BY
PAMELA OJIEGO
1.0. INTRODUCTION
Globalization has changed the mode of doing business and it is more common to find commercial entities engaging in large volumes of trade activities between one country and another country. Cross border transactions or trans-jurisdictional transactions are becoming a common occurrence in our world today. one country to other countries. These transactions need to be regulated and taxed, thus international taxation. This research work is an appraisal of international taxation and the various challenges and obstacles that it faces and also to look at the future of this aspect of taxation, solutions to these challenges and generally its prospects. The methodology adopted by the writer is the doctrinal methodology.
International taxation has been described as 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[efn_note] https://en.m.wikipedia.org/wiki/international_taxation accessed on 5th of November, 2019 7:08am[/efn_note]. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income.[efn_note] http://www.un.org/esa/ffd/documents/UN_Model_2011_Update.pdf accessed on 5th of November,2019 6:45am[/efn_note]It is that aspect of taxation that is concerned with tax payment of individuals, businesses, or investments across the border of the taxpayer’s State; where the tax laws of any interested State may be applicable. International taxation refers to the global tax rules that apply to transactions between two or more countries, commonly referred to as States in the international parlance. It encompasses all tax issues arising under a country’s income tax laws that include some foreign element.[efn_note]http://www.yourarticlelibrary.com/essay/essay-on-international-taxation/83300 accessed on 5th of November,2019 7:15am[/efn_note] The key objectives of international taxation are tax equity, economic efficiency, national wealth maximization, balance capital export and import neutrality.[efn_note] Vinay N Sanji, Tax Treaties- An overview[/efn_note] It is a body of legal provisions embedded in the tax laws of each country to cover the tax aspects of cross border transactions. [efn_note]ibid[/efn_note]It is important to note that there are no international tax laws or global tax laws that govern all cross border transactions as taxes are not international. It is however an interaction of various tax laws and rules of different states (country). It is a mutation of tax laws and rules as they apply to cross border transactions. Under international taxation, a situation may arise where two or more countries are interested in taxing a person, this will bring about a tax dispute or conflict in determining which country is entitled to the said tax. Global businesses have no borders but tax laws and rules are restricted by sovereignty of other countries and territories, thus having clear cut borders. As a general principle, only the domestic tax laws of a sovereign country are applicable and enforceable within that country. Also, section 12 of the 1999 constitution of the federal republic of Nigeria provides that “No treaty between the Federation and other country shall have the force of law except to the extent to which any such treaty has been enacted into law by the National Assembly”.
There are two major taxing rights commonly at the disposal of a country;
- Source principle of Taxation: the country may tax the income having its source in that country, regardless of the residence of taxpayer.
- Residence principle of Taxation: the country has taxing right over the taxpayer where such payer (individual or enterprise) is resident.[efn_note]Lecture note on international taxation presented by M.O. Ibiloye, DD May 2013[/efn_note]
2.0. CHALLENGES OF INTERNATIONAL TAXATION
Where a taxpayer is subject to taxation on cross border transactions in more than one jurisdiction, he generally incurs higher tax liability than he would have incurred if the transaction was wholly and completely carried out in one country. This and others are some of the conflicts that can arise from international taxation such as source conflicts; where two or more states lay claim to the source of an income, resident conflict, resident source conflict, income characterization, entity conflict as stated by Tax Justice Network [efn_note]http://www.taxjustice.net/cms/upload/pdf/source_and_residence_taxation_-_SEP-2005.pdf accessed on 5th of November, 2019 8:15am.[/efn_note]and these conflicts pose a challenge to international taxation. Double taxation is a major challenge facing international taxation. This double taxation may be economic or juridical
- Economic double taxation: this occurs when two persons are taxed for the same income. It arises when the same economics transaction, item or income is taxed in two or more states during the same period.
- Juridical double taxation: this double taxation in international taxation arises where two or more states levy their respective taxes on the same entity or person on the same income and for identical periods. Simply put, this arises where two countries or jurisdictions levy taxes on the same property or person such that the tax burden is heavier on the subject as compared to the burden he would have if he were within the jurisdiction of one country.
Tax avoidance and Tax evasion is also a major challenge which international taxation faces as incomes or a person may not be taxed in a bid to prevent double taxation of such income or person as the case may be. It is trite that taxpayers want to minimize their tax liability to the greatest extent possible and when this taxpayer is a multinational company, it sees transfer pricing as a means to do such. Transfer Pricing is the price which is paid for goods or services transferred from one unit of an organization to its other units situated in different countries. Transfer pricing in itself is not unlawful, however, the abuses associated with it have tainted it, making it synonymous to something fraudulent. Multinationals, leveraging on the different tax rates in the different countries in a bid to pay less taxes gives more credence to the need for international taxation.
