiss domiciliary company primarily or exclusively derives its income from commercial activities outside of Switzerland or admin activities carried out in Switzerland on behalf of other companies in the group (e.g. financing, re-invoicing). Swiss federal corporate taxes are very low (< 10%) and foreign source income of a Swiss domiciliary company is exempt from government taxes below the federal level (e.g. provincial, municipal).

Commonly used offshore entities: Trusts

A trustee administers the trust assets on a fiduciary basis, legally owns a trust's assets, and manages the assets for the benefit of the beneficiaries and according to the legal terms of the trust. The trust's settlor is no longer the legal owner once assets are transferred to the trust but the settlor can have influence (not control) over the way in which the assets are distributed to the beneficiaries. This is done through a non-legally binding "letter of wishes". In some jurisdictions, the settlor can also appoint a protector to look after the interests of the beneficiaries. The protector has the right to remove and appoint trustees, change the residence of the trust, and sometimes veto the trustee's decisions.

3 potential solutions to double taxation: Making agreements with other countries to determine how the 2 countries will share the right to tax specific income types

Ability to make different rules for different income types. When income is generated in a foreign country that is subject to tax in that foreign country, tax treaties will often limit the foreign country's ability to tax that income to a certain level of withholding tax. For foreign source investment income (dividends, interest, royalties), withholding tax is generally the only method of taxation an income tax treaty allows to the foreign country in which the income is generated.

Measures to prevent the non-declaration of foreign assets: US form W-9

All US persons who hold US securities deposited with foreign financial institutions must complete US form W-9, Request for Taxpayer Identification Number and Certification. It allows foreign financial institutions to release and disclose the US account holder's identity to the IRS. Any US person who chooses to withhold their identity is subject to a 31% withholding tax rate on interest, dividends, royalties, and gross proceeds from the sale of US securities.

Jurisdiction to tax: Reconciling residence conflicts for individuals

An individual can be considered a resident under the domestic tax laws of multiple countries. If there is no income tax treaty, the countries must resolve the issue under their own separate national tax systems and neither country can prevent the other from claiming the right to tax. (Individual is potentially subject to double taxation but either can can exempt the foreign source income or give credit for tax paid to the foreign country.) When there is an income tax treaty, conflicts can be removed through residency determination rules.

Measures to prevent the non-declaration of foreign assets: FATCA non-compliance

Any client the IRS deems to be in non-compliance is charged a flat 30% withholding tax regardless of any tax treaty benefit they might otherwise be entitled to. Unlike with QI, FATCA affects FFIs even if they do not have any US clients. Onus is on FFIs to prove that they have no US account holders. Otherwise a 30% withholding tax will be applied to all US source income or gross proceeds resulting from the disposal of US assets by the FFI, regardless of the beneficial owner's tax status.

Anti-haven and anti-avoidance measures: Anti-haven legislation

Besides the CFC rules which applies to companies, several countries have introduced anti-avoidance legislation to target the use of tax havens by individuals and other entities. The legislation restricts deductions of tax expenses or granting of tax benefits to entities in blacklisted countries. Countries are blacklisted because of low/no tax rates, financial secrecy, discretionary tax privileges, allows ownership to be held in trust, or no taxes on dividends or interest to non-residents.

Source country taxation: Rules under an income tax treaty: Capital gains when an individual changes their country of residence & cost basis step up

Canada applies deemed disposition rules that allow emigrating residents to elect to be treated in their new country as if they had sold and re-acquired their assets on the date they changed residence. Step up in cost base in the new country of residence avoids potential double taxation of capital gains when the actual disposition happens at a later date. This is very important in situations where a person moves from Canada to the US and their property listed before they leave but is not sold until after they leave.

Anti-haven and anti-avoidance measures: Canada and exit taxes

Canada imposes an exit or departure tax on certain capital gains when a person becomes a non-resident. The person is deemed to have disposed of all assets at fair market value on the date of emigration. Any resulting capital gains are reportable on the final tax return filed for the year of departure. Exemptions exist for pensions, RRSPs, RRIFs and taxable Canadian property. These are taxed when amounts are withdrawn and received by the non-resident taxpayer, where non-resident withholding taxes are taken before the net amount is remitted. Canada also has special rules for individuals coming to Canada for what they expect will be a short duration. Individuals that stay resident in Canada for < 5 years are exempted from the departure tax on the appreciation of specific assets they bought into Canada and have not since transacted upon.

