Globalization flourished amongst countries particularly in the extractive / production and service economy. This breeds the hybrids of business organizations amongst foreign multi-nationals and the government of each countries are designing techniques of expanding their tax nets by blocking every loophole in the tax system. Individual and corporate foreign investors are therefore more agitated and getting more concerned of their investments’ tax exposure in the contracting countries. The investment activities and transactions are therefore planned and structured towards reducing their tax liability in the host country and preventing their investment returns from double taxation in the home country.
The emergent economies in Europe, Asia, America and some parts of Africa now consider plugging all evasions and avoidance arising from capital flights on investment returns to tax havens, while the multi-national companies focus on the domestic tax law of the foreign contracting States and relevant tax treaty with a view to take benefits accruable from the treaty. The intricacies involved in the taxation of international transactions and income is knowledge driven which characterizes this aspect of taxation as crucial, topical and special branch of knowledge requiring exploration by any thrift prospective investing taxpayers.
In this edition, the discussions will cover fundamental concepts and issues in international taxation; basic principles of international taxation; basis for tax liability under international taxation; tax treaties and models around the world (Organization of Economic & Cooperation Development – OECD Model, United Nations Model and US Model) and other legal documents such as Multilateral Instruments (MLI); application of tax treaties to income and capital; concept of transfer pricing (TP); review of the Nigerian Income Tax (Transfer Pricing) Regulation 2018 (as amended), as well as the efforts made by the developed world in dealing with Base Erosion and Profit Shifting.
This edition shall focus on fundamental concepts and issues in international taxation. In a general parlance, Ned Sheltons (2018) opined that taxation of cross-border transactions carried out in more than one territorial state is considered as international taxation. This appears simple when considering the relationship between a company of one country and its subsidiary in a foreign country. It becomes somewhat complex where the multi-nationals involved take different classifications like partnerships, parent company, permanent establishment, subsidiaries, classified as representative offices, and hybrid entities. An illustration of how it plays out is necessary.
Partnership is a type of business organization in which two or more individuals or corporations pool their resources together for the purpose of engaging in a going concern and share profit and loss in accordance with terms of the partnership agreement.
France foreign business entities are only subject to tax in France where the business is conducted in France through an autonomous establishment. Income not generated in France will not be considered for tax purpose. Whereas, United States considers a foreign business entity subject to US federal tax once the income is effectively connected to a trade or business in the United States. Where the entity that earn the income is a partnership in Belgium, Scotland and Singapore (which treats a partnership as a limited liability entity) for instance, its tax treatment will be different from partnership entity in Nigeria, Austria, Australia and China (which treat a partnership as a transparent entity). An issue of international taxation therefore arises where a partnership is floated in Belgium or Singapore and its partners are US and Nigeria that treat partnership as transparent entity. This is so considering the fact that the tax characteristics of the partnership status in Singapore and Belgium is different from that of Nigeria and China. While the Belgian or Singaporean tax authority would assess the partnership to tax being a legal entity, the Nigerian and Chinese partners would object on the ground that partnership in their home countries are not taxable but the partners. Since the partners are not residents in Singapore, they are not taxable. This happens often times. Therefore, multi-national corporations must consider the tax characteristics of their business entities in the foreign country they invest.
Of course, arguments as to whether the partners have permanent establishment in Singapore will arise and since the partnership is registered in Singapore, there is little success to be recorded on avoidance of such tax. Nigeria loses so much revenue in this regard and that calls for the National Assembly’s reconsideration of some of the extant tax treaties with other contracting States (in this context meaning countries).
Another issue that would arise back home in Nigeria and China is that of double taxation argument as the tax law in Nigeria subject every income “derive in, accrued from, received in, brought into” Nigeria to tax. Whether the partners in Nigeria will be allowed to tax credit for the amount paid for its investment in Singapore / Belgium will be determined if there is any tax treaty between Nigeria and Belgium or Nigeria and Singapore. What is tax treaty? How permanent establishment is described in the tax treaty? How does it apply to a foreign investment income for tax purpose? What is the position of the Nigerian tax law on permanent establishment rule under the extant tax treaties? These and many other fundamental concepts of international taxation shall be considered in the next edition.
Bashir Ramoni, FCTI, Partner in charge of taxation and revenue writes for SimmonsCooper Partners