Tuesday, April 14, 2009

Double Taxation Agreements: The other side of the coin!

Over the last few weeks there has been allot of debate about the Organization for Economic Development and Cooperation (OECD) and their recent tax haven crackdown successes.

While the OECD recognizes movement by countries that are even borderline (so called) tax havens, they claim that the movement, while welcomed, has not been substantial enough.

The issues spark debate about what does the OECD really want from offshore jurisdictions?

One option on the table has been to encourage countries to increase and enhance current Tax Information Exchange Agreements (TIEA's) with their developed country partners.

I think that it is silly to think otherwise from that of the OECD and consequentially the G-20, went through all of their work and effort on Harmful Tax Practices and Tax Havens, to put recommendations (ultimatums), most particularly in regards to the standard quota for TIEA’s, in that the quota being twelve (12) per country and that they would find it beneficial, hypothetically, for a country like the Cayman Islands to go ahead and sign TIEA's with North Korea and/or the Sudan or regimes like those.

Another and more abstract sub-issue has been the notion that the respective internal regulatory blockages that are seen as impediments that hamper the full implementation and execution of tax information exchange systems and overall tax transparency, need to be removed in order to come full circle in regards to total compliance with the OECD standard on this issue.

Yet another issue to emerge out of policy circles and to coeval with removing impediments to tax transparency regulations, has been the notion of offshore tax jurisdictions, increasing their number of double tax agreements (DTA's) in order to not only comply, but evolve to a new system of taxation as well as generate rents for public services, without unfairly taxing an individual or company twice- both in their country of domicile and in their foreign country of business. Hence the provenance of the term “double taxation”.

This "other side of the coin", has been made to work in effect in jurisdictions such as Barbados, Singapore and in the Philippines. All considered tax havens at some point in the recent past. They all now have put in place double taxation treaties, to be fair to both the investor and his or her earnings as well as use it as a form of regulatory modernization, in regards to becoming more stable by raising tax revenue for public services as well as becoming more globally competitive.

In a nutshell, the basic premise behind a DTA’s is to have entities exempted--both individual and corporate-- from paying taxes in both their country of domicile and their country of investment, if the country of investment were to be foreign.

A hypothetical example where double taxation may occur, is in the form of corporate entity A, paying taxes in country A as well as its employee’s being legal citizens of country A, but live and/or work in country B and also make not only income from salaries in country B, but investment gains and other wealth gratuities in country B.

In the case of the USA, entities, regardless if whether or not they were living in country A or country B, are required to pay their individual taxes on any income or additional earnings. If not, dire consequences are sure to follow, with an unmerciful wrath inflicted upon you and your household by the Federal Government via their Internal Revenue Service.

It gives this author visions of the well known caricature of “Uncle Sam”, with a white flowing beard, all adorned in a duck-tailed coat-suit with top-hat colored coded in red white and blue, rabidly frothing American virtues and patriotic values at a most feverish pitch, with mean blood-shot eyes and the stars and stripes wrapped around him as a sign of purity and wholeness. All at the same time, delivering a performance no short of super-spectacular, as one would see a U.S congressman- on the dishing out end of a congressional hearing- deliver a volcanic eruption of righteously indignant, better than you brimstone and hell-fire lectures on the merits of paying one’s taxes, while in the process, wagging violently his index finger as he follows it up with an abusive excoriation on the criminal and immoral act of missing tax payments.

While we all have our jolly fantasies of tax dodgers getting theirs, the broader issue of double taxation and the mitigation of such between countries, has to be taken into the context of both countries having in place existing domestic tax systems, which provides taxation for both corporate and individual income taxes, however they are to be defined.

The thing with DTA's, has been that they appear to only be logically doable between countries, where investment opportunities are great but the fear of high tax burdens imposed by both country of domicile and country of investment, makes prospects and risk of investment, economically non-viable.

To put it more bluntly: one would need a system of taxation on all or most relevant wealth generating sources of economic activity, before you sign a double tax treaty, which would work to mitigate against the likelihood of an investor or individual being taxed doubly.

In this vein, if this is to be the route, new taxes on foreign earnings could be the start of not only income tax in countries that don't already have them. But, also, a way to earn revenue and a way to standardize the system in which you can provide a better platform for domestic taxation--if the case may be.

The case for domestic taxation--for countries that don't already have domestic income taxation--is another story, of course.

But, the issues put into a fuller context, is something to consider.
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