ChoiSM_ch12 - Chapter 12 International Taxation and...

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International Taxation and Transfer Pricing Discussion Questions 1. Tax neutrality means that taxes have no (are neutral in their) effect on business decisions. In other words, business decisions are driven by economic fundamentals instead of taxes. Such decisions should result in an optimal allocation of resources. However, taxes have the potential to divert this allocation of resources. Taxes are seldom neutral. Governments often use taxes for social purposes. This is not necessarily bad. For example, countries can use tax breaks to attract business investment, thereby promoting economic growth. Chapter 12 discusses harmful tax competition, a concern of both the OECD and EU. The concern is that some countries (tax havens) use taxes as an unfair competitive tool, depriving other countries of taxes needed to support their infrastructure and government services. Transactions are funneled through tax havens merely to avoid taxes; they have no real business purpose. Students should have fun debating whether this is good or bad. 2. The types of taxes discussed in the book are: a. Income tax . Tax bases and tax rates vary from country to country. The effective tax rate is what is important, not the nominal rate. b. Withholding tax . These are withholdings on interest, dividend and royalty payments to investors. c. Value-added tax . This is a consumption tax popular in Europe and Canada. The tax is levied on each stage of production or distribution based on the incremental value added at that stage. Companies that pay the tax in their own costs reclaim them later from the tax authorities. Consumers ultimately bear the cost of this tax. d. Border tax . This is a customs or import duty. e. Transfer tax . This is a tax on the transfer of items between taxpayers. The two most common taxes are the income tax and the border tax. Philosophies of taxation vary with the types of taxes, since ultimately the question is who pays and how much. In the case of income taxes, philosophies vary as to whether income earned outside the country’s borders should be taxed (territorial versus worldwide). 3. Tax credits reduce a business entity’s income tax liability dollar for dollar. The purpose of these credits in international taxation is to insure that profits earned abroad are not subject to double taxation. Accordingly, the country in which a parent company is domiciled will generally relinquish taxes on income earned abroad up to the amount of the foreign tax. Tax credits may fall short of their intended results because of how taxable income is defined under domestic and foreign tax laws. The treatment of expenses is a case in point. Under U.S. law, for example, business expenses attributable to foreign source income must be so allocated in determining the foreign tax credit limitation. Distortions occur when the deduction is not allowed in determining taxable income in the foreign country. The result is usually an overstatement of the total amount of taxes paid and excess foreign tax credits recognized. Additional distortions
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This note was uploaded on 04/07/2009 for the course ACT - taught by Professor Burks during the Spring '09 term at Troy.

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ChoiSM_ch12 - Chapter 12 International Taxation and...

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