Use of tax havens: Tax treaty havens and special concession havens: Delaware (US)

Corporate home of over 60% of the Fortune 500 companies and half of the firms traded on the NYSE and NASDAQ. Also one of the most popular investment havens through its offer of the Limited Liability Corporation (LLC). A Delaware LLC does not have to file tax returns if the LLC's income is not derived within the US, reporting requirements are minimal, and there is no need to disclose beneficial owners or file annual accounts. Anonymous filings is available to preserve privacy and records on beneficial owners do not need to be maintained. Anyone in the world can incorporate a Delaware LLC.

Domestic tax law

Domestic tax law is the foundation upon which the complex interactions that make up international tax law operates. Domestic tax law specifies when and how a tax liability arises on any domestic or cross border transactions. Identifies relevant factors that bring a transaction within the scope of a domestic tax authority's ability to levy taxes.

Measures to prevent the non-declaration of foreign assets: FATCA in the US

FATCA operates in addition to QI rules and has very far reaching consequences. Purpose of FATCA is to ensure that the IRS can identify and collect the appropriate tax from US persons holding financial assets outside of the US, including assets not previously caught by QI rules. FATCA potentially applies to any company or entity with US clients or assets that could generate US source income. FATCA further shifts the onus of tax reporting and compliance onto any company holding or trading US assets on behalf of others, such as Canadian brokerages which are considered foreign financial institutions (FFIs).

Source country taxation: Rules under an income tax treaty: Capital gains

For the domestic taxation of capital gains, individual countries have widely varying rules. In the US, short term capital gains (property held for < 1 year) are taxed as income and long term capital gains (held >= 1 year) are taxed more favourably. OECD declares that capital gains are taxable exclusively in the recipient's residence country though there are often exceptions (e.g. real property such as real estate) where both countries have taxation rights. In general, most double tax treaties allow both countries to tax real estate capital gains.

Anti-haven and anti-avoidance measures: Controlled foreign company (CFC) rules

Foreign income is normally taxed only after the right to it as accrued or it has been received in the country of residence. Shareholders do not have a right to a company's profits before they are distributed as dividends. This makes it fairly easy to defer and avoid tax on foreign sources by channeling foreign income into a company in a low tax country. As a result, many countries have enacted CFC rules to stop tax on foreign income from being deferred or avoided in this way. Note that CFC rules only apply where resident shareholders have control or substantial influence over the foreign company, where the definition of control can vary by country.

3 potential solutions to double taxation: Giving credit for foreign taxes paid to reduce the amount of home country taxation

Give home country residents credit for foreign taxes paid on income that is also taxable in their home country. Adopted by most larger countries, including Canada and US. Canada taxes foreign source income earned by Canadian companies (similar to what happens for Canadian individuals).

Use of tax havens: Base havens for business activities

If Canadian entrepreneurs use base companies in tax havens to earn passive income, Canadian domestic tax law may tax them through rules related to controlled foreign affiliates. When profits are generated through active business activity, base companies in developed countries (e.g. Panama, Hong Kong, Switzerland) are more suitable. From a Canadian perspective, the taxation of active business income earned abroad does not attract punitive tax results as Canada encourages development of foreign active business income by Canadian entrepreneurs and businesses, and taxes this income through regular means.

Residence country taxation: Relief under domestic tax law by deduction

If a foreign country withholds more than 15% in taxes, Canada allows the excess to be used as a tax deduction. (NOT the same as relief under domestic tax law by credit.)

Anti-haven and anti-avoidance measures: The US and exit taxes

If a person chooses to give up their US citizenship or green card, expatriation rules apply if they meet any of the following criteria: 1) They are high income. 2) If they are high net worth. 3) Failed to comply with federal tax obligations in any of the 5 years prior to expatriation. If any apply, the person faces a mark to market deemed disposition of all of their assets at fair market value on the day before the expatriation date.

Anti-haven and anti-avoidance measures: General domestic anti-avoidance rules

If transactions have a sufficient element of artificiality, general anti avoidance rules (GAAR) may allow home tax authorities to tax the resulting benefits. In Canada and elsewhere, GAAR rules are not specific to international transactions.

