Interational Tax System - Law and Practices
First Principle of taxation
Residence vs source jurisdiction
Rules governing tax residence
Tax residence certificate (TRC)
Tax Identification Number (TIN, PAN, etc)
First principle of taxation
- Income can be earned from economic activities, and income can also be derived from properties that a person owns.
Residence jurisdiction vs source jurisdiction
- Under a residence jurisdiction, income may be taxed under the tax law of a country because of a nexus between the country and the person earning the income, irrespective of the place where the income is earned.
- Under a source jurisdiction, income may be taxed under the tax law of a country because of a nexus between the country and the activities that generate the income, with no reference of the residence of the taxpayer.
- Most countries or jurisdictions adopt both the residence and source concepts in the tax system, such as the U.S. and China. Some of the jurisdictions only adopt the source concept in the tax system such as Hong Kong and Macau. Tax residents are entitled to claim credit for tax paid on foreign income but non-tax residents are not entitled to do so.
- Some jurisdictions like the Cayman Islands and BVI, do not impose income tax and their tax laws do not define residence for tax purposes. Companies that are incorporated in those jurisdictions have no residence for tax purposes.
Conflicts between source and residence
- In case that the same income is taxed by a residence jurisdiction and a source jurisdiction. The source jurisdiction shall take precedence over the residence jurisdiction. In any bilateral double tax agreement, the tax right is allocated to the source country.
Rules governing tax residence
- Tax residence is defined under the domestic legal rules of a country or jurisdiction. For purposes of implementing the exchange of tax information, the OECD has provided a platform where one can search for the rules governing tax residence in respect of individual countries/regions. [read]
