International taxation

International taxation appeared to prevent double taxation between countries

Mostafa Hosni - • International tax

International taxation

1-Introduction

International taxation has emerged for the following reasons:

1- To prevent double taxation between countries.

2- Due to harmful tax planning that leads to erosion of the tax base and profit shifting, where companies transfer their activities to tax haven countries, resulting in a significant loss in the tax base for industrialized and developing countries.

3- The world has become a small village now, and with just a click, companies and individuals can make cross-border deals that are invisible to tax authorities.

Important Definitions

International Taxation

  • Any cross-border transaction involves international taxes.
  • There is no such thing as international tax law; instead, there are international agreements to prevent tax evasion and double taxation.
  • The main references for international taxation are the Group of (G20) and the Organization for Economic Co-operation and Development (OECD) (specifically the OECD's Centre for Tax Policy and Administration).

- A multinational group of companies is any group composed of any of the following:

- 1 Two or more entities with tax residence in different countries.

- 2 One entity established for tax purposes in one country and subject to tax on activities carried out through a branch or permanent establishment in another country.

– Beneficial Owner:

A natural person who ultimately owns or exercises ultimate control over the legal entity directly or through a chain of ownership, control, or other indirect means, as well as the natural person on whose behalf transactions are conducted or who exercises effective ultimate control over a legal entity.

• Resident Company:

– Egypt becomes the center of effective management of the legal entity and is considered a resident in Egypt if at least two of the following conditions are met:

• If it is the headquarters where daily management decisions are made.

• If it is the location where board meetings are held.

• If it is the location where at least 50% of the board of directors or managers reside.

• If it is the location where partners or shareholders who hold more than half of the share capital or voting rights reside.

Follow important definitions

• The related party:

An entity that is part of the same group to which the licensee belongs.

• The related foreign person:

The related person whose residence is not in the country.

• Neutral price:

The price at which transactions are conducted between two or more unrelated persons, determined according to market prices and transaction conditions.

Sources for international taxation

• Domestic laws regulating transactions between countries determine the tax base, rate, and exemptions.

• Tax treaties aim to define the boundaries of each country's tax sovereignty. They began in 1963 and the most recent ones were concluded in 2017. These treaties are fairly consistent, and there are models for international agreements, with the OECD model and the United Nations model being the most famous. Egypt follows the UN model.

• Tax treaties do not exempt from taxation or subject to tax; rather, they prevent double taxation or double non-taxation. However, tax treaties determine which country has the right to impose tax or may allocate tax between the contracting states.

• Tax treaties are used in tax planning, where the most favorable treaties are chosen before transactions occur.

International taxation and the digital economy.

The digital economy

– The digital economy refers to activities conducted through electronic platforms, and more broadly encompasses all activities that utilize electronic data and information.

– Global electronic activities amounted to $25 trillion USD in 2015 and $27.7 trillion USD in 2016, with $23.9 trillion being business-to-business (B2B) transactions.

– Current data indicates an increase in transactions, as evidenced by Europe collecting €3 billion upon implementing value-added tax on these transactions.

International taxation and the digital economy

• Tax risks surrounding the digital economy:

– Rules determining the portion of profitability subject to taxation

– Rules and provisions subjecting non-resident electronic activities to taxation

• Bilateral agreements contribute to defining the above by avoiding tax duplication and exemption duplication.

• Multilateral agreements, led by the organization, involving over 100 countries, have been reached on solutions.

International taxation and the digital economy

Questions about the digital economy.

– What countries are entitled to collect taxes on the digital economy?

– Does providing a service require the physical presence of the person?

– Can a country impose a corporate profit tax on profits generated from online platforms?

– Is the location of the server from which the service is provided subject to taxation?

Multilateral agreement.

• Due to financial crises starting from the 2008 crisis, the G20 countries, through the Organization for Economic Cooperation and Development (OECD), have shifted towards addressing profit shifting and erosion through a package of measures to achieve the following objectives:

1- Support for global rules on determining corporate tax-related profits through a set of measures.

2- Substance requirement.

3- Enhancing transparency.

Economic substance and automatic information exchange

1. In view of the fact that the UAE was considered one of the tax paradises before 2018 and as a member of the Economic Cooperation Organization, the European Union obligated it to submit data and reports on companies in the UAE and determine who carries out activities inside the country and who practices activities from outside the country

2. Therefore, in 2019, the UAE issued the application of systems to determine economic substance activities.

3. See illustration figure to determine the regulations and the expected penalty for companies engaged in a related activity and evading tax

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