THE INTERNATIONAL TAXATION SYSTEM

THE INTERNATIONAL TAXATION SYSTEM

THE INTERNATIONAL TAXATION SYSTEM edited by Andrew Lymer University of Birmingham United Kingdom and John Hasseldine University of Nottingham United Kingdom SPRINGER SCIENCE+BUSINESS MEDIA, LLC

The international taxation system I edited by Andrew Lymer and John Hasseldine. p.cm. Includes bibliographical references and index. ISBN 978-1-4613-5380-5 ISBN 978-1-4615-1071-0 (ebook) DOI 10.1007/978-1-4615-1071-0 1. Taxation--Law and legislation. 2.Double taxation. 3.1ncome tax--foreign income. 1. Lymer, Andrew. II. Hasseldine, John. K4475.1582002 341.4'844--dc21 2002075243 Copyright 2002 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 2002 Softcover reprint ofthe hardcover lst edition 2002 AII rights reserved. No part ofthis work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, microfilm ing, recording, or otherwise, without the written permission from the Publisher, with the exception of any material supplied specifically for the purpose ofbeing entered and executed on a computer system, for exclusive use by the purchaser ofthe work. Permission for books published in Europe: permissions@wkap.nl Permissions for books published in the United States of America: permissions@wkap.com Printed on acid-free paper. The Publisher offers discounts on this bookfor course use and bulk purchases. For further information, send email to<david.cella@wkap.com>

Contents Contributors Preface VII Xl 1. Introduction to Taxation in an International Context ANDREW LYMER AND JOHN HASSELDINE Part 1: The Global Tax Environment 2. History of Taxation 21 WILLIAM D. SAMSON 3. History ofinternational Business Taxation 43 PAUL HEWITI, ANDREW LYMER AND LYNNE OATS 4. Internet Challenge to Tax System Design 61 NEIL WARREN 5. Anti-Avoidance and Harmful Tax Competition: From Unilateral to Multilateral Strategies? 83 MARIKA TOUMI 6. The Future International Tax Environment 105 SIMON JAMES

vi Part 2: Aspects of International Taxation 7. The Role of Tax Treaties in International Taxation 123 WALTER O'CONNOR 8. Foreign Tax Credits 135 ROBERT RICKETTS 9. International Transfer Pricing 157 JAMIE ELLIOTT AND CLIVE EMMANUEL 10. International Tax Aspects of Income Derived from the Supply of Intellectual Property: Royalties vs. Business Profits 181 KEVIN HOLMES 11. Taxing Non-Residents: A U.S. Perspective 207 PEGGyHITE 12. Taxes and Compensation 229 AMINMAwANI Part 3: Comparative Analyses 13. Taxing Companies and Their Shareholders: Design Issues 249 LYNNE OATS 14. Administrative and Compliance Costs of International Taxation 273 JEFF POPE 15. Binding Rulings: A Comparative Perspective 291 ADRIAN SAWYER Index 317

Contributors Jamie Elliott is Senior Manager in the International Tax Group at Deloitte & Touche. Prior to his appointment, he held academic positions at the University of Southampton and the London Business School. He has researched extensively on many aspects of International Transfer Pricing. He is co-author of "Financial Accounting and Reporting" (Elliott and Elliott). He completed his Ph.D degree ("Managing International Transfer Pricing Policies") at the University of Glasgow in 1999. Clive Emmanuel is Director of the Centre for International Finance and Accounting and Ernst and Young professor at the University of Glasgow. His research on international transfer pricing with Jamie Elliott has attracted CIMA Foundation support and he currently supervises three doctoral candidates working in the area. John Hasseldine is the Co-Chair of Tax Management Research-Net and Director of the International Centre for Taxation Management Research at the Nottingham University Business School. He has held prior academic positions in the U.S. and in New Zealand. He researches and consults in the areas of tax compliance and tax administration. Currently, he is leading a four-year crossnational ESRC research project on improving voluntary tax compliance in the U.K. He completed his Ph.D degree in Accounting at the Kelley School of Business, Indiana University in 1997. He is on the editorial board of Advances in Taxation and is a U.K. correspondent for the Bulletin for International Fiscal Documentation.

