Double Taxation Case Study

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The interaction of domestic tax systems sometimes leads to an overlap, which means that an item of income can be taxed by more than one jurisdiction thus resulting in double taxation. The interaction can also leave gaps, which result in an item of income not being taxed anywhere thus resulting in so called ‘double non-taxation’. Corporations have urged bilateral and multilateral co-operation among countries to address differences in tax rules that results in double taxation, while simultaneously exploiting difference that result in double non-taxation.
Treaty rules for taxing business profits use the concept of permanent establishment as a basic nexus/threshold rule for determining whether or not a country has taxing rights with respect to
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Profits that include certain types of payment which, depending on the treaty, may include dividends, interest, royalties or technical fees, on which the treaty allows the country of source to levy a limited tax based on the gross amount of payment (as supposed to the profit element related to the payment); iii. Under some treaties, profits derived from collecting insurance premiums or insuring risks in the source country; iv. Under some treaties, profits derived from the provision of services if the presence of the provider in the country of source meets certain conditions.
The permanent establishment concept also acts as a source rule to the extent that, as a general rule, the only business profits of a non-resident that may be taxed by a country are those that are attributable to a permanent establishment.

The issue of jurisdiction to tax is closely linked with one of the measurements of profits. Once it has been established that a share of an enterprise’s profits can be considered to originate from a country and that the country should be allowed to tax it, it is necessary to have rules for the determination of the relevant share of the profits which will be subjected to
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This therefore creates an incentive to shift functions/asset/risks to where their returns are taxed more favorably. While it may be difficult to shift underlying functions, the risk and ownership of tangible and intangible assets may, by their very virtue, be easier to shift. Many corporate tax structures focus on allocating significant risks and hard-to-value intangibles to low-tax jurisdiction, where their returns may benefits from a favorable tax regime. Such arrangements may result in or contribute to BEPS. Shifting income through transfer pricing arrangements related to the contractual allocation of risks and intangibles often involves thorny questions. One basic question involves the circumstances under which a tax payer’s particular allocation of risk should be accepted. Transfer pricing under the arm’s length standard generally respects the risk allocations adopted by related parties. Such risk allocation and the income allocation consequences asserted to follow from them can become a source of controversy. The evaluation of risk often involves discussions regarding whether, in fact, a low-tax transferee of intangibles should be treated as having borne, on behalf of the MNE group, significant risks related to the development and use of the intangibles in
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