Question

What are some of the names for rules have been implemented in situations where taxpayer in one country has a deduction but the recipient does not have taxable income where its received? List 3 examples - can be inbound or outbound.

Answer 1

It has been commonly accepted practice that the rule of taxation is applied based on the territorial jurisdiction and it's power over the defined subjects. In cases of cross border income, the legitimate claims were determined either based on the relationship to a person or it's territorial jurisdiction.

This dual nature of soverignity has also contributed to the formulation of realistic doctrine. Under the realistic jurisdiction, a distinction is made between jurisdiction to impose taxes and jurisdiction to enforce them, henceforth, also called "enforcement jurisdiction".

Domestic tax rules relating to cross border income generally cover two types of situations: the taxation of outbound investments of resident companies and the taxation of inbound investments of non-resident companies.

While for the former, the definition of residence is a key notion, the latter follows two broad models; the worldwide system and the territorial system.

A country applying worldwide system subjects it's residents to tax on their worldwide income whether derived from home country or overseas. But collection of information for overseas income often poses a challenge.

A country applying territorial system subjects it's residents to tax only on the income derived from sources located in it's territory.

Three examples of such instances of cross-border income are as follows:

• A resident company having overseas income will be taxed only for the money once repatriated into local accounts.
• A foreign company will be taxed for the income generated within the country's territorial juristiction even if their permanent place of business is overseas.
• Royalties, interests, dividend income earned by non-resident companies are commonly taxed by local tax authorities with withholding taxes on gross receipts.