Taxing Non Residents Capital Gains. Wei Cui (UBC Faculty of Law) September 23, 2014

Transcription

1 Taxing Non Residents Capital Gains Wei Cui (UBC Faculty of Law) September 23, 2014

2 A. The tax base for non residents capital gains B. Administering the tax on non resident capital gains C. Anti avoidance for taxing capital gains

3 The tax base for non residents capital gains A wide range of assets may be sold by non residents at substantial gains: operating businesses, monopoly rights (e.g. to explore natural resources, or to develop a particular restricted industry), financial claims (loan portfolios and leases), and, of course, real estate. The OECD and UN Model Conventions only contemplate taxing some of these gains: real estate, businesses carried through a permanent establishment, and (under the UN Model) substantial share participation.

4 Why? 1. Developed countries general preference for resident country taxation, viz a viz other developed economies and also developing countries 2. Non taxation of dividends (Europe) 3. Administrative burden (U.S., Canada) and insufficient revenue payoff Is there more to the case of non taxation than the previous three considerations? For example, beyond these considerations, is there something about gain from real estate that makes it distinctly more taxable?

5 Two dimensions of (in)consistency, which may lead to tax avoidance: 1. Income (interest, rent, dividend, business profit, etc) v. gain 2. Assets of v. ownership interest in an entity (e.g. a company and its shares)

6 Administering the tax on non resident capital gains Gross income or net income basis? The prevalent approach is that passive income (which capital gains income often consists in) should be taxed on a gross income basis. However, withholding has clear limitations when applied to capital gains. Advantages of net income basis taxation: minimizes distortions from taxing gain but not recognizing losses; creates incentives for filing returns.

7 Methods of administration: 1. Transferor self declaration only (Australia, Japan) 2. Transferee withholding (U.S., Canada, India) including when transferees are foreign Liability for failure to withhold Implicit liability if tax authority can deny cost basis based on purchase not having been reported/taxed 3. Third party reporting: target company, debtors/lessees that receive notice, registries, brokers (in the case of traded securities)

8 Enforcement strategies: Difficult to assign staff resources because of unpredictable revenue Difficult to conduct audits: even the IRS doesn t do it! Create voluntary compliance through the help of buyers and advisors and rationalizing rules for computing tax liability.

9 Anti avoidance for taxing capital gains For non residents, avoidance and evasion may be closer alternatives than in the domestic context Treaty shopping Indirect transfers through holding companies Tax deferred reorganizations

10 Two ways of taxing indirect transfers Traditional approach: making the gains from the transfer of shares of foreign companies per se taxable: India, Canada, Australia, Japan, OECD and UN Models, etc. Rule capable of application by taxpayers (and withholding agents) themselves May be characterized as a form of specific antiavoidance rule (SAAR) (Foreseeable) risk of multiple taxation of the same gain Entire gain is taxed even if only a portion of the assets is located in the taxing country

11 Chinese general anti avoidance approach What is per se taxable is still the transfer of domestic assets But the existence of intermediate entities is disregarded for lack of business purpose Implicitly, the problems of multiple taxation and proportional taxation are solved, since the intermediate entities do not exist (are looked through) for purposes of taxing gains

12 Do we have to choose among these two approaches? GAAR approach unwieldy when taxable transfers occur very frequently Look through approach may create greater compliance Theoretically, an ex ante, look through approach is possible.

13 Conclusion Despite appearances, the case for taxing nonresidents capital gains is reasonably strong. International tax norms (e.g. in the model conventions) err on the side of leaving the tax base too narrow. Tax evasion is the key issue. Administrative strategies suitable for dealing with evasion need to be taken to produce compliance here.