【Dry Goods】How can offshore companies utilize DTAs?
DTAs are bilateral tax agreements concluded between countries in order to avoid and eliminate the double taxation of the same taxpayer, on the basis of the same income, on the basis of the principle of equality and reciprocity.
Income taxes are levied by countries that, to varying degrees, exercise tax jurisdiction based on the principles of source of income and residence of the taxpayer.If there is no mutually acceptable coordination arrangement between the country of residence of a taxpayer and the country from which he or she derives his or her income, it often results in overlapping taxation, which not only increases the burden on taxpayers, but also is not conducive to the international exchange of economic, technological and human resources. Therefore, after the Second World War, with the development of international capital flows, labour exchanges and trade, the signing of double-taxation agreements between countries has received increasing attention at the international level.
Differences in the level of economic development of countries and the flow of capital and technology between countries are mutual among developed countries, while developing countries mainly absorb foreign capital and introduce technology. If a tax agreement is signed, it may reduce the tax revenue of the country from which the income is derived, so that the developed countries will receive a certain degree of tax sharing; however, it will still be beneficial to the developing countries in terms of absorbing foreign capital and introducing technology, and in terms of the development of their own economies.
Provisions are generally made in two respects: first, as to the persons to whom they apply and, second, as to the types of tax to which they are limited.
1. Scope of persons
With respect to the scope of persons, it is usually limited to persons who are residents of one of the contracting States or of both contracting States. In the absence of special provisions, it does not apply to other persons.
Residents are natural persons, legal persons and other bodies of persons treated as legal persons for tax purposes under the law of the State in which they reside, on the basis of their period of residence, domicile, place of their head office or management, etc., irrespective of their nationality, who are liable to tax.
Since different countries make different distinctions between residents and non-residents, some by period of residence, some by residence combined with period of residence, and some by whether the sojourner has a permanent residence, i.e., by domicile, and thus there may be a situation in which a taxpayer is a resident of one Contracting State and at the same time a resident of the other, which gives rise to the question of the party to which to aggregate the tax payments and the party in which to offset the tax payments already made. Therefore, the principle and order of determining which side a taxpayer should belong to is generally based on the country of permanent residence in the first place.
If there is a permanent domicile on both sides, whichever is the center of their economically important interests. If this remains unresolved, the State in which he or she has his or her habitual residence. If this is not possible, the State of nationality is attributed. In the case of dual nationality or nationality of neither party, the matter is finally settled by agreement between the competent authorities of the contracting States. In the case of non-individual taxpayers, such as corporations and enterprises, who are residents of both States, the State in which they have their head office or de facto management is the main criterion.
2. In terms of tax types
In terms of the types of tax, they are generally limited to taxes on income and do not deal with taxes on transactions or property, for example. A general provision specifying the range of taxes by object of taxation is usually accompanied by a specific list of existing taxes to which it applies:
（1）The scope of the agreement is clearly defined in terms of taxation of income.
（2）The parties separately list the existing taxes to which the agreement applies.
（3）Clarify the taxes that will apply after the conclusion of the agreement, adding to or replacing existing taxes.
In addition, there are two other issues that need to be agreed upon:
◆Does it include income taxes levied by local governments?
It is generally recognized that local income taxes are taxes on income and should be included in the scope of the agreement.
◆Does the non-differential treatment of taxes include taxes other than
taxes on income?
Generally as a special provision, the taxes to which the non-differential treatment of taxes is allowed to apply include income taxes and various other taxes.
1.Corporate income tax
In accordance with international tax practice, two basic principles are generally followed: first, a permanent establishment can be taxed only if it has a permanent establishment; and second, only profits attributable to the permanent establishment can be taxed.
A permanent establishment is a fixed place where an enterprise carries on all or part of its business, including, inter alia, places of management, branches, factories, workshops, offices and places where natural resources are exploited, construction sites, installation works, etc., as well as agents with no independent status who are authorized to enter into contracts on behalf of the enterprise, and commission agents who act wholly or almost wholly on behalf of an enterprise.
There is also taxation on the principle of attraction, that is to say, business activities carried on by the head office of the enterprise without going through a permanent establishment. If the business carried on by the permanent establishment is the same or of the same kind as that of the permanent establishment, the profits are taxed as if they were the profits of the permanent establishment.
2.Individual income tax
The parties need to focus on agreeing on what can be allowed as exceptions for income from labor, while adhering to the principle of source taxation. Generally speaking, the main ones that are taxed in the country where the beneficiary is a resident are as follows:
◆Income from remuneration received by a short-term (90 days in China) stayer from an employer in the country of residence.
