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International relations are an unquestionable fact, since neither individuals nor states can live in themselves. In this sense, supranational intercommunication is but the logical conclusion of indisputable premises that take on even greater importance, if possible, in the economic sphere.
Indeed, the dynamism of modern reality, characterized by the mobility of people and the international transfer of capital as a projection of a tax system that is not confined within borders, entails the need for States to organize the exercise of the various taxation sovereignties that are considered legitimate to tax the same manifestations of wealth. As a result, a new branch of the legal system was born, International Tax Law, which has its roots in the conclusion of the first tax conventions against double taxation by sovereign States after the First World War, under the auspices of the League of Nations, creating what is known as international taxation.
International Tax Law or International Fiscal Law regulates those situations in which the tax system of two or more countries may be applicable, for example, the case where a company/legal entity that is fiscally resident in Spain obtains income in France. So the key is that there are two points of connection (relationships) in two or more tax systems, one in the country of the source of income (France as an example) and another in the country of residence (Spain). This is what International Taxation is about, analyzing and resolving the conflicts existing between two, or more, tax sovereignties. And this is what is going to be analyzed profusely during this course from a practical point of view. Therefore, the adjective international does not refer so much to the source of legal production, since often there are rules of internal source, as well as the object of the same.
Purposes of International Taxation
Each State decides which connection points it will take into account in applying its direct and indirect taxes, which is done through the establishment by each national regulation of the criteria for being subject to the tax.
In direct taxes, States normally tax the income produced in their territory, regardless of who earns it, and in turn usually tax their residents on worldwide income.
In direct taxes, States normally tax the income produced in their territory, regardless of who earns it, and in turn usually tax their residents on worldwide income.
“Everyone shall contribute to the support of public expenditures in accordance with their economic capacity through a fair tax system inspired by the principles of equality and progressiveness which, in no case, shall be confiscatory in scope.”
Principles of International Taxation.
There are two basic principles in the field of taxation, to which must be added the principle of neutrality.
These are the residence principle (defended by the world’s rich countries or capital exporters) and the source principle (defended by developing countries or capital importers).
Residency principle
Most countries make a distinction when defining the scope of application of income taxes, depending on whether or not the taxpayer is resident in their territory. Generally, residents of a country are taxed on their worldwide income, i.e. irrespective of where the income is earned, resulting in unlimited tax liability. Non-residents, on the other hand, are taxed only on income from domestic sources (source principle). The taxation of worldwide income of residents has generally been justified on the basis of the progressive nature of income taxes, and that in order to achieve full progressivity and in accordance with the principle of economic capacity, all income of that subject should be taxed, regardless of where it has been obtained. Additionally, it has been justified on the basis that the resident in a territory is the one who obtains public services from it (security, health, education, etc.) and therefore should be taxed in that territory.
This connects with how the tax residence of individuals and legal entities is determined in the international sphere. Especially in the DTAs (Double taxation agreements) and in the OECD (Organisation for Economic Co-operation and Development) Model Convention.
Source principle – territoriality
Most countries tax non-residents only on the income they earn in those countries. That is, they tax the income originating in that country, called the source country. In other words, income generated within the territory of the state is taxed in accordance with the internal rules of each country, regardless of the nationality, domicile or place of residence of the taxpayer. This is what Article 13 of the Non-Resident Income Law (Royal Legislative Decree 5/2004, of March 5) does in Spain, which establishes which income has been obtained in Spain to be taxed internally, except for the existence of an applicable Double Taxation Agreement.
It is important to note that there are certain countries that apply the source principle even to the taxation of their residents, as do Bolivia, Costa Rica, Guatemala, Nicaragua, Panama, Paraguay, Uruguay, Hong Kong or Singapore.
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