Use of tax havens: Base havens for business activities: Hong Kong

In HK, certain classes of profit are tax exempt regardless of their source (capital gains, interest, dividends). HK follows the territorial basis of income taxation and therefore a company is only subject to tax on income derived from HK. Note that Canadians should be careful about engaging in passive investment activities from a HK base as the Canadian tax rules will result in significant tax implications.

Jurisdiction to tax: Gross or net taxation and withholding tax in absence of a tax treaty

In the absence of a tax treaty, a source country (where income is derived) has the primary rights of taxation because the income source is located within its jurisdiction and can get to the money first. Source country has the choice of whether to tax on a gross basis or net basis (after deductions). Many countries find it more convenient to tax the gross amount of income generated in their country. The main exception to this is owning real estate, where most countries allow deductions for maintenance costs and sometimes acquisition costs.

International tax treaties

International tax treaties are always concluded on a bilateral basis (between 2 countries to enable the integration of their tax systems). In the 1960s, the Organsation for Economic Co-operation and Development (OECD) produced a model international tax treaty for its member companies to use. Most international tax treaties negotiated since the 1960s follow the OECD model tax treaty. However, there are competing models for the development of international tax treaties. The US has produced a separate model on which it negotiates its own tax treaties. The UN has developed a model favoured by a number of developing countries.

Do international tax treaties create or raise tax liabilities

International tax treaties do not create tax liabilities where none exist under domestic tax law. International tax treaties can only reduce or eliminate domestic taxes.

Use of tax havens: 4 types of residence havens for Individuals

Jurisdictions that: 1) Levy no taxes of any kind, e.g. Dubai. 2) Levy few, if any, individual taxes, e.g. Monaco, Andorra. 3) Levy no taxes on foreign source income, e.g. Hong Kong, Singapore. 4) High tax countries with special regimes for long term resident foreigners, e.g. UK, Malta, Switzerland.

Source country taxation: Rules under an income tax treaty: Interest income

Like dividends, OECD model treaty stipulates that interest may be taxed in both the source and residence countries. If the interest recipient is the beneficial owner, the withholding tax deducted at source is limited in the OECD model treaty to 10%. However, this is a guideline and withholding rates of up to 15% are not uncommon. Often interest paid from a source in one country to the government of another country is exempt from withholding tax in the country where the interest payment originated.

Commonly used offshore entities: Foundations

Loosely described as the civic law equivalent of the common law trust. Unlike trusts, foundations are created by contract. Preferred in civil law countries where the concept of trusts is not recognized. Foundations are incorporated and managed like companies except there are beneficiaries instead of shareholders. Similar to a company, it can hold assets, contracts with third parties, sue or be sued in its own name.

Commonly used offshore entities: Anti avoidance rules

Many developed countries have enacted special anti-avoidance rules to counter the use of offshore trusts and foundations. From a US perspective, Canadian RRSPs are considered to be foreign grantor trusts. There are special provisions in the income tax treaty between Canada and the US so that income a US taxpayer earns in an RRSP is not taxed on an annual basis on US tax returns. Otherwise there would be severe double taxation issues. Canada chooses to treat many foreign trusts with Canadian connections as residents of Canada for tax purposes. It also makes trustees and resident beneficiaries jointly liable for tax on the trust's income.

Source country taxation: Rules under an income tax treaty: Dividends

Most income tax treaties provided that dividends can be taxed in both countries (where dividends were paid, recipient's country of residence). Almost all source countries require companies to withhold tax before paying their foreign shareholders and remit the tax to the source country. OECD model tax treaty indicates that the primary taxation rights for dividends belongs with the recipient's country of residence. Treaty also gives the source country a more limited right to tax the dividends so long as the dividend recipient is also the beneficial owner. (Beneficial ownership tests apply to dividends, interest and royalties.)

Anti-haven and anti-avoidance measures: Prevention of treaty abuse: Priority between domestic anti-avoidance rules and tax treaties

OECD model tax treaty commentary states that "a purpose of tax treaties is to prevent tax avoidance". For the following questions, the answer is No: 1) Whether treaty benefits must be granted when transactions constitute an abuse of treaty provisions. 2) Whether specific provisions and rules of domestic tax law that are intended to prevent tax abuse conflict with treaty provisions.

