International Taxation and Cross-Border Transactions
Core concepts
Cross-border taxation rests on residence vs source and double tax treaties (based on OECD/UN models). Understand tie-breaker rules, permanent establishment (PE), withholding taxes on dividends, interest, and royalties, and relief for double taxation (credit vs exemption).
Key concepts: transfer pricing at arm's length, controlled foreign company (CFC) rules, thin capitalisation, and treaty shopping limitations. Know the difference between deferred and current tax effects of cross-border structures.
Traps to watch
- PE can arise from a fixed place of business or a dependent agent; do not assume treaty protection without checking.
- Withholding tax rates are reduced by treaty only if conditions (beneficial ownership, residence) are met.
- Foreign tax credit is usually limited to the domestic tax on that income (no refund of excess).
- Transfer pricing adjustments can trigger double taxation absent a mutual agreement procedure.
Rule of thumb
Apply domestic law first, then treaty relief, then credit/exemption; the credit is capped at domestic tax on the foreign income.
Worked example: Foreign income 100,000 taxed abroad at 30% (30,000). Domestic rate 20% → domestic tax 20,000. Credit capped at 20,000; excess 10,000 is not refunded (may be carried forward per rules).