International Taxation Challenges
Expert-defined terms from the Certificate in Digital Economy Tax course at LearnUNI. Free to read, free to share, paired with a globally recognised certification pathway.
**Arm's Length Principle (ALP)** #
**Arm's Length Principle (ALP)**
The Arm's Length Principle (ALP) is a fundamental concept in international taxat… #
ALP suggests that the price for goods, services, or intangibles sold between related entities should be comparable to the price charged in similar transactions between unrelated parties in comparable market conditions. This principle is used to determine the appropriate transfer pricing for related-party transactions, preventing tax base erosion and profit shifting.
**Base Erosion and Profit Shifting (BEPS)** #
**Base Erosion and Profit Shifting (BEPS)**
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used b… #
The BEPS project, led by the Organisation for Economic Co-operation and Development (OECD), addresses 15 key action areas to tackle BEPS, including transfer pricing, digital economy, and treaty abuse.
**Controlled Foreign Company (CFC)** #
**Controlled Foreign Company (CFC)**
A Controlled Foreign Company (CFC) is a foreign entity that is controlled by a d… #
CFC rules are designed to prevent taxpayers from shifting income to low-tax jurisdictions by requiring them to include a portion of the CFC's income in their domestic tax base. CFC rules often consider factors such as the level of economic substance in the foreign entity and the application of the arm's length principle.
**Digital Economy** #
**Digital Economy**
The digital economy refers to the economic activities that rely on digital techn… #
Digital economy companies often face unique tax challenges due to their ability to create value without a significant physical presence in a jurisdiction. This has led to ongoing discussions on how to adapt international tax rules to ensure that digital economy companies pay their fair share of taxes.
**Double Taxation** #
**Double Taxation**
Double taxation occurs when the same income is subject to taxation in two or mor… #
Double taxation can be either juridical (when the same income is taxed by two different countries) or economic (when two different types of taxes are levied on the same income by the same country). Tax treaties are designed to prevent double taxation by allocating taxing rights between countries and providing relief mechanisms, such as foreign tax credits and exemptions.
**E #
commerce**
E-commerce, short for electronic commerce, refers to the buying and selling of g… #
E-commerce has transformed the way businesses operate and consumers purchase goods and services, leading to new tax challenges related to jurisdiction, nexus, and value creation. E-commerce taxation often involves the application of consumption taxes, such as value-added tax (VAT) or goods and services tax (GST), and the determination of a permanent establishment.
**Enterprise Resource Planning (ERP)** #
**Enterprise Resource Planning (ERP)**
Enterprise Resource Planning (ERP) is a business management software system that… #
ERP systems can help organizations manage their tax processes more efficiently by providing a unified platform for data management, compliance, and reporting. Tax functions can leverage ERP systems for data analytics, transfer pricing, and tax accounting.
**Foreign Tax Credit (FTC)** #
**Foreign Tax Credit (FTC)**
A Foreign Tax Credit (FTC) is a mechanism that allows taxpayers to claim a credi… #
FTCs are designed to prevent double taxation and to encourage cross-border trade and investment. FTCs can be granted on a territorial or worldwide basis, depending on the domestic tax laws and tax treaty provisions.
**Goods and Services Tax (GST)** #
**Goods and Services Tax (GST)**
Goods and Services Tax (GST) is a consumption tax levied on the supply of goods… #
GST is typically implemented as a value-added tax (VAT) and is designed to be neutral, with the tax burden ultimately borne by the final consumer. GST has been adopted by numerous countries as a more efficient and transparent alternative to traditional sales taxes and cascading taxes.
**International Tax Treaties** #
**International Tax Treaties**
International tax treaties are agreements between two or more countries that aim… #
Tax treaties typically address issues such as residence, source, permanent establishment, withholding tax, and exchange of information. The most widely adopted model tax treaty is the OECD Model Tax Convention, which provides a framework for negotiating and implementing bilateral tax treaties.
**Permanent Establishment (PE)** #
**Permanent Establishment (PE)**
A Permanent Establishment (PE) is a fixed place of business through which a fore… #
The concept of PE is a key factor in determining the taxing rights of source and residence countries, as it triggers the application of domestic tax laws and the obligation to file tax returns. The definition of PE has been expanded in recent years to include digital economy activities and the use of dependent agents and service PEs.
**Substance** #
**Substance**
Substance refers to the economic and commercial activities carried out by a lega… #
Substance requirements are designed to ensure that legal entities have a genuine economic presence and are not established solely for tax purposes. Substance can be demonstrated through factors such as the presence of employees, physical assets, and business functions.
**Tax Avoidance** #
**Tax Avoidance**
Tax avoidance refers to the use of legal tax planning strategies to minimize tax… #
Tax avoidance is different from tax evasion, which involves the illegal non-payment or underpayment of taxes. Tax avoidance strategies can include the use of controlled foreign companies, transfer pricing manipulation, and treaty shopping. The BEPS project aims to address tax avoidance through the development of minimum standards and best practices.
**Transfer Pricing** #
**Transfer Pricing**
Transfer pricing refers to the pricing of cross #
border transactions between related parties, such as subsidiaries, branches, or associated enterprises. Transfer pricing is a critical aspect of international taxation, as it can significantly impact the allocation of taxable profits between jurisdictions. Transfer pricing rules are designed to ensure that related-party transactions are priced at arm's length, in accordance with the arm's length principle.
**Value Added Tax (VAT)** #
**Value Added Tax (VAT)**
Value Added Tax (VAT) is a consumption tax levied on the value added to goods an… #
VAT is typically implemented as a multi-stage tax, with each business entity charging and collecting tax on its taxable supplies and deducting the tax paid on its inputs. VAT is designed to be neutral, with the tax burden ultimately borne by the final consumer.
**Withholding Tax** #
**Withholding Tax**
Withholding tax is a tax levied on the payment of certain types of income, such… #
Withholding tax is typically collected by the payer and remitted to the tax authorities on behalf of the payee. Withholding tax rates and exemptions are often determined by tax treaties and domestic tax laws. Withholding tax can contribute to double taxation, as the same income may be subject to tax in both the source and residence countries.