International taxation final job

International Taxation

Máster en Comercio Exterior 2014 – 2015 Universidad de Valladolid

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Proposed exercises

Samson Alasia | Carlos Alonso | Ileana Guzmán | Victoria Martínez

Para Texto Completo contactar con Carlos Alonso Rodríguez



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Facultad de Comercio

Máster en Comercio Exterior

2014-2015


José Ignacio Gobernado Rebaque

Samson Alasia Lidimani

Carlos Alonso Rodríguez

Ileana Isabel Guzmán Portillo

Victoria Adriana Martínez Cota

March 2015



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1. Proposed exercise number 1

A Spanish resident company P has undertaken an Investment in country C through a

subsidiary S. P owns 100% of the share capital of S. Country C’s tax system’s main

features are:

Corporation tax rate: 20%

Withholding rate on dividends: 5%

Profit before tax made by S amounts to €1,000,000.

Assuming that the subsidiary distributes all of its profit after tax as dividends and

assuming also that company P made a profit before tax and dividends of €5,000,000.

a) Determine P’s tax liabilities in Spain in the absence of any method to avoid

double taxation.

i. Taxes due by the subsidiary S

TSC =tc * YS

C=€1,000,000 * 0.2 (20%) = €200,000.

Dividend distributed to Parent Company P amounts to €1,000,000 -

€200,000 = € 800,000.

ii. Taxes due by the Spanish Parent Company P

TPC= rc*YP

C= 0.05 (5%) * € 800,000 = € 40,000.

TPSP = tsp*YP

W =tsp* (YPSP + YP

C) =tsp*YPSP + tsp*YP

C= 0.25 (25%) * €5,000,000 +

0.25 (25%) * € 800,000 = €1,250,000 + €200,000 = €1,450,000.

Parent

Company

Subsidiary

S

Spain Country C

Investment:

100%



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TPW = TP

C + TPSP = € 40,000 + €1,450,000 = € 1,490,000.

So, in this case, both international and economic double taxation occur. The Parent

Company is taxed twice on the dividends distributed by the subsidiary at a total

rate of 20% (International Double Taxation). As profit before tax made by the

subsidiary (€1,000,000) is also taxed on the Parent Company. Economics Double

Taxation also occurs in such a way that 30% (25% corresponding to the Spanish´s

corporate income rate plus 5% corresponding to withhold tax rate) of the original

profits are paid.

b) Determine P’s tax liabilities in Spain making use, alternatively, of both

unilateral methods to avoid double taxation as established in the IS Act.

Specify requirements to be met to be entitled to use them.

i. Exemption method

Under the Exemption Method in this case, we have: According with Article

21 from the IS Act, where it establishes the exemption for international

double taxation on dividends (investments made through a subsidiary

company); If a company has paid a similar tax on profits at a minimum

nominal tax rate of 10% (in our case, 20% is similar to 25% > 10%)

derived from activities carried out abroad; it may qualify for an exemption

to avoid international double taxation if the investment has been held for

at least one year.

Taxes due by subsidiary S:

TSC = tc * YS

C=€1,000,000 * 0.2 (20%) = €200,000.

Dividend distributed to Parent Company P amounts to €1,000,000 -

€200,000 = € 800,000

Taxes due by the Spanish Parent Company P:

TPC= rc*YP

C= 0.05 (5%) * € 800,000 = € 40,000.

TPSP = tsp*YP

W =tsp* YPSP = 0.25 (25%) * €5,000,000 = €1,250,000.

TPW = TP

C + TPSP = € 40,000 + €1,250,000 = € 1,290,000. € 1,290,000 ≠ €

1,490,000.



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TPSP = tsp* YP

W - FTC = tsp* (YPSP + YP

C +TSC) – FTC = 0.25 (25%) * (€5,000,000+

€800,000 + €200,000) - €240,000 = 0.25 * €6,000,000 - €240,000 = €1,260,000.

TPW = TP

C + TPSP = € 40,000 + €1,260,000 = € 1,300,000. € 1,300,000 ≠ €

1,490,000.

Using this method we might pay €1,300,000 which is different for this case to

the previous method mentioned above where we had to pay €1,290,000.

c) Evaluate both alternatives in terms of eliminating double taxation.

According to the results obtained using both methods above, it is notable that

using the Exemption Method happens to bring put better outcomes for the company,

since the fiscal amount to pay is lower. We will recommend then to use the Exemption

Method since using it we should pay €1,290,000 instead of €1,300,000. But in both cases

we are not able to avoid the Economic Double Taxation, so it still remains.


