International Taxation Issues


International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries or the international aspects of an individual country’s tax laws as the case may be. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residence-based, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more. 

(Source: Wikipedia)

International taxation issues revolve around two main concepts that are also fundamental reasons/causes of international juridical double taxation. These two concepts are known as the

    1. The concept of source; and
    2. The concept of residence.

Both concepts arise from domestic tax law provisions, which distinguish between two types of taxpayers like non-residents and residents.

Tax payer based on source

The jurisdiction to impose income tax based on the relationship of the income (tax object) to the taxing state is commonly known as the source or situs principle. This category of taxpayers would generally have limited nexus (connection) with the country in question, however, the income received by these taxpayers will have an economic link – will originate in the particular country. This country wishes to levy tax on this taxpayer, however, only in respect of the income originated therein (having source in this country) – referred to as source taxation and sometimes known also as limited tax liability.

Under the source principle, a State’s claim to tax income is based on the State’s relationship to that income. For example, a State would invoke the source principle to tax income derived from the extraction of mineral deposits located within its territorial boundaries. Source taxation is generally justified on the ground that the State has contributed to the creation of the economic opportunities that allow the taxpayer to derive income generated within the territorial borders of the State. Of course, jurisdiction to tax is also about power, and a State generally has the power to tax income if the assets and activities that generated it are located within its borders.

Taxpayer based on residence

The relationship of the taxpayer (tax subject) to the taxing state based on residence or nationality is called the tax base don residence principle. This category of taxpayers – residents – would have a close personal and economic connection (nexus) with the country in question and the country chooses to tax this taxpayer on his/her worldwide income – referred to as worldwide taxation and sometimes known also as unlimited tax liability.

Under the residence principle, a State’s claim to tax income is based on its relationship to the person deriving that income. For example, a State would invoke the residence principle to tax wages earned by a resident of that State without reference to the place where the wages were earned. In general, a State invokes the residence principle to impose a tax on the worldwide income of its residents.

Critical analysis of ‘Source’ and ‘Residence’ concepts

Source: Twitter Post of @oxfam

Income itself does not have a geographical location. It is a quantity, calculated by adding and subtracting various other quantities in accordance with certain accounting rules. By long-standing convention, however, income is assigned a geographical location by reference to the location of the assets and activities that are used to generate the income. When all of those assets and activities are located in one State, that State may be considered to be the unconditional source of the income. For example, wages paid to an employee stationed in a State that represents compensation exclusively for work performed in that State would have a source exclusively in that State.

However, when some of the assets or activities generating income are located in more than one state, the source of the income is less clear. For example, business profits derived from the manufacture of goods in State A and their sale in State B have a significant relationship to State A and to State B. In these circumstances, some rules for determining sources are needed. Those source rules might apportion the income between the two claimant States, or they may assign it to one State exclusively.