Anti-haven and anti-avoidance measures: Prevention of treaty abuse: Treaty shopping

Most treaties and some domestic laws have provisions to ensure that treaties are not used as pass through structures for treaty shopping. Most countries regard treaty shopping as unacceptable, including Canada and the US. However some countries encourage treaty shopping as a way to encourage inward investment. US has limitation of of benefit (LOB) clauses in its international income tax treaties to limit treaty benefits to corporations based on stock ownership tests and foreign entity income tests.

Use of tax havens: Investment base havens

Mostly used as a base for holding companies and trusts. E.g. Bahamas, Cayman Islands, British Virgin Islands. Tax havens do not introduce any issues of double taxation because they do not charge any taxes. However, many developed countries have introduced legislation that cover rules on controlled foreign companies or affiliates, and other anti avoidance rules.

Use of tax havens: Tax treaty havens and special concession havens: Netherlands

Netherlands is one of the leading financial centres for tax planning. Does not have many anti avoidance measures to discourage offshore activities. Is one of the most popular countries in which multi national corporates set up subsidiaries, even if they have little or no real business activity there. Netherlands has very low corporate tax rates. There are no withholding taxes on royalties paid on intellectual property and is therefore popular with musicians.

Source country taxation: Rules under an income tax treaty: Royalties

OECD model tax treaty gives exclusive taxation rights to the residence country of the royalties beneficial owner. But many double tax treaties do not follow OECD and therefore permit the source country to charge withholding taxes. E.g. Canada and US tax treaty permits both countries to tax royalty payments and that the withholding tax in the source country is limited to 10%.

Anti-haven and anti-avoidance measures: Prevention of treaty abuse: Beneficial ownership test

OECD model tax treaty has very few anti-abuse provisions. Most important concept that is included is the concept of beneficial ownership regarding dividends, interest and royalties to counter treaty shopping.

Source country taxation: Rules under an income tax treaty: Income from immovable property

OECD model tax treaty provides that income from immovable property may be taxed in the country in which the property is located. Some exceptions include dividends from property companies and REITs. (Under the OECD model treaty, REIT distributions and taxed as dividends and subject to withholding taxes rather than taxed as immovable property.) On the sale of immovable property, the rules used to determine the taxable amount of a gain in the property's country would apply when the seller is resident in another country. This would only allow the net gain to be taxed, not the entire proceeds

Anti-haven and anti-avoidance measures: Prevention of treaty abuse: Treaty benefits where transactions are regarded as abusive

OECD model tax treaty's commentary now seeks to establish a general anti avoidance rule requiring treaties to be interpreted in order to prevent avoidance. The challenge to domestic tax authorities and courts will be where to draw the line between impermissible tax avoidance and permissible tax planning and mitigation.

Commonly used offshore entities: Taxation of offshore trusts

Offshore trusts produce tax planning opportunities because of the different rules that affect them in a variety of jurisdictions. E.g. With an offshore trust, both the settlor and beneficiaries are normally non-residents, therefore the trust income is from foreign sources. Trust income is usually not taxable to the trust or its non-resident beneficiaries in the offshore jurisdiction.

Commonly used offshore entities: Partnerships and hybrid companies

Partnerships are regarded as fiscally transparent in many countries including Canada and therefore unable to benefit from income tax treaties. Partner liability is generally unlimited, or limited (such as in Canada) as long as there is at least one general partner with unlimited liability. Hybrid company is a company limited by guarantee that also has share capital. Can be used as a quasi-trust or family foundation. Hybrid company receives its assets as a gift from hits founder. 2 types of participants in a hybrid company: 1) Shareholders, who do not benefit from ownership as they are not entitled to dividends or capital, but who control the company. 2) Guarantee members, who are the beneficiaries.

Jurisdiction to tax: Residence of non-natural persons (e.g. corporations)

Question of residence is purely a matter of domestic taxation law; the corporate equivalent of nationality. Often this is the country of incorporation. However, most countries also apply a test for tax residence that is based on the place from which the company's business is actually conducted.

Commonly used offshore entities: Treaty recognition of offshore trusts

Several international financial centres have tax treaties that can be used for planning purposes using their offshore trusts. E.g. Barbados, UK, US.