Find out the main differences (if they exist) between the general taxation rules on

business profits, interest, royalties and dividends contained in the OECD model and

the rules of the real DTI signed by Spain with the countries of Mexico and Great

Britain.

It is important to take in consideration the following bases and term´s meanings:

The Organization for Economic Co-operation and Development (OECD) has

the mission to promote policies that will improve the economic and social well

being of people around the world. It also measures productivity and global flows of

trade and investment and set international standards of taxes.

The general taxation rules on business profits, interest, royalties and dividends

are immerse in the “Model Convention with respect to Taxes on Income and on

Capital -Convention between (State A) and (State B) with respect to Taxes on Income

and on Capital.”- issued on 28 January of 2008, by the OECD.

o This Convention shall apply to taxes on income and on capital imposed on

behalf of a Contracting State or of its political subdivisions or local

authorities, irrespective of the manner in which they are levied.



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The “Convenio entre el Reino de España y el Reino Unido de Gran Bretaña e Irlanda

del Norte para evitar la Doble Imposición y prevenir la Evasión Fiscal en Materia de

Impuestos sobre la Renta y sobre el Patrimonio”, was subscribed in London, on

March 14th, 2013. And the “Instrumento de Ratificación del Convenio entre el Reino

de España y los Estados Unidos Mexicanos para evitar la Doble Imposición en

Materia de Impuestos sobre la Renta y el Patrimonio y prevenir el Fraude y la

Evasión Fiscal” was suscribed in Madrid, on July 24th, 1992.

Business profits refers to the surplus remaining after total costs are deducted

from total revenue and the basis on which tax is computed and dividend is paid.

Interests are the fees paid for the use of another party´s money. According to the

Article 11 of the “Model Convention with respect to Taxes on Income and on Capital”

(It also matches the regulations of the other analyzed legislations), interests mean

income from debt-claims of every kind, whether or not secured by mortgage and

whether or not carrying a right to participate in the debtor´s profits; this term also

refers to the income form government securities and income from bonds or

debentures.

Royalties stand for the compensation computed usually as a percentage of

revenue or profit of the company, while a dividend is a share of the after-tax profit

of a company, distributed to its shareholders according to the number and class of

shares held by each of them. The Article 12 of the “Model Convention with respect to

Taxes on Income and on Capital” (It also matches the regulations of the other

analyzed legislations) states that royalties mean payments of any kind received as

a consideration for the use of any copyright of literary, artistic or scientific work,

including cinematograph films, any patent, trade mark, design or model, plan

secret formula or process. And the Article 10 of the same legal regulation states

that a Dividend is the income from shares.

To clarify the differences it is shown the matching box presented at the end of this

document as Annex 1.


A company established in Spain for VAT purposes has made the following

transactions during a taxable period:

i. Sales of goods to companies established in Spain: €1,000,000.

ii. Sales of goods to a company established in Austria: €50,000.

iii. Sales of goods to a company established in México: €80,000.

iv. Mail-ordered sales to non-accountable persons in Luxemburg: €60,000. No

mail-ordered sales to this country have been made before.

v. Supply of consultancy services to companies established in Spain: €500,000.

vi. Purchase of goods and services to companies established in Spain: €600,000.



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vii. Purchase of goods to a company established in Poland: €200,000.

viii. Purchase of goods to a company established In Morocco: €150,000.

ix. Purchase of goods of €50,000 from a company established in Italy. These

goods are immediately sold to a company established in Portugal for

€60,000. The goods are delivered directly from Italy to Portugal.

x. Purchase of professional services to a company established in the United

Kingdom: €20,000.

a) Determine VAT payable by Company S in this period.

VAT charged

Corresponding to sales of goods to companies established in Spain

21% of €1,000,000 = €210,000.

Corresponding to purchase of goods to a company established in Poland

21% of €200,000 = €42,000. There is an Intra-community Acquisition. The trader

makes an intra-Community acquisition of the goods in Spain and therefore, must

charge itself VAT at 21%. Since the Spanish Company qualifies for full

deductibility, VAT charged on the intra-community acquisition has no effect on the

VAT payable.

Corresponding to purchase of professional services to a company established in

the United Kingdom. We apply the reverse charge mechanism. The company is

deemed to have supplied the services to itself.

21% of €20,000 = €4,200. In this case, the reverse charge mechanism is basically

the same as the intra-community acquisitions procedure although based on

different rules.

