International Taxation

MGM – IGC Bremen

Master in International Tourism

Management

German and International Tax Structures –

SS 2020

Prof. Dr. Vera de Hesselle

vera.dehesselle@hs-bremen.de
 Taxation in general

Taxes on Earnings: Transaction Taxes: Excise Taxes:

Einkommensteuer  Umsatzsteuer  Tabaksteuer 

(income  tax) (value added tax) (tabacco tax)
Stromsteuer 
Körperschaftsteuer  Grunderwerbsteuer 
(electricity tax)
(corporate income tax) (property transfer tax)
Branntweinsteuer 
Solidaritätszuschlag  (alcohol tax)
(solidarity surcharge) Hundesteuer 
(dog licence fee)

2
Direct an indirect taxes

 The term direct tax means a tax paid directly by

the persons on whom it is imposed (income tax,
property taxes).

 An indirect tax can be passed on to another

person or group. A business may recover the cost
of the taxes it pays by charging higher prices to
customers (e.g. VAT, alcohol tax, tobacco tax).

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BASIC PRINCIPLES OF
INTERNATIONAL TAXATION
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Fundamental principles of
taxation (see OECD Addressing the Tax Challenges (2014), chapter 2)

 Neutrality: Taxation should seek to be neutral and

equitable between forms of business activities.
 Efficiency: Compliance costs to business and
administration costs for governments should be
minimised as far as possible.
 Certainty and simplicity: Tax rules should be
clear and simple to understand, so that taxpayers
know where they stand.

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Fundamental principles of
taxation (see OECD Addressing the Tax Challenges (2014), chapter 2)

 Effectiveness and fairness: Taxation should

produce the right amount of tax at the right time,
while avoiding both double taxation and
unintentional non-taxation. In addition, the potential
for evasion and avoidance should be minimised.
 Flexibility: Taxation systems should be flexible and
dynamic enough to ensure they keep pace with
technological and commercial developments.

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Fundamental principles of
taxation (see OECD Addressing the Tax Challenges (2014), chapter 2)

 Taxes on income and comsumption: While income

taxes are levied on net income (i.e. from labour and
capital) over an annual tax period, consumption
taxes operate as a levy on expenditure relating to
the consumption of goods and services, imposed at
the time of the transaction.
 Corporate income tax
 The taxation of cross-border income under
domestic corporate income tax law
 VAT as indirect tax (goods and services)
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 Basic principles
of International Taxation
 Two fundamental principles
 The right of the country of residence of the taxpayer
to tax worldwide income, regardless of where the
income is earned (Residence Jurisdiction)
 The right of a country to tax income earned within
its boundaries (Source Jurisdiction)
 Cross-border investment
 Most income is taxable in the country of residence,
as well as in the country where the income is
earned (source taxation/residence taxation) =
double taxation!!! (but: DTT)
Basic principles of International Taxation

Every country has fiscal sovereignty, this means the

right to levy taxes, including
1. The taxation of resident individuals / corporations
on income generated both in their country of
residence and in foreign countries [residence
taxation – worldwide taxation]
2. The taxation of nonresident individuals /
corporations on income generated domestically
[source taxation].
Principle of worldwide income

Worldwide income is income

worldwide  earned anywhere in the world
income and is used to determine
taxable income

Deductions depending on the type 
of income
Basic principles of International
Taxation – residence taxation

Example:
P - Income:
• Germany 100.000
(residence state)
• France 50.000 (source).

Germany is taxing

150.000 (worldwide taxation)

100.000

50.000

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Basic principles of International
Taxation – source taxation

Example:
P - Income:

• France 50.000 (residence

state)
• Germany 100.000 (source
state)

Germany is taxing
100.000 (source taxation)
100.000

50.000

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 Permanent Establishment (PE)

 A fixed place of business (article 5 (1) OECD MA);

 A construction or project PE, which is a special
subset of the fixed place of business PE, with different
requirements (article 5(3) OECD MA)
 An agency PE, through the actions of a dependent
agent (article 5 (5-6) OECD MA).
 Problem: virtual service – digital economy PE?

