Question

Even with defined rules and treatments, as well as processes established in tax treaties, differences of opinion and disputes develop when taxing jurisdictions overlap.

Please respond to all of the following prompts:

Please discuss some of the common factors and transaction types that arise for a multinational company that may create issues.

Does the international taxing structure operate efficiently and fairly? Explain.

What areas of the international taxing structure need improvement and how could it be improved?

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Answer 1

Tax Jurisdiction Overlap: When more than one Jurisdiction has difference in their tax rules then overlapping in tax jurisdiction occurs.

A) Some of the Common factors that arise in a Multinational Company & which creates issues are :

1. Intra-firm transactions and complex modern business models: Intra-firm transaction with its counterparties, which would set in same transaction between unrelated parties for allocating profits between jurisdictions. So that current international tax framework has been constructed through bilateral arrangements, whose primary focus is on allocating taxing rights between the two countries concerned.Business models are now globally integrated so that looking at any two locations in isolation is unlikely to be sufficient to arrive at an appropriate split of tax base.

2. Digital transactions: The current international tax architecture took shape when a physical presence was presumed necessary to undertake business activity. But IT advancement has allowed many more businesses to undertake substantial economic activity without the degree of physical presence required to be subject to the corporate income tax i.e. providing services over the internet.

3. Financial sector innovation: The current international tax framework makes distinctions between forms of income i.e. capital gains and income that financial innovation has made quite easy to engineer around.

   4.Intangibles: The increased importance of intellectual property rights and other intangibles, which are easy to move and hard to value has posed particular difficulties.

5.Shifting profits to low tax jurisdictions: transfer pricing is often regarded as matter of concern, but there are many other devices to, which these include the direct provision of services from, and location of intellectual property rights in for low tax jurisdictions

6.Taking deductions in high-tax countries : Borrowing there to lend to affiliates in low-tax jurisdictions;

7.Exploiting mismatches : tax arbitrage opportunities can arise if different countries view the same entity, transaction, or financial instrument differently

8.Delay repatriating earnings: countries operating worldwide systems defer taxing business income earned abroad until it is paid to the parent company.

B) Does International taxing structure operates efficiently and fairly.

No single tax structure can possibly meet the requirements of every country. The best system for any country should be determined taking into account its economic structure, its capacity to administer taxes, its public service needs, and many other factors. Nonetheless, one way to get an idea of what matters in tax policy is to look at what taxes exist around the world.

Different countries raise taxes differs as widely as do the amounts they raise. The pattern of taxes found in any country depends upon many factors such as its economic structure, its history, and the tax structures found in neighboring countries

Both opportunity and choice appear to affect tax levels. Countries with access to rich natural resource revenues, i.e. Venezuela and Azerbaijan, tend to have higher tax ratios than otherwise comparable countries, though such revenues may also be highly volatile, reflecting commodity price changes. Tax ratios in higher income countries appear to reflect more choice than chance. Some, such as Sweden and the Netherlands, have large and centralized governments and others, such as the United States and Switzerland, have smaller and more decentralized governments.

Developing countries, covering a wide variety of countries have different tax levels and structures. Some countries may lack effective governance structures. Such countries need to develop and implement effective and efficient tax systems if they are to be able to provide for the needs of their people and to participate effectively in the world economy. Another group of countries may have made substantial progress in meeting development goals. There countries may still face significant problems in tax policy due to globalization and other factors. While globalization and other factors may lead to further convergence of tax systems, the evidence to date suggests that the size and structure of taxation in most countries will continue to be dominated largely by domestic rather than global factors.

C) Areas in which International taxing structure need improvement are:

1. Funding and resources: Government should review the allocation of funding and resources to the tax policy-making process in order to achieve the minimum standards advocated in this report.
2. Internal institutions of government: few areas of tax policy-making process that should take place within the framework of government should be:

• The coordination of the tax policy-making process within the internal institutions of   government.
• The involvement of the tax administration in the policy-making process.
• The staffing and organization of the policy-making department.
• The post-implementation review of tax policy changes
• The staffing and organization of the policy-making department
• The post-implementation review of tax policy changes
• The mapping of the tax policy-making process.

3.The involvement of the tax administration: to improve coordination and co-operation between the department so that it can have lead role on tax policy and the tax administration, with a view to reducing both formal and informal barriers that currently exist.

4.Staffing and organization of the policy making department: policy-making process is too narrowly based in almost all of the subject-countries and that, should be an approach to making policy.

5.The role for senior economists: Organizational structure of the policy-making department should include at least one high-level oversight role for an experienced economist focused on tax policy.

6.Consultation and external relationships: Staffs at every level should be trained in consultation techniques and the handling of external relationships with taxpayers and their representatives.