Corresponding to supply of consultancy services to companies established in Spain

21% of €500,000 = €105,000.

Corresponding to Mail-ordered sales to non-accountable persons in Luxemburg.

No mail-ordered sales to this country have been made before. So, since sales have

not exceeded the threshold, sales will be taxed in Spain up to €100,000, which is

the Luxembourg´s threshold. Beyond that amount, sales will begin to be taxed in

Luxembourg.

So, the Spanish Company S will charge: 0.21 (21%) * €60,000= €12,600.

Note: Since the threshold of 100.000 with Luxemburg has not been reached yet,

the entire amount is taxed in Spain.



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exempt intra-community supply. In addition, Spanish company sells the

goods to Company established in Portugal, but no VAT is charged. Finally,

company established in Portugal must charge itself VAT on this purchase

and it will have the right to deduct it according to the general rules.

Thus, this transaction will not appear in the VAT return of the Spanish

company.

• Sales of goods to a company established in Austria: €50,000.

For the sales of goods to a company established in Austria, The Spanish

company invoices the trader for €50,000 and does not charge Spanish VAT

if it gets the trader´s Austrian VAT number (so it is an intra-community

supply).

Total VAT charged

€210,000 + €42,000 + €4,200 + €105,000 + €12,600 = €373,800.

Total VAT paid deductible

€126,000 + €42,000 + €31,500 + €4,200 = €203,700.

VAT payable

€373,800 – €203.700 = €170,100.



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ANNEX 1

COMPARISSION BOX OF MAIN DIFFERENCES BETWEEN THE GENERAL TAXATION RULES ON BUSINESS PROFITS, INTEREST, ROYALTIES AND

DIVIDENDS CONTAINED IN THE OECD MODEL AND THE RULES OF THE REAL DTI SIGNED BY SPAIN WITH THE COUNTRIES OF MEXICO AND

GREAT BRITAIN

Model Convention with respect to Taxes

on Income and on Capital -OECD-

INSTRUMENTO de Ratificación del

Convenio entre el Reino de España y los

Estados Unidos Mexicanos para evitar la

Doble Imposición en Materia de

Impuestos sobre la Renta y el Patrimonio

y prevenir el Fraude y la Evasión Fiscal

Convenio entre el Reino de España y el

Reino Unido de Gran Bretaña e Irlanda

del Norte para evitar la Doble Imposición

y prevenir la Evasión Fiscal en Materia de

Impuestos sobre la Renta y sobre el

Patrimonio

Business Profits

Rule: The profits of an enterprise of a

Contracting State shall be taxable in that

State.

Rule: The profits of a company of a

Contracting State shall be taxed only in

that State.

Rule: The profits of a company of a

Contracting State shall be taxed only in

that State.

Exception: The profits of a company

obtained through a permanent

establishment situated in the other

contracting State may be taxed in this

other State.




Contracting State may be taxed in this

other State.




Contracting State may be taxed in this

other State.

Determination of the profits of a

permanent establishment: The expenses

which are incurred for the purposes of it,

including executive and administrative

ones are deductible, whether the

expenses are incurred in that State or

elsewhere.





ones are deductible, whether the expenses

are incurred in that State or elsewhere.

Won´t be deductible the payments of the

permanent establishment to the central





ones are deductible, whether the

expenses are incurred in that State or

elsewhere.



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company as royalties, fees to use patents

or commissions; unless is a bank by way of

interests for the lend money to the

permanent establishment.

No profits: The mere purchase by the

permanent establishment of goods or

merchandise for the enterprise shall not

be attributed as profits of it.









Comments COMMENT: From the comparison of the

OECD model and that of the Double

Taxation Convention of the two countries

SPAIN and MEXICO. There is not much

difference between them, Basically in

both of the cases the rules are the same.

However to a certain extent with the

Spain-Mexico convention on the 3rd

paragraph which states that deductions

and non-deductions expenses which

allows calculation of the tax payable for

assessment of tax.

COMMENT: It is quite similar with the

OECD model; nevertheless, it is missing

the clause 4 that appears on said model.

Interests

Rule: The interests arising in a Contracting

State and paid to a resident of the other

Contracting State may be taxed in that

other State. They may also be taxed in that

State, but if the beneficial owner of them

is a resident of the other Contracting

State, the tax charged shall not exceed 10

per cent of the gross amount of the

interest.




other State. They may also be taxed in that


is a resident of the other Contracting State,

the tax charged shall not exceed 10 per

cent of the gross amount of the interest, if

the beneficial owner is a bank or 15 per

cent in other cases.




other State.