 Liability: Income Tax and Value added Tax

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Example 1:
Cross-border investment

Individual A is a resident of Germany (domicile) with a

factory (PE/permanent establishment) in the USA.
Factory profit in 2017: 3 mio €.

Germany Tax liability of

USA individual A?

Profit: 3 mio. EUR

Example 2:
Cross-border investment
US- corporation B derives interest income from a
German bank account (fixed deposits) in the amount
of 500.000 €.
Bank

Germany Tax liability of

USA
company B?
Interest
income
Company B
References
 PwC, The Impact of Taxes on the Competitiveness of
European Tourism, 2017,
https://publications.europa.eu/en/publication-detail/-
/publication/920639c3-ce70-11e7-a5d5-01aa75ed71a1
(14.03.2017)
 European Union, Taxation: https://europa.eu/european-
union/topics/taxation_en
 Joumard, Isabelle, Tax systems in European Union Countries
(2003), OECD Economic studies, http://www.oecd-
ilibrary.org/economics/oecd-economic-studies_16097491
 OECD 2014, Addressing the Tax Challenges of the Digital
Economy, chapter 2, http://www.oecd-
ilibrary.org/taxation/addressing-the-tax-challenges-of-the-
digital-economy/fundamental-principles-of-
taxation_9789264218789-5-en 16
International Taxation
MGM – IGC Bremen

Master in International Tourism Management

The Digital Economy and its impacts on
economy and taxes (OECD 2014, ch. 1, 3)
– SS 2020

Prof. Dr. Vera de Hesselle

vera.dehesselle@hs-bremen.de
Background

 Situation: tax planning by multinational enterprises

that makes use of gaps in the interaction of different
tax systems to artificially reduce taxable income or
shift profits to low-tax jurisdictions. Therefore the
OECD created the BEPS Action Plan
 The Ottawa Taxation Framework (1998): Neutrality,
Efficiency, Certainty and Simplicity, Effectiveness
and Fairness, Flexibility
 Problem: tax avoidance or profit shifting?

2
Information and Communication
Technology (ICT)

 Personal Computing – revolution in the end of 1980

 Services around the telecommunication network
 Software as component of the value chain
 Cloud services
 Internet of things (devices and services, artificial
intelligence, robotics, 3D Printing)
 Sharing economy (collaborative consumption)
 Collecting and use of data as a value chain
 Virtual currencies

3
Personal Data (OECD 2014, ch.3.1.5)

4
Virtual currency (OECD 2014,
ch.3.2.2)

 Single virtual economy (game, closed group),

 Exchange for real currency or
 Purchase for real goods and services

5
International Taxation
MGM – IGC Bremen

The Digital Economy and its impacts on taxes (OECD

2014, ch. 5, 6, OECD 2020, OECD 2013)
– SS 2020

Prof. Dr. Vera de Hesselle

vera.dehesselle@hs-bremen.de
Digital economy

2
BEPS strategies digital economy:
direct taxation – indirect taxation

 Minimization of taxation in the market country by

avoiding a taxable presence.
 Low or no withholding tax at source.
 Low or no taxation at the level of the recipient
 No current taxation of the low-tax profits at the level
of the ultimate parent.