3.0. PROSPECTS OF INTERNATIONAL TAXATION
In an increasingly connected and fast paced world, business policies hinged on globalization has become the new norm as revenue minded businesses now extend beyond their countries of origin and transact across multiple borders in a bid to achieve scale and profit. These international tax transactions attract international tax implications. Despite all the challenges international taxation faces both theoretically and in practice, there is the possibility of future success. The success of international taxation is very imperative as businesses that go on in the international space are goldmine for generation of revenue and in a bid to tap into this goldmine there may be conflicts between countries and also, international activities have tax implications. To avoid this ugly situation and maximize the potentials that lie in international taxation, it is the opinion of the writer that treaties be put in place. A treaty is an international agreement governed by international law and concluded in written form between one or more states and one or more international organizations or between international organizations.[efn_note]Article 2(1) VCIO 1986.[/efn_note] There has been a staggering proliferation of tax treaties, over 3000 bilateral income tax treaties between countries of the world [efn_note]Kim brooks & Richard Kerver, the troubling role of tax treaties. http://ssrn.com/abstract=2639064.[/efn_note]and over 2500 double tax treaties (DTTs). This goes to show the importance of tax treaties and the willingness of countries to cooperate and bring parity to international taxation. The current DTTs are all based on the UN and the OECD models, however the OECD model is the source of most DTTs. Most of these tax treaties are bilateral and thus, requiring a country to enter into numerous treaties with as many countries as possible, Nigeria for one has DTTS with thirteen countries. This is time consuming, and expensive and may slow down or stunt the growth on this aspect of taxation. It is the proposal of the writer that there exist a general tax treaty to which countries of the world as they are a part of the United Nations become signatory to it, seeing that 75% of words used in these DTTs are actually identical. [efn_note]Double tax treaties: An Introduction , Reuven S Avi-Yonah , http://ssrn.com/abstract=1048441 .[/efn_note]This treaty will inculcate the important objectives of tax treaties as reflected in the original long title of the league of Nations and the OECD model tax treaty. These objectives are to reduce double taxation and prevent international tax evasion and avoidance. The exchange of information between countries that are signatories to these treaties will help to combat tax evasion and tax avoidance while credit for source country tax or exemption from resident country taxation of income derived in the partner source country. These treaties will also contain a dispute resolution mechanism to resolve conflicts which will inevitably arise between countries as tax treaties nominate competent authorities as negotiators and may provide for arbitration to resolve cross border disputes and whose award shall be binding among countries. This general tax treaty will also promote international investment through nondiscrimination clauses to treat foreign and domestic investors alike. This treaty may also adopt the “Most-Favoured-Nation treatment” principle which will accord all members equal tax reliefs, exemptions, credits on “like incomes”.
At the risk of sounding like a broken record, it is imperative that we consider the concept of jurisdiction. There are three types of jurisdiction generally recognized in international law, viz, jurisdiction to prescribe, jurisdiction to enforce and jurisdiction to adjudicate. These jurisdictions are essential and also need to be inculcated in the treaty. The treaty will spell out which countries’ domestic law will be used to prescribe the rules for the taxation of a said international income/profit/transaction, and may be based on subjective or objective territoriality, which jurisdiction enforces this law which is most likely derived from the determination of the jurisdiction to prescribe and which country has the jurisdiction to adjudicate on any matter or disputes that may arise in accordance with the dispute resolution mechanisms as contained in the treaty.
In the creation of every law or any agreement, its enforceability is as important as the law itself. Considering the sovereignty of nations and the fact that some countries like Nigeria already made express provision for the unenforceability of a treaty unless it is domesticated, one may wonder how compliance of this general treaty is to be enforced. Article 26 of the Vienna convention on the law of treaties provides thus “Every treaty is binding upon the parties to it and must be performed by them in good faith”. Furthermore, article 27 provides that “A Party may not invoke the provision of its internal law as justification for its failure to perform a treaty”. It therefore follows by parity of reasoning that once a country agrees to a treaty, it is under an obligation to carry out the requirements of such treaty and cannot shy away from its obligation using its internal laws as a shield to protect it from whatever consequences that may arise from its noncompliance.
4.0. CONCLUSION
In the current era of staggering growth in international trade and commerce, cross border transactions and an ever increasing interaction between nations of the world, international taxation is an aspect of taxation which needs to be explored, discussed, advocated for, established and implemented. Globalization has come to stay and grow as businesses extend its sphere to countries where it earns income. Businesses are transcending border barriers and so must our laws.