International Taxation and Cross-Border Issues
Core framework
Cross-border taxation asks two questions: which country may tax the income, and how is double taxation relieved? The answer comes from domestic law, treaties and supranational rules. Candidates must understand residence and source, permanent establishment, withholding taxes, treaty tie-breakers, foreign tax credits and transfer pricing.
Concepts to master
- Residence versus source taxation and the treaty hierarchy.
- Permanent establishment: fixed place of business, dependent agents, service PEs.
- Withholding on dividends, interest and royalties; beneficial ownership.
- Foreign tax credit limits and the exemption versus credit methods.
- Transfer pricing and the arm's-length principle.
- Controlled foreign company rules and anti-abuse provisions.
- Treaty shopping, limitation on benefits and the principal-purpose test.
Common traps
A foreign tax credit is usually limited to the domestic tax on the same income; excess credit may be carried forward or lost. Treaty residence tie-breakers can change the taxing country. A subsidiary is not automatically a permanent establishment. Withholding may apply even when the recipient files a return. Do not assume the treaty rate applies without beneficial ownership and documentation.
Worked example
Foreign-source income is 100,000 and foreign tax paid is 30,000. Domestic tax on that income, before credit, is 25,000. The credit is limited to 25,000; the excess 5,000 is not refundable unless domestic law permits carry-forward. The trap is crediting the full 30,000.
Rule of thumb
Apply the treaty first, domestic credit second: identify the taxing right, then compute the credit cap on a per-income or per-basket basis.