 Destination principle for business-to-business (B2B)

transactions

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BEPS strategies digital economy

 Action 1: Address the tax challenges of the digital

economy
 ACTION 2: Neutralise the effects of hybrid
mismatch arrangements
 ACTION 3: Strengthen controlled foreign
companies (CFC) rules
 ACTION 4: Limit base erosion via interest
deductions and other financial payments

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BEPS strategies digital economy

 Action 5: Exchange of tax rulings and preferential

tax regimes
 Action 6 and Action 15: Prevention of Tax treaty
abuse and BEPS Multilateral Instrument
 ACTION 7: Prevent the artificial avoidance of PE
status
 ACTIONS 8, 9, 10: Assure that transfer pricing
outcomes are in line with value creation

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BEPS strategies digital economy

 ACTION 11: Establish methodologies to collect and

analyse data on BEPS and the actions to address it
 ACTION 12: Require taxpayers to disclose their
aggressive tax planning arrangements
 Action 13: Improving transparency through Country-
by-Country Reporting; Re-examine transfer pricing
documentation
 Action 14: Mutual Agreement Procedures

https://www.oecd.org/tax/beps/beps-actions/
6
International Taxation
MGM – IGC Bremen

Double Taxation

SS 2020

Prof. Dr. Vera de Hesselle

vera.dehesselle@hs-bremen.de
 Double taxation

Legal aspects:
 The same taxpayer is liable to identical or similar
taxes in two (or more) sovereign fiscal jurisdictions
with the same taxable event within the same
assessment period.
 Double taxation
Link of taxation:
 taxable subject related to a country
 unlimited tax liability (residence taxation)
 taxable object related to a country
 limited tax liability (source taxation)

As far as cross-border facts are concerned, the worldwide

coexistence of residence and source taxation inevitably leads to
competing tax claims of the related countries.
This can result in international double taxation.

Possible constellations
 Multiple unlimited tax liability
 Multiple limited tax liability
 Limited and unlimited tax liability
Double Taxation Treaties

 EU member states:
https://ec.europa.eu/taxation_customs/individuals/p
ersonal-taxation/treaties-avoidance-double-
taxation-concluded-member-states_en
 Countries want to avoid double taxation and double
non-taxation of individuals and companies.
 Double taxation treaties distribute taxation rights
between states, i.e. they do not give rise to any tax
claim, but in the event of existing competing tax
claims between different states, they assign the
right of taxation to only one of the states involved in
order to avoid double taxation. 4
 Double taxation
Unilateral measures
direct tax credit
(Sec. 34c (1) EStG, Sec. 26 (1) KStG)

tax deduction
(Sec. 34c (2), (3) EStG, Sec. 26 (6) KStG
in connection with Sec. 34c (2),(3) EStG)

Methods of lump sum taxation or tax abatement

(Sec. 34c (5) EStG, Sec 26 (6) KStG
eliminating in connection with Sec. 34c (5) EStG)

or mitigating
double taxation
Bilateral measures
exemption method
(Art. 23 A OECD Model Tax Convention)

credit method
(Art. 23 B OECD Model Tax Convention)
Double taxation
Methods of avoiding double taxation

Individual living in Germany (Income tax rate 45%) obtain branch

profits from a foreign PE in country S (Income tax rate 10%).

1. Exemption method (DTT)

[Full exemption / Exemption with progression]

2. Credit method (DTT)

[Full credit / ordinary credit]

3. Deduction method (UNILATERAL)

Exemption Method, Art. 23 A
1. Where a resident of a Contracting State derives income or
owns capital which, in accordance with the provisions of this
convention, may be taxed in the other Contracting State, the
first-mentioned State shall, subject to the provisions of
paragraphs 2 and 3, exempt such income or capital from tax.
2. Where a resident of a Contracting State derives items of
income which, in accordance with the provisions of Articles 10
and 11, may be taxed in the other Contracting State, the first-
mentioned State shall allow as a deduction from the tax on the
income of that resident an amount equal to the tax paid in that
other State. Such deduction shall not, however, exceed that
part of the tax, as computed before the deduction is given,
which is attributable to such items of income derived from that
other State.
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Exemption Method

 Full exemption of the foreign income. R state only

tax the domestic income.
or
 Exemption only for the base of taxation, not for
the tarif (exemption with progression -
Progressionsvorbehalt). The domestic income in R-
State is taxed at the taxe rate for worldwide income.
[domestic income * tax for worldwide income]