◆Income from crew members of ships and airplanes engaged in international transportation.
◆Income of government employees who are sent to work abroad.
◆Income from remuneration for teaching or research personnel of one Contracting State who go to the other country to give lectures for a period of not more than two years or several years.
The source country of income is generally not taxed on income earned by foreign students and interns, etc., for the purpose of study and living, as well as on income earned by actors and athletes who engage in cultural exchanges under intergovernmental agreements.
3.Withholding tax on investment income (dividends, interest, royalties)
It is mainly negotiated to adopt a restricted tax rate and share the income between both parties. In the agreement, it is generally made clear that the tax can be levied by both parties, but the source country of the income has a preferential right to levy the tax, and the rate of the limitation of the withholding tax is determined accordingly.
The OECD model proposes a tax rate of no more than 15 per cent on dividends, 5 per cent on dividends from subsidiaries of a parent-subsidiary company (with a direct shareholding of not less than 25 per cent) and 10 per cent on interest. Tax experts in many developing countries argue that this limitation on tax rates would result in a significant loss of revenue for the source country, while the United Nations model leaves the issue of tax rates to be resolved during negotiations between the parties.
Taxation of investment income is directly related to bilateral rights and interests and is often at the center of negotiations. Although developed countries claim that they have no intention of transferring tax revenues from developing countries to developed countries by entering into tax agreements, what is most important to developing countries is that measures to reduce tax rates can effectively and efficiently serve to encourage investment and the introduction of technology without equity spillovers, whereby reduced revenues from encouraging investment flow into the coffers of capital-exporting countries.
1. Tax-free approach
That is, the elimination of taxes on income derived from the other country, which is often considered to be the best approach. It can provide the necessary conditions for firms from capital-exporting countries to operate in developing countries on a competitive footing with local firms.
2. Type of credit
This means that the amount of tax paid in the source country can be deducted from the tax payable in the home country on an aggregated basis. By adopting the credit method, the profits derived from investment will eventually be taxed at a high rate in the capital-exporting country, and as a result, the low tax rate in developing countries will not benefit investors, thus making it less attractive to enterprises in capital-exporting countries, failing to effectively play the role of encouraging international investment, and at the same time not being conducive to the expansion of business by the investing enterprises.
However, it has also been argued that the use of credits can have the effect of equalizing burdens so that enterprises in developed countries do not have different burdens depending on where their operations are located.
With regard to the disadvantages of the tax credit approach, there are also those who advocate the use of deemed tax credits to make up for them appropriately. That is to say, the tax concessions granted by the source country should be deducted as if they were taxes levied when calculating taxes in the country of residence, so as to encourage international investment. However, some developed countries do not agree with the use of deemed tax credits, and some only agree to grant deemed tax credits for withholding tax deductions, but not for corporate income tax.
The avoidance of tax discrimination is an important principle in international tax relations and one of the key issues to be clarified in negotiating tax agreements.
Non-differential treatment clauses are usually included in tax treaties to ensure that taxpayers in one of the contracting States are not treated differently or burdened with tax liabilities in the other State than taxpayers in the other State would be in the same situation. There are four main areas:
◆No difference in nationality: No difference in treatment in taxation based on the nationality of the taxpayer.
◆No difference in permanent establishment: No difference in taxation between permanent establishment and domestic enterprises.
◆No difference in payment: No difference in taxation due to different objects of payment.
◆No difference in capital: no different or heavier burden than that of a domestic enterprise because its capital is owned or controlled by an enterprise or individual of the other country.
However, such non-discriminatory tax treatment must not affect the implementation of domestic fiscal and economic policies. That is, it should not include tax breaks and exemptions granted to national residents, enterprises and other special case tax breaks and exemptions on the basis of, for example, citizenship or family burdens and domestic policies.
In recent years, an increasing number of tax treaties have included this provision.The growing interconnectedness of national economies and the increasing number of transnational corporations, coupled with differences in tax regimes and levels of burdens across countries, have resulted in considerable losses in both developed and developing countries.
The difficulty of national tax authorities in preventing tax evasion and avoidance of taxes occurring outside their territorial jurisdictions has led to an increased focus on strengthening international tax cooperation. As a result, tax cooperation to prevent international tax evasion and avoidance is developing in the direction of treatyization, resulting in the Model Agreement for the Avoidance of Double Taxation between Developed and Developing Countries (the United Nations Model Tax Convention). (referred to as the United Nations Model Tax Agreement)
