This booklet explores the key concepts of the international tax system, including the principles of source and residence and the ways countries allocate taxing rights.
It also addresses the issues of tax evasion and tax dodging under Egyptian law, examining how companies take advantage of differences in national tax laws and the challenges governments face in trying to prevent these practices.
By highlighting the complexities and controversies in international taxation, this booklet provides a clearer view of the ongoing debates and reforms shaping the global tax landscape.
Q: What are the main ideas behind the international tax system?
The international tax system is based on two main ideas: source and residence.
Q: How is a company's tax residence determined?
A company's tax residence is determined by either where it was incorporated (created) or where its management and control are located. The country where the company is a resident can tax all of its income, no matter where that income was earned.
Q: What does "source of income" mean for a company?
The source of income refers to the place where a company earns its money. The country where this income is generated (the source country) has the right to tax that income. However, determining the exact source can sometimes be tricky and disputed.
Q: Can a company's income be taxed by both the source and residence countries?
Yes, both the source country (where the income is earned) and the residence country (where the company is based) can tax the income.
Q: If both countries want to tax the income, which one goes first?
The source country taxes the income first. The residence country is then expected to reduce its tax to prevent double taxation.
Q: How do tax treaties change the way countries share tax rights?
Tax treaties change the rules by requiring the source country to share the responsibility of preventing double taxation, often by taxing less. These treaties can shift more tax revenue to richer countries (usually the residence countries) and away from poorer ones (usually the source countries).
Q: What limits do tax treaties place on the source country's right to tax?
Tax treaties limit the source country's right to tax by stipulating that a country can't tax a foreign company unless that company has a "permanent establishment" (like an office or other physical presence) in the source country.
Q: What is a "permanent establishment"?
A permanent establishment is a physical place, a physical presence, or a dependent agent that a company has in a country. If a company has this in the source country, that country has the right to tax the company's income.
Tax Evasion and Tax Dodging
Q: What is tax evasion?
Tax evasion is the illegal act of not paying taxes that are owed. This usually involves fraudulent actions like underreporting income, inflating deductions, or hiding money in offshore accounts. It is a criminal offense that can lead to penalties, fines, or even imprisonment.
Q: What is tax dodging, and how is it different from tax evasion?
Tax dodging is a broader term that includes both illegal and legal ways to reduce tax liability. While it can involve illegal practices like tax evasion, it often refers to legal but ethically questionable strategies, such as exploiting loopholes or engaging in aggressive tax avoidance. In summary, tax evasion is always illegal, while tax dodging can be either illegal or legal but is often seen as controversial.
Q: How have companies exploited differences in national tax laws?
Lawyers have exploited differences in national tax laws and rates to create "stateless" companies. These companies are not taxed on their global income by any country, allowing them to minimize or avoid taxes altogether.
Q: Why have efforts to combat corporate tax avoidance been ineffective?
Efforts by individual countries to combat corporate tax avoidance have often failed due to global tax competition. As countries competed to attract businesses, corporate tax rates dropped. Politicians began viewing tax avoidance strategies as a competitive advantage for their own corporations. Additionally, tax havens resisted cooperation because they benefited from attracting business with low taxes.
Q: What challenges do international tax systems face in addressing these issues?
The complexity of international tax systems and the reluctance of nations to relinquish control over their taxes have made it difficult to address these issues effectively. Each country only sees the portion of a company's income that is reported domestically, making the full scope of tax avoidance strategies unclear. Despite efforts to reform the system, many tax avoidance techniques used by multinational corporations remain legal and widespread.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.