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Example (Full) Exemption Method
Income Residence-state:
70.000€ (40% tax)
Gross income 100.000
Income R-state (70.000)
Income S-state (30.000)

R-tax rate 40% x 70.000 28.000

S-tax rate 30% x 30.000 9.000

Income Source-state: Total Taxes 37.000

30.000€ (30% tax)

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Example Exemption with
progression
Income Residence-state: 70.000€
(40% - 70.000; 50% - 100.000)
Gross income 100.000
Income R-state (70.000)
Income S-state (30.000)

R-tax rate 50% x 70.000 35.000

S-tax rate 30% x 30.000 9.000

Income Source-state: Total Taxes 44.000

30.000€ (30% tax)

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Credit Method, Art. 23 B
1. Where a resident of a Contracting State derives income or owns
capital which, in accordance with the provisions of this Convention,
may be taxed in the other Contracting State, the first-mentioned State
shall allow:
a) as a deduction from the tax on the income of that resident, an
amount equal to the income tax paid in that other State;
b) as a deduction from the tax on the capital of that resident, an
amount equal to the capital tax paid in that other State.
Such deduction in either case shall not, however, exceed that part of
the income tax or capital tax, as computed before the deduction is
given, which is attributable, as the case may be, to the income or the
capital which may be taxed in that other State.
2. Where in accordance with any provision of the Convention income
derived or capital owned by a resident of a Contracting State is
exempt from tax in that State, such State may nevertheless, in
calculating the amount of tax on the remaining income or capital of
such resident, take into account the exempted income or capital. 11
Credit Method

 Principle of credit method: the State of residence R

calculates its tax on the basis of the taxpayers total
income including the income from the State S
which, according to the Convention, may be taxed
in the State S.
 It allows a deduction from its own tax for the tax
paid in the State S.
 This means, that the tax is substracted (credited)
from Resident State Taxes.

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Credit Method
 Full credit: R-State allows the deduction of the
foreign-source tax from the tax calculated on
worldwide income [Tax of worldwide income minus
foreign tax].
or
 Ordinary credit: R-State allows the deduction of
the foreign-source tax from the tax calculated on
worldwide income but not more than a maximum
deduction (limitation to the average taxe rate). [Tax
on worldwide income minus foreign tax, but
maximum deduction]
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Example (Full) Credit Method
Income Residence-state: 70.000€
(40% - 70.000; 45% - 100.000)
In FIN the resident would 45,000
pay (45% of 100.000)
In GE the resident already 15,000
payed (50% of 30.000)
The resident has to pay in 30,000
FIN

Income S-state: 30.000€ /

50%: german tax 15.000 €

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Example Ordinary Credit Method
Income Residence-state: 70.000€
(40% - 70.000; 45% - 100.000)
In FIN the resident would 45.000
pay 45.000 (45% of
100.000)
In GE the resident already 13.500
payed 15.000 (credit 45%
of 30.000 = 13.500)
The resident has to pay in 31.500
FIN
Income Source-state:
30.000€ (50% tax)

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Example for both methods: Artist

An artist (A) earns 80,000 at home in State

R(esidence) and 20,000 abroad in State S(ource) =
worldwide income of 100,000;
 in State R the tax rates are progressive, namely
35% on an income of 100,000 (= 35,000) and 30%
on an income of 80,000 (= 24,000); and
 in State S the tax rate from 20,000 is either 20% (in
case I = 4,000) or 40% (in case II = 8,000) source
tax

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Example Artist

Without any relief of double taxation, the tax bourdon

would be:

17
Artist: Example full exemption

18
Artist: Example exemption with
progression

19
Artist: Example full credit

20
Artist: Example ordinary credit

21
Deduction Method in Germany

 Income is taxable in both states.

 The payed foreign taxes deduct the taxabale
income in the resident state (only the base of
calculation, not the taxation)

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Structur PE

 Art 5 para 1 OECD „fixed place“ ?

