Chapter 8. International Taxation

CHAPTER 8:
INTERNATIONAL TAXATION
Hanoi, 2020
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LEARNING OBJECTIVES
1. Describe differences in corporate income tax and

withholding tax regimes across countries
2. Explain how overlapping tax jurisdictions cause double
taxation
3. Show how foreign tax credits reduce the incidence of
double taxation
4. Describe some of the benefits provided by tax treaties
5. Explain and demonstrate procedures for translating
foreign currency amounts for tax purposes
6. Describe tax incentives provided by countries to attract
foreign direct investment and stimulate exports
INTERNATIONAL SCHOOL
IMPACT OF TAXES—INTERNATIONAL
BUSINESS DECISIONS
Tax issues are important in deciding:
 International location decisions

 Legal form of operation
 Method of financing contribution (equity or loan)
TYPES OF TAXES AND TAX RATES
• Types of taxes
(1) Corporate income taxes
• Imposed by governments
• Tax rates vary (9% - 40 %)
EXHIBIT 8.1
(2) Withholding taxes
• Taxes on dividends
• Other amounts paid to foreign citizens. There are
three types of payments typically subject to
withholding tax: dividends, interest, and royalties
TAX JURISDICTION
There are two approaches taken on one tax jurisdiction:

(1) Worldwide (nationality) approach
Tax on all income of resident, company of a country
is taxed by country regardless of place of earning
 In other words, foreign source income is taxed
by the country of residence
(2) Territorial approach

Only the income earned within the borders of the
country (domestic source income) is taxed
DOUBLE TAXATION
• The most common overlap of jurisdictions is

• Same income taxed
– In a foreign branch or subsidiary is located taxes on
the basis of source and
– Country of residence
DOUBLE TAXATION
• Solutions
(1) Adoption of territorial approach
• Exemption of foreign source income
(2) Deduction of taxes
• By parent company
• Paid to foreign governments
(3) Tax credit
• To parent company
• For tax paid to foreign governments
• U.S. allows
– (1) deduct all foreign taxes paid or
– (2) take a credit for foreign income taxes paid.
DOUBLE TAXATION
• FTC – Example
• Assume : GCO, a U.S. company has a branch in Mexico
where corporate income tax rate is 33%
• The U.S. corporate income tax rate is 35%
• GCO has foreign source income in Mexico of $50,000
• GCO pays $16,500 of corporate income tax in Mexico
and $20,000 of other taxes
• GCO decides to do a calculation to choose between
using taxes paid in Mexico as a deduction or tax credit
DOUBLE TAXATION
• FTC – Example
• Deduction Credit
• Foreign source income $50,000 $50,000
• Deduction for all taxes paid $36,500 $ 0
• U.S. taxable income $13,500 $50,000
• U.S tax before tax credit $4,725 $17,500
• Foreign tax credit $ 0 $16,500
• Net U.S. tax liability $ 4,725 $ 1,000
TAX TREATIES
• Is bilateral agreements between two countries regarding

– individuals and companies from one country will be
taxed
– When earning income in the other
– Facilitate international trade and investment
• In addition, treaties generally require the exchange of
information between countries
• Helps in domestic enforcement
MODEL TREATIES
1. Organization for Economic Cooperation and

Development (OECD) model treaty
– Basis for most bilateral treaties of developed countries
– Tax if they are attributable to a permanent establishment
– One of the most important benefits afforded by tax
treaties is the reduction in withholding tax rates:
• 5% of direct investment dividends
• 15% of portfolio dividends
• 10% of interest
• 0% of royalties
MODEL TREATIES
2. United Nations Model

The United Nations (UN) model treaty, designed:
- to be used between developed and developing
countries, assumes an imbalance.
- recognizes that the host country (often a developing
country) should have more taxing rights when profit
repatriation essentially is a one-way street (from the
developing to the developed country).
MODEL TREATIES
3. U.S. Tax Treaties

• Zero percent withholding tax
– Interest and royalties
• 15 percent
– Dividend payments
• United States has treaties with over 50 countries
• One notable exception
– Brazil because lack of Brazilian investment in the
U.S.
TREATY SHOPPING
• a process in which a resident of Country A uses a

corporation in Country B to get the benefit of Country B’s
tax treaty with Country.
TRANSLATION OF FOREIGN BRANCH
INCOME
• Net income
– Translated into U.S. dollars
– Use of average exchange rate of the year
– Net income after foreign taxes paid
• Added
– Grossing up
– Taxes paid to the foreign government
– Payment date exchange rate
• Earnings are repatriated to the U.S
– Converted to U.S. dollars
– Difference due to exchange rate  Foreign exchange gain or
loss
TRANSLATION OF FOREIGN SUBSIDIARY
INCOME
• Dividends paid to U.S. parent
– Translated at the spot rate
– On the date of payment
• Added
– Grossed up
– Taxes deemed paid on the dividend
– Payment date spot rate
• Translated deemed taxes paid
– also is used to determine the foreign tax credit
TAX INCENTIVES
Governments often use the national tax law to encourage

certain types of behavior. For example:
• Tax holidays
– Incentive used by a government
– Offered by many Asian countries
– Partially or completely exempts a taxpayer
– A period of time
– Encourages foreign direct investment
• Significant benefit to multinational companies as long as
the income earned in the foreign country is reinvested in
that country
U.S. EXPORT INCENTIVES
• Prevention of tax avoidance

• Domestic international sales corporation (DISC)
– Short-lived export incentive program
– For U.S. companies
– Repealed due to foreign opposition
• Foreign sales corporation (FSC)
– Short-lived export incentive program
– For U.S. companies
– Replaced by Extraterritorial Income Exclusion Act (ETI)
– Repealed due to foreign opposition
End of Chapter 11

Chapter 8. International Taxation

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Chapter 8. International Taxation

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CHAPTER 8:

1. Describe differences in corporate income tax and

 International location decisions

TYPES OF TAXES AND TAX RATES

There are two approaches taken on one tax jurisdiction:

(2) Territorial approach

• The most common overlap of jurisdictions is

• Is bilateral agreements between two countries regarding

1. Organization for Economic Cooperation and

2. United Nations Model

3. U.S. Tax Treaties

• a process in which a resident of Country A uses a

Governments often use the national tax law to encourage

U.S. EXPORT INCENTIVES

• Prevention of tax avoidance

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