Vlll Contributors Paul Hewitt is a Researcher in Taxation at the University of Birmingham in the UK. He is currently working on a research project addressing the impact of electronic commerce and electronic business practices on international taxation. Peggy Hite is a Professor of Accounting at the Indiana University Kelley School of Business where she is the Chair of the Honors Program. Professor Hite received her Ph.D in 1986 from the University of Colorado. She has published in numerous journals including The Accounting Review, The Journal of the American Taxation Association, The National Tax Journal, Public Opinion Quarterly, Public Finance, Journal of Economic Psychology and Advances in Taxation. Professor Hite's research interests include taxpayer compliance, taxpayer-client relationships, and progressivity preferences. Professor Hite has won several teaching awards at the department, school, and university level. Kevin Holmes is Principal Research Associate at the International Bureau of Fiscal Documentation (IBFD), Amsterdam, The Netherlands and Visiting Professor of Taxation at Eotvos Lonind University in Budapest, Hungary. He is co-editor of the International Guide to the Taxation of Transfers of Technology and a member of the editorial board of the Bulletin for International Fiscal Documentation. He was formerly Head of the IBFD's Government Consultancy Department and a tax partner of an international accountancy firm. He has a Ph.D degree from Victoria University of Wellington, New Zealand. Simon James is Reader in Economics, School of Business and Economics, University of Exeter, Visiting Fellow, School of Finance, Australian National University, a Chartered Tax Adviser and Fellow of the Chartered Institute of Taxation. His 40 published research papers are mainly concerned with taxation and his 15 books include The Economics of Taxation: Principles Policy and Practice. He has also edited a four-volume collection of tax papers entitled Taxation: Critical Perspectives on the World Economy, which will be published by Routledge in 2002. Andy Lymer is a Senior Lecturer at the University of Birmingham in the u.k. where he teaches the unusual combination of courses in U.K. taxation, international taxation and information systems. He has held visiting positions in Australia (at ATAX, University of New South Wales, the University of Sydney and Curtin Institute of Technology) and in the U.S. (at Texas Tech University). His research interests in tax include information technology impacts in tax practice and administration, transfer pricing developments and the impact of electronic commerce on taxation systems. He is the joint author

Contributors ix of an annually produced guide to U.K. taxation entitled "Taxation: Policy and Practice ", produced by Thomson, and now in its ninth edition. He is the Managing Editor of the AccountingEducation.com web community. Amin Mawani is an Associate Professor of Taxation at the Schulich School of Business at York University in Toronto, Canada. His research and teaching interests are in the area of taxation of employee stock options. Amin Mawani earned his Ph.D in Taxation from the University of Waterloo, his MA in Public Economics from the University of Toronto, and his Bachelor of Commerce in Finance from the University of Alberta. Amin is also a Certified Management Accountant (CMA) and a Certified Financial Planner (CFP). Lynne Oats is a Lecturer in Taxation at Warwick Business School. She was previously a Senior Lecturer in Taxation at Sheffield Hallam University and at Curtin University of Technology, Western Australia. She completed her Ph.D at the University of Western Australia in 2000 and is currently researching in the areas of corporation tax, tax policy and U.K. tax history. Walter O'Connor is Professor of Taxation and Accounting at Fordham University in New York where he is the Director of the Masters in Taxation Program and Area Chair of Accounting and Taxation. He was a Fulbright scholar in Macroeconomics and completed his Ph.D at City University of New York I Baruch. He now serves as Editor-in-Chief of The International Tax Journal and is retired Vice Chairman International of KPMG. He has published four books and numerous articles in academic and professional journals. Jeff Pope is an Associate Professor in Economics at Curtin University of Technology, Perth, Australia. He pioneered the estimation of tax compliance costs in Australia in the late 1980s and early 1990s, with five (co-authored) books being published by the Australian Tax Research Foundation. His research has focused on tax compliance costs in the Asia-Pacific region, including the (co-authored) book Taxation and Compliance Costs in Asia Pacific Economies. Jeff has undertaken research for the Australian Business Coalition for Tax Reform and served on Government and business tax review committees. He is widely published in tax compliance costs and taxation policy in Australia and internationally. Robert Ricketts is Frank M. Burke Chair in Taxation at Jerry S. Rawls College of Business Administration at Texas Tech University, in Lubbock, Texas. He teaches in the areas of corporate taxation, partnership taxation and

x Contributors international taxation, and conducts research on tax policy and the effects of tax rules on investor and taxpayer behaviour. He is co-editor of Fundamental Concepts o/taxation, a textbook on the u.s. income tax system. He received his Ph.D degree in Accounting from the University of North Texas in 1988. William D. Samson is the Roddy-Gamer Professor of Accounting at the University of Alabama. He is the 2002 President of the Academy of Accounting Historians, and served the organisation in a variety of offices including four years as co-editor of its journal: The Accounting Historians Journal. He recently completed a tax history project examining tax rates over time. In 1997, Bill has received national recognition for his teaching activities he specialises in teaching income taxation of individuals and tax planning courses. Bill received his Ph.D in 1981 from the University of North Carolina, has taught for 25 years and is a North Carolina CPA. Adrian Sawyer, M Com (Hons), LLB, is a senior lecturer in taxation and business law at the University of Canterbury, Christchurch, NZ. He specialises in tax compliance and administration research, as well as insolvency law. He is both a chartered accountant and barrister and solicitor of the High Court. He has been a consultant for the NZ Inland Revenue Department on several occasions, including issues involving self-assessment, tax compliance and most recently binding rulings. He is a tax commentary writer for Brookers and Butterworths in New Zealand, is widely published, and is a co-editor of the NZ Journal o/taxation Law & Policy. Marika Toumi, Maitrise de Droit, LLM, is a researcher at Nottingham University Business School where she works on an ESRC-funded project on the role of tax agencies in increasing voluntary tax compliance. She has worked in Coopers & Lybrand's International Tax Department and taught at Warwick University. She is now researching for her Ph.D thesis, a socio-iegal and comparative study of tax avoidance and legal control. Neil Warren is an Associate Professor of Economics in the Australian Taxation Studies Program (ATAX) at the Faculty of Law, University of New South Wales and since 1994, has been Research Director of the Australian Tax Research Foundation. He has consulted widely to both Commonwealth and state governments on taxation issues and advised on taxation policy and tax administration issues in a number of international development projects in the Asia-Pacific. In addition, he has advised numerous private sector organisations on taxation issues and written extensively on most economic aspects of tax policy design and development.