3 potential solutions to double taxation: Exempting foreign source income from home country taxation

Simplest but most unpopular method. Still a handful of countries and regions that exempt all foreign source income earned by individuals (e.g. Hong Kong, Singapore). Many more countries exempt foreign source income earned by resident companies. (If the company and its shareholders are residents of the same country, the country can indirectly tax the company's profits by taxing the dividends it pays to the resident shareholders. For shareholders who live abroad, the country can tax the company's dividends through a non-resident withholding tax.) US has a hybrid approach that is unique in regard to exempting foreign source income earned by US companies. US will not tax the foreign source income earned by US companies as long as the income remains outside of the US. Only taxed when the foreign source income is repatriated back to the US.

Measures to prevent the non-declaration of foreign assets: US approach of bank to country information exchange

Since 2001, the US's main emphasis has been to turn foreign banks into tax and information collection agents both through the QI system in 2001 and FATCA provisions in 2014. EU has a similar approach requiring that banks provide information directly to countries in the EU through the EU Savings Directive. EU member countries have also turned into each other's information and tax collecting agents.

Anti-haven and anti-avoidance measures: 2 rules for individuals and exit taxes

Some countries treat a transfer of residence as a form of tax avoidance and have therefore enacted anti avoidance measures to prevent loss of tax revenue due to emigration. The pattern for individuals is normally: 1) They will remain taxable in their former country of residence on either specific types of income or their worldwide income, or 2) They are taxed on their unrealized capital gains on emigration or in a trailing tax at a point within a number of years after the emigration has occurred.

Undefined terms in international tax treaties refer back to domestic tax law

Some terms are defined in the OECD model tax treaty (e.g. interest, dividends). However, many terms remain undefined. Many international tax treaties provide that undefined terms will have the same meaning as they do in the domestic tax laws of the countries involved in the treaty. Challenges arise if the countries have different definitions for the same term.

Source country taxation: Rules under an income tax treaty: Capital gains when an individual changes their country of residence

Special provisions are built into Canada's income tax treaties that provide Canada (and its treaty partners) the continuing right to tax when an individual changes their country of residence to the tax treaty's other party. E.g. If a Canadian resident owned property in Canada at the time they ceased to be a Canadian resident and moved to the US, Canada can tax the gains if the property is disposed in the first 10 years of the change of residence. The reciprocal would be for a US resident with US property moving to Canada.

Commonly used offshore entities: 4 tax considerations on the choice of a holding company's location

Tax considerations in the choice of a holding company's location include: 1) Low or ineffective corporate tax on income received and on other income earned in the low tax jurisdiction. 2) No local capital taxes, stamp duties on transfers, or net worth taxes. 3) No withholding tax on dividends or other outbound payments made by the holding company. 4) Qualifications for any tax concessions.

Measures to prevent the non-declaration of foreign assets: US qualified intermediary (QI) rules

Tax reporting rules that require non-US financial institutions to provide the IRS with information about any US persons who hold accounts with the financial institutions and the amount of reportable income that each US person receives. The goal of the QI rules was to ensure that US persons do not escape the payment of tax on any income earned on assets held outside of the US. If a financial institution did not participate, they would be cut off from access to the US financial and banking system. Clients of the foreign financial institutions would be penalized by being subject to the 30% maximum US non-resident withholding tax on dividends and other types of income. In 2010, the QI rules were extended to legal entities that US persons might control as beneficial owners, including trusts, corporations and foundations.

Residence country taxation

Taxation rights of residence countries are much simpler as the right of a residence country to impose taxes is not excluded by income tax treaties. Practical effects of income tax treaties are that a source country often has the first right of taxation with the residence country left to relieve the impact of the source country's taxation on the taxpayer.

Jurisdiction to tax: Residence of persons

Tests of residence can vary widely between countries. Therefore 2 or more countries can claim the right to tax a person on the basis of residency at the same time.

Anti-haven and anti-avoidance measures: Substance over form in the US

The US has no GAAR but the US courts apply extensive business purpose and "substance over form" tests, e.g. tax rules should treat transactions based on the economic substance of the transaction (end result) rather than the way in which it was set up (form).

Jurisdiction to tax: Residual taxation rights for residence country of persons

The country in which income is generated (source country) will always have the primary right of taxation. The country of residence decides whether it will exempt a taxpayer's foreign source income from home country taxation or provide tax relief in the form of a tax credit on foreign source income. The country of residence can make this determination under domestic law or under the provisions of an income tax treaty.

