Adventures of international taxation;

              THE ADVENTURES
OF INTERNATIONAL
TAXATION
By ANDRE A. AVERSA
Director of International Tax
Touche Ross International
"Is it lawful to pay taxes to Caesar or not?" When Christ
was asked this question 2000 years ago, His reply was
simple: we should render to both God and Caesar.
I do not want to distort the conflict between the world
and the spirit in this story, but it may be noted that it
made no reference to double taxation, a concept of taxa­tion
that dominated the centuries until 1907, when in
Genoa, Italy, a group of scholars held the first international
conference to meet the new challenge of worldwide trade.
The last 68 years show progress toward what I believe is
the ultimate goal: rendering one account to the Caesars
of our world on a basis acceptable to all of them.
Finally, after World War II, the United States joined in
this effort. At present, while it is negotiating a series of
treaties, the United States has, in common with most
of the industrialized nations of the world, tax laws that
have reached high levels of complexity. In the developing
nations, on the other hand, such laws are often so brief
and cryptic that planning a business transaction can be
rather adventurous. For example, in one Arab country there
are no written tax regulations whatsoever. Between these
two extremes, of course, the complexity of tax rules varies
from nation to nation.
A common thread among tax rules is that they are de­signed
with two objectives: (1) to raise revenue to finance
public activities, and/or (2) to encourage or discourage
certain private activities. For instance, in the States, allow­ance
of the investment credit is designed to stimulate
capital outlays as a means of creating increased employ­ment.
Whereas in Brazil, incentives are available when a
business invests in property, plant, and equipment in order
to encourage manufacturing goods for export. The meas­ure
is designed to attract capital to Brazil, create jobs, and
improve the country's balance of payments.
Obviously, each country's tax laws do not fit into a neat
symmetrical pattern; they are, rather, the product of what­ever
priorities and problems are faced by the nation and
its people. Let's discuss a couple of examples in which a
business transaction takes place in two countries, and see
how the tax laws of the two nations must be correlated so
that the taxpayer does not face an excessive tax burden.
The Case of Corporation "X"
First, we have a hypothetical US corporation, which for the
first time is planning to expand its operations into foreign
markets. Initially there will be salesmen, but eventually it
will have manufacturing facilities located abroad.
To arrive at the optimum international tax plan consist­ent
with operating realities, a number of factors must be
considered. While there is no prescribed order, these fac­tors
do require an analysis of the tax laws of the United
States and the other country concerned, as well as any
agreements or treaties between the two.
For example, it must be determined whether or not the
activity planned in the foreign country will subject the US
corporation to tax in that country. If there is a tax treaty
(and it must be realized that there are many countries with
which the US has no such treaty), an answer may be ob­tainable.
Typically, industrial or commercial profits gen­erated
by a resident of one treaty country are exempt in
the other treaty country, if the taxpayer does not main­tain
a permanent establishment in the other country. Since
the definition of "permanent establishment" varies from
treaty to treaty, it is difficult to generalize about this term.
It is used often but rarely defined.
In addition, the appropriate form of organization must
be selected. This will involve studying the laws of both
countries. Questions to be considered here include the
current deductibility of losses, insulation of the US cor­poration
from liability, effective tax rates and foreign tax
credits, differing methods of accounting, and commercial
and trade regulations. The US corporation could decide
to use an unincorporated branch of the US corporation, a
separate US corporation, a wholly-owned foreign sub­sidiary,
or a partnership. Other possibilities which must be
considered include the use of a foreign holding company,
a Domestic International Sales Corporation (DISC), a West­ern
Hemisphere Trade Corporation (WHTC), a financing
subsidiary, or an offshore captive insurance company. This
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