Preface Although we have entitled this book 'The International Taxation System', the term 'international tax' is in fact a misnomer. When we speak of international tax what we are really referring to is the international aspects of domestic tax laws. There is no overriding global law of taxation, no single international tax authority ensuring compliance and tax payment. Tax laws are creations of national states that, from time to time, interact with one another where they describe the taxation of cross-border activity. To understand the taxes that will be imposed on any individual taxpayer, business taxpayer or personal, you need to understand the national tax laws of the countries in which some potentially taxable activity is occurring. This book focuses on the trends in taxation that have received wide (i.e. multiple country) acceptance - and which therefore are collectively termed international tax - and the underpinning, but differing, national views on the interpretation of these trends - which is termed comparative taxation. Teaching materials currently available in the area of international taxation appear in a wide range of technical and discursive styles. They also are founded in multiple disciplines because of the nature and importance of taxation - including at least accounting, legal, economic and political science disciplines. Why is another book needed in this area? As teachers of taxation we were concerned that much of this material focused heavily on the USA and the range of resources that were in fact appropriate for support of teaching of international taxation outside of the USA were very limited. The remit we accepted therefore was to create materials, at appropriate depth and with suitable breadth, to support the teaching of international taxation right across the world, with necessary support for comparative analysis. We have attempted to build on the material available in the USA, but also to integrate a

Xli Preface wider international viewpoint on the subject into the resources we have created. This book is mainly targeted at taught university-level study of international taxation. For most universities, this is undertaken at a postgraduate, Masters, level. The authors of the chapters of this book have therefore mainly been asked to assume that basic taxation knowledge is available to readers from a first, nationally focused, course in taxation that most will have been gained from prior study. To cover the possibility that some users may not have such a background, however, we have included some introductory support (see 'Introduction to International Business Taxation' particularly) that introduces appropriate foundation principles of taxation needed for the study of international taxation. However, this text is not an introduction to taxation theory, or to any particular national tax system. The rest of the remit given to each of our authors was also common. Each chapter introduces the reader to the topic being examined, leads you through the key issues related to the topic, and provides details on further reading and discussion issues in each case. Each chapter provides enough material for a two-hour lecture on the topic at hand, with pre- and post- reading suggested as appropriate. The range of resources we, as educators, would like to have available in this area, and the different perspectives that could usefully be taken on most of this topics from different disciplinary focuses, lead to a long wish list of different chapters for the book. Of course, some limitation on this range had to be imposed because of the physical constraints of the publication process. We therefore choose to opt for a publication deal with a publishing partner who was willing to think imaginatively about how best to provide a wide range of resources for this topic - not just what would appear in the printed part. Kluwer Academic were willing supporters of this idea. For this reason the book is therefore just one part of a range of materials, managed by us as editors, available to support the study of international and comparative taxation. Readers are encouraged to visit the website that provides a companion to this printed text. It contains materials that directly link to the chapters chosen to form a part of this book. It also, however, provides other chapters on different topics, other teaching and study support, and other useful links and content to provide a complete framework for the study of this topic. These materials as a set provide a wide variety of perspectives, content and focus. This allows the educator a wide choice of approaches to this increasingly important topic of study and provides a range of viewpoints for the student seeking to understand this topic area. Website address: http://www.taxstudent.com/international

Preface Xlll As editors, we would like to acknowledge the support of the various people who have played key roles in the production of this text. These particularly include Marika Toumi, of Nottingham University in the UK, who played an essential role in the management of the production of the text. We also acknowledge the support from the publishers, especially from our Publishing Editor at Kluwer Academic, David Cella. Other support was offered from various members of the Tax Research Network (TRN - http://www.tm.org.uk) that we gratefully acknowledge. We would welcome feedback on the materials in this text, and on the website, including suggestions for additional materials. Please address these comments to int_tax@taxstudent.com. (Please note however, we will not be able to answer questions on international taxation via this address) Please note, whilst every attempt has been made to be accurate in the production of the content of this text, the information should not be used, or relied upon, for tax planning purposes in any way. Neither the authors, editors nor publishers will accept any liability for actions taken on the basis of information contained in this text, or on the website. Andrew Lymer and John Hasse/dine May 2002