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Requirements to tax the interests in the

Contract State of which the beneficial

owner is resident: a) The beneficial owner

should be one of the Contract State,

political party or entity. b) The payment of

the interests should be paid by one of the

above. c) The interests should be paid by

loans for 3 years or more, guaranteed by

public institutions of the Contract State, to

exportation uses.

Exception: The rule provisions do not

apply if the beneficial owner of the

interest, being a resident of a Contracting

State, carries on business in the other

Contracting State in which the interest

arises through a permanent establishment

and the debt-claim in respect of the

interest is paid is effectively connected

with it.









with it. In this case would apply the -Profit

Rule-.









with it.

Interests arise in a Contracting State:

Interest shall be deemed to arise in a

Contracting State when the payer is a

resident of that State.

Interest arised in a Contracting State:

Interest shall be deemed to arise in a

Contracting State when the payer is a

resident of that State.

Special Relations: When the payer and the

beneficial owner or between them and a

third person, the amount of the interest

paid, exceeds the agreed amount between

the debtor and the creditor without the

special relation, this applies to the last

amount and the excess is taxed according

















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Comments COMMENT: In this said convention there is

shared taxation in both countries, residence

country and source country.

However in the Spanish-Mexico Convention

on the last paragraph of the article it states

“this article shall not apply only to the latter

amount. In such case, the excess amount may

taxable according to the laws of each

Contracting State, taking into account the

other provisions of this Convention".

COMMENT: No differences are found

between UK-Spain convention and the

OECD model.

Dividends

Rule: Dividends paid by a company which

is a resident of a Contracting State to a

resident of the other Contracting State

may be taxed in that other State.









Taxation in Contracting State: Dividends

paid by a company which is a resident of a

Contracting State may also be taxed in

that State, but if the beneficial owner of

them is a resident of the other Contracting


per cent of the gross amount of the

dividends if the beneficial owner holds at

least 25 per cent of the capital; for the

other cases, shall not exceed 15 per cent.



Contracting State may also be taxed in that


is a resident of the other Contracting State,

the tax charged shall not exceed 5 per cent

of the gross amount of the dividends if the

beneficial owner holds at least 25 per cent

of the capital; for the other cases, shall not

exceed 15 per cent.



Contracting State may also be taxed in

that State, but if the beneficial owner of

them is a resident of the other Contracting


per cent of the gross dividends and 15 per

cent of the gross dividends, when they are

paid for rents of real estate.



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Exemptions: There are exemptions in the

Contracting State of residence of the

company that pays the dividends, when

the beneficial owner is a society resident

in the other Contracting State that owns at

least 10 per cent of the capital or a

pension contributions resident in the

other Contracting State.

Exception: If the beneficial owner of the

dividends, being a resident of a

Contracting State, carries on business in

the other Contracting State of which the

company paying the dividends is a

resident through a permanent

establishment, the regulation to apply is

the one for profits.





company paying the dividends is a resident

through a permanent establishment, the

regulation to apply is the one for profits.





company paying the dividends is a

resident through a permanent

establishment, the regulation to apply is

the one for profits.

Profits in the other Contracting State:

When a resident company of a Contracting

State obtains profits from the other

Contracting State, this other State cannot

charge taxes to the dividends paid by the

company. If and when, the dividends are

paid to a resident of the other Contracting

State, or these are linked to a permanent

establishment.









establishment.









establishment.

Comments COMMENT: As such with the OECD model

this part (dividend) of the Spain-Mexico

convention basically illustrates the same

standards as that of OECD.

COMMENTS: As for this article 10 on the

OECD model and the convention between

the UK-Spain there is difference in the

rate of the gross amount of dividend

whereby Spain may be taxed in Spain.



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Such dividends may also be taxed in the

United Kingdom and according to the

laws of the United Kingdom, but where

such dividends are beneficially owned by

a resident of Spain the tax so charged

shall not exceed:

(a) 10 per cent of the gross amount of the

dividends if the beneficial owner is a

company which controls directly or

indirectly at least 10 per cent of the

voting power in the company paying the

dividends; however the OECD model sets

the gross amount to just 5%, 5 lesser than

that of Spain-UK convention

Para Texto Completo contactar con Carlos Alonso Rodríguez

Economy & Finance

International taxation final job