Business taxation case study ppt

Members :
* Harman
* prisha
* laher
* mitali
* krishna
* virali

Introduction slide : 2 & 3

Harman

Slide 4 Mitali

Slide 5 & 6 ( Que 1 ) : Krishna

Slide 7 & 8 ( que 1) continuation: Virali

Slide 9 & 10: Laher

Slide 11 & 10 : Prisha

Slide 13 & 14 : Mitali

Slide 15 : harman

● Introduction slide : 2 & 3 : Harman

International taxation is a system of global tax rules that apply to transactions between two or
more countries.
Tax planning for cross-border transactions depends on the interaction of tax laws and
enforcement agencies in multiple countries.
Tax systems determine when, where, what, and whose income is subject to taxation.
Multijurisdictional taxation refers to taxation across multiple jurisdictions, including countries,
states, and localities.
The international aspects of multijurisdictional taxation are the focus of this note, specifically the
cross-border transactions of U.S. entities.
The importance of cross-border transactions lies in the impact of international taxation on these
transactions. Tax planning for cross-border transactions depends on the interaction of tax laws
and enforcement agencies in multiple countries, leading to excessive or minimal taxation. The
international aspects of multijurisdictional taxation are crucial for businesses pursuing
cross-border transactions, as the tax systems in different countries can significantly affect the
tax liability of multinational corporations.

A territorial tax system taxes residents on income earned within its jurisdiction.
A worldwide tax system taxes residents on income earned regardless of the jurisdiction.
Countries that have territorial tax systems generally apply it to only active business income and
not to compensation or income from portfolio investments.
Almost all countries apply a worldwide tax system to their individual residents on their
compensation and portfolio income and tax all nonresidents on only domestic-sourced income.

Resident and Nonresident

Every country defines its residents differently.
The United States defines its residents as U.S. citizens, resident aliens, corporations
incorporated under the laws of the United States, and permanent residents (i.e., green cards).
Nonresidents are by default everyone else and are generally taxed on income earned within the
country.

Foreign Tax Credits (FTCs)

Residents of worldwide tax systems pay tax twice on the same income if their home country's
worldwide tax system offers no relief.
Most worldwide tax systems, however, offer some form of foreign tax credits (FTCs) to their
corporate and/or individual residents as relief from double taxation.
The FTC is the lesser of the foreign taxes paid and the FTC limit and cannot be negative.
The foreign taxes paid are a function of the foreign country's tax laws that define taxable income
and its tax rate.
The FTC limit is a function of U.S. tax laws that define foreign-sourced income and the U.S. tax
rate.

Tax Treaties
The traditional objectives of U.S. tax treaties are the avoidance of international double
taxation and the prevention of tax evasion.
Tax treaties seek to eliminate double taxation by defining the term "resident" and
providing that neither country will tax business income derived by residents of the other
country unless the business activities in the taxing jurisdiction are substantial enough to
constitute a permanent establishment in that jurisdiction.

Slide 4 Mitali
Tax Havens
Tax havens attract multinational corporations through favorable tax legislation, such as
low or zero tax rates, favorable withholding tax rates, and tax treaties that reduce or
eliminate double taxation.
Different categories of tax havens include base havens, intermediary havens, and
industry havens, each with varying tax regimes and offerings.
Factors influencing the choice of incorporation in a particular tax haven by multinational
corporations include tax rates, tax treaties, ease of incorporation, and legal and cultural
considerations.

Branch/Subsidiary
U.S. businesses are subject to worldwide taxation, but the income earned by their
foreign subsidiaries reinvested outside of the United States generally is not reported on
their U.S. tax returns until it is distributed back to the U.S. parent company.
A foreign branch is essentially an entity that is not classified as a corporation, and
income and losses of foreign branches are immediately taxed as deductible on a U.S.
company’s tax return.

Controlled Foreign Corporations (CFCs)

Corporations in the United States cannot avoid U.S. taxation simply by incorporating
subsidiaries offshore.
U.S. tax law defines a foreign corporation as a controlled foreign corporation (CFC) if
50% of the voting power is controlled by U.S. shareholders.
The CFC designation is important because it can limit the ability to defer U.S. taxation
on certain types of income earned by foreign subsidiaries.

Slide 5 & 6 ( Que 1 ) : Krishna

Economic Incentives for Countries to Adopt Territorial vs. Worldwide Tax Systems

* Territorial tax system:

+ Economic incentives:
- Encourages foreign investment
- Attracts multinational corporations to establish operations within the
jurisdiction
- Promotes economic growth and job creation
+ Impact on competitiveness:
- Favors multinational corporations incorporated in territorial tax countries
- Provides a competitive advantage for these corporations in cross-border
transactions
Slide 7 & 8 Virali
* Worldwide tax system:
+ Economic incentives:
- Ensures taxation of residents’ worldwide income, regardless of where it
is earned
- Prevents tax evasion and encourages tax compliance
+ Impact on competitiveness:
- Disadvantages multinational corporations incorporated in worldwide tax
countries
- Requires tax relief measures, such as deferral and foreign tax credits, to
maintain competitiveness

Slide 9 & 10: Laher

FTCs help avoid double taxation for individuals and companies under worldwide tax
systems like the US. They offset taxes paid abroad against what's owed domestically.
However, their effectiveness depends on FTC limits and foreign tax laws. These laws
vary, leading to potential double taxation due to differences in income allocation. Tax
treaties help by defining residency and reducing barriers to trade, encouraging
investment by cutting withholding rates. In short, FTCs are vital in global tax systems,
but their success relies on limits and treaties.

-- FTCs: Reduce tax liability by foreign taxes paid.

- Influenced by: FTC limits, foreign tax laws.
- US FTC limits: Lesser of foreign taxes paid or FTC limit.
- Impact: Variations in foreign tax laws affect effectiveness.
- Double taxation: Allocation differences or dual residency.
- Tax treaties: Define residency, prevent double taxation.
- Incentives: Reduce withholding rates, promote investment.

Slide 11 & 10 : Prisha

Withholding tax rates are pivotal in international taxation, levying taxes on nonresident
passive income like dividends, interest, and royalties. These rates, applied by resident
entities and paid directly to governments, vary across countries, with the United States
imposing a flat 30% rate on certain incomes. Tax treaties significantly impact these
rates, often reducing or eliminating them to foster cross-border trade and investment,
exemplified by the EU Parent-Subsidiary Directive's elimination of withholding taxes
within EU member states. However, some jurisdictions, notably tax havens, offer 0%
withholding to attract foreign investment, leading to the practice of treaty shopping,
wherein capital is routed through favorable jurisdictions. To curb abuse, tax authorities
enforce anti-treaty shopping provisions, necessitating legitimate business reasons for
treaty benefits. Overall, tax treaties facilitate information exchange, prevent evasion,
and establish fair tax practices internationally by defining terms like "resident" and
"permanent establishment," thus mitigating double taxation and promoting equitable
taxation.

Slide 13 & 14 : Mitali

Tax havens, like Bermuda and the Cayman Islands, entice multinational corporations
with low taxes, favorable laws, and treaties. They're grouped into base, intermediary,
and industry havens, each with different tax setups. Incorporation choice depends on
tax rates, treaties, ease of setup, and cultural factors. Base havens lack income tax and
prioritize secrecy, while intermediary ones like Luxembourg charge minimal fees for
limited activity. Industry havens focus on specific sectors but lack consistent tax
benefits. Multinationals weigh these factors when picking a tax haven.