Source country taxation: Rules under an income tax treaty: Dividends, interest and royalties

The most significant items of passive investment income. The starting point for taxation is always domestic tax law. Some source countries may choose not to tax dividends, interest, and royalties. (E.g. Dividends are not taxed in the UK, Australia, Singapore). For non-resident recipients, Canada and the US exclude most forms of interest income from withholding taxes.

Measures to prevent the non-declaration of foreign assets: FATCA and information sharing agreements

To help FFIs in countries with which the US has information sharing agreements, it has agreed to obtain information through these agreements rather than through the FFIs when required. When the US requests information, the FFI will pass the information onto their own country's government, which would then pass it on to the US. Many countries have agreed to this information sharing partnership (Intergovernmental Agreement) including Canada, UK, Spain, France, Bermuda, Australia, Malaysia, Switzerland, among others.

Relationship between international tax treaties and domestic tax law

Treaties are governed by international, rather than domestic, tax law. Treaty provisions override domestic tax law and the countries involved must act in good fait to carry out the treaty provisions.

Use of tax havens: Tax treaty havens and special concession havens

Treaty havens can be used as a tax efficient jurisdiction for intermediary or conduit companies, either between a high tax jurisdiction and a source of profits/gains, or between a trust or foundation and a distributing company.

Anti-haven and anti-avoidance measures: Prevention of treaty abuse

UN defines "abuse of treaties" as the use of tax treaties by a person for whom the treaties were not designed to benefit. Occurs when a taxpayer who resides in a third country uses a structure to flow income through a low tax country that has a favourable tax treaty. The victim is usually the country where the income was generated as the tax treaty prevents it from applying its normal tax rate.

Residence country taxation: US treaty saving clauses

US is one of the few countries that resources the right, through a "savings clause", to charge full US taxes on its residences and on individuals who are, or have been, US citizens. US wishes to ensure that its citizens pay the same amount of tax worldwide as if they were a US resident. The savings clause provides an additional tax credit on their US tax return for the amount they pay to the foreign country in which they are a resident.

Commonly used offshore entities: Taxation of trusts under domestic tax law

Under Canadian domestic law, tax trusts are taxed as individuals. Trusts are treated as a separate person and are required to file an annual income tax return. In Canada and the US, trusts are only taxed on the income remaining in the trust after any distributions are made to the beneficiaries. Beneficiaries must then report the income that is allocated to them on their own tax returns.

Jurisdiction to tax: Domicile of persons

Under common law, domicile is the country and individual regards as their home. An individual can be a resident of multiple countries but can only have one domicile at a time.

Measures to prevent the non-declaration of foreign assets: US form W-8

Under the QI rules, non-US persons are also required to provide specific information about the beneficial ownership of their investment accounts. Most foreign financial institutions require that account holders complete US form W-8, Certificate of Foreign Status of Beneficial Owner for US Tax Withholding. Even though the form is collected as evidence of non-US status, QI rules do not require that this information be remitted to the US tax authorities for non-US persons.

Measures to prevent the non-declaration of foreign assets: Tax information exchange agreements

Under the threat of sanctions from larger countries, many tax havens are now obligated to enter into tax information exchange agreements.

Residence country taxation: Relief under domestic tax law by credit

When a residence country chooses to provide relief by way of a tax credit, foreign income is taxable due to worldwide income reporting requirements. Foreign taxes paid are then creditable against the taxes due in the residence country on the worldwide income. Effectively, the taxpayer ends up paying the higher of the source country and residence country taxes on all income. In the case of investment income, the tax credits is the amount of withholding tax taken from dividends, interest or royalties. Canada calculates foreign tax credits on a per income type and per country basis while the US pools foreign taxes by income type regardless of country. If more foreign taxes are paid than are available to use as a credit to reduce the amount of domestic taxes payable, Canada allows the excess to be carried forward for business income but not on personal income.

What is special treaty meaning

When a treaty's term's meaning is different from its meaning in the domestic tax law of either country involved. E.g. beneficial owner means true economic owner in tax treaties to prevent the insertion of shell companies in favourable jurisdictions.

What is double taxation

When the same income is taxed in both countries for transactions that cross national borders