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Selection of the Form of an International Transaction, Operation, or Relationship
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In most international tax situations, at least two of the countries are determined
in advance. In such cases, the planning process may not go beyond the stage of selecting
the most favourable form of a transaction, operation, or relationship from the tax
point of view.
Dividends, interest, royalty receipts, and capital gains frequently receive quite
different tax treatment at the domestic level and at the treaty level. It would
thus be necessary to take such differences into account in deciding, for example,
whether an investment should take the form of a dividend-producing share participation
or an interest-producing loan. In the case of industrial and intellectual property,
it might be necessary to decide whether the rights should be sold or be exploited
by way of royalty arrangement.
In certain countries, dividends arising from substantial share participations (as
variously determined) receive favoured tax treatment in the hands of corporate shareholders.
This can prove an important consideration in fixing the amount of a proposed shareholding.
The tax consequences of operating through a subsidiary, through a branch office,
or through an independent agent are frequently quite different. These differences
may be crucial in determining the manner in which a proposed operation is to be
conducted.
In many countries, the notion of “permanent establishment” is employed for the purpose
of determining the tax liability of non-resident taxpayers carrying on business
within such countries. In addition, this notion is frequently used in tax treaties
as a basis for the apportionment of taxable income (particularly in the case of
industrial and commercial profits).
This feature in tax treaties can be particularly valuable where there is no tax
at home since it can be used to turn a high tax jurisdiction into a virtual tax
haven for the purposes of a particular transaction or operation.
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