 Art. 5 para 2 OECD „includes especially“ (+)
 But Exemption Art. 5 para 4 OECD, (+) in that case
no PE.

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Case study, Art. 5 DTT GE-USA

USA Cap. Company

(production USA;
distribution USA

Taxable in GE? Is it a PE?

Office in Bremen for

purchasing chemicals (2
germans are working for the
company at the office)

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Case study, Art. 5 DTT GE-USA

 Art 7 DTT GE-US: Business Profits are taxable in

GE, when PE in GE.
 Art. 5 DTT GE-US?
 Art. 5 para 2c office (+)
 Art. 5 para 4d purchasing goods (+)
 No PE in GE! No taxation in GE!

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 Case study Art. 7 OECD

R-GmbH GE Ltd UK
Profit for R-GmbH: 50,000

Delivery contract GmbH – Ltd

Profit for R-GmbH: 50,000 Euro in UK –
Where is the business profit taxable?
26
Business Profits, Art. 7

 R-GmbH = PE (Art. 5) in GE (+)

 Business = Art. 3 para.1 h (model OECD) =
performance of professional services (+)
 Art. 7 para 1 = taxable in GE, unless the enterprise
has a PE in UK?
 Has the R-GmbH a PE in UK? = Art. 5 para 4 a) (-)
 Result: Business profit of 50,000 € is taxable in GE.

27
 Case study Art. 7 OECD
R-GmbH has an office in UK
for preparating contracts;
Profit for R-GmbH: 50,000 in
UK

R-GmbH GE

Ltd UK
Delivery contract GmbH – Ltd

Where is the business profit

28
taxable?
Business Profits, Art. 7

 R-GmbH = PE (= Art. 5 ) in GE (+)

 Business = Art. 3 para.1 h = performance of
professional services (+)
 Art. 7 para 1 = taxable in GE, unless the enterprise
has a PE in UK?
 Has the R-GmbH a PE in UK?
see Art. 5 para 4 e (-)
 Result: Business profit of 50,000 € is taxable in GE.

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 Case study Art. 15 OECD
Maria (employee of R-GmbH) ist working
as computer programmer. In 2014 she
worked for a client in London and she
was living in an apartment for 5 month.
Salary: 5 x 5,000 = 25,000 in UK.

Salary
employee M:
R-GmbH GE Ltd UK
Where is the salary of
Maria taxable?
30
Case study Art. 15 OECD

 Maria = individual person (Art. 3 para 1a) (+)

 Resident (Art. 4) = national law = domicil (+), sec. 8
AO GE: worldwide income (+)
 Art. 15 para 1: taxable in UK; but Art. 15 para 2 a =
less then 183 days (+)
 Result: The salary of Maria is taxable in GE

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Art. 15 DTT GE-USA

 Person P is working for a german Ltd (GmbH). The

GmbH is producing cars in Germany, in the USA
and in Austria. P is payed by the mother company
in GE.
 P is working 3 month in USA and 3 month in
Austria. For 6 month, P is working in Germany. P
was always living in an apartment in every country.
Where is the salary taxed?

 Modification: P is payed by the factory in USA (3

month).
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 Case study, Art. 15 DTT GE-USA
Where is the salary taxed?

German Cap. Company

(production cars)

3 month 100% - subsidiary 3 month

company (daughter)
USA Cap. Company Austria Cap. Company
(production cars) (production cars)

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Art. 15 DTT GE-USA

 P = resident in GE (+): worldwide income (+)

 Working place: USA (source state)
 Art. 15 para 2 DTT GE-USA: Taxation in Resident
state, when P was less than 183 days in USA (2a)
and employer is not resident of the USA (2b) and
the remuneration is not borne by a PE that the
employer has in the USA (2c).
 Result: Taxable in GE.

 Modification: P is taxed by USA and GE

(Exemption method with progression, Art. 23 para 334
a DTT GE-USA).