Objectives of International Taxation

The main objectives of International Taxation are the Neutrality and Equity.

Tax Neutrality

A neutral tax is one that would not influence any aspect of the investment decision such as the location of the investment or the nationality or the investor. The basis justification for tax neutrality is economy efficiency. World welfare will be increase if capital is free to move from countries were the rate of return is low to those where it is high. Therefore, if the tax system distorts the after-tax profitability between two investments or between two investor leading to a different set of investments being undertaken, then gross world product will be reduced. Tax neutrality can be separated into domestic and foreign neutrality. Domestic neutrality is an compasses the equal treatment of any citizen investing at home and citizen investing abroad. The key issues to consider here are whether the marginal tax burden is equalized between home and host countries and whether such equalization is desirable.

Foreign neutrality: The theory behind Foreign neutrality in international taxation is that the tax burden placed on the foreign subsidiaries of domestic companies should equal that imposed on foreign-owned competitor operating in the same country.

Tax Equity

The basis of tax equity is the criterion that all tax payers in a similar situation be subject to the same rules. All Companies should be taxed on income, regardless of where it is earned. This, the income of a foreign branch should be taxed in the same manner that the income of a domestic branch is taxed. This form of equity should neutralize the tax consideration in a decision on foreign location versus domestic location. The basic consideration here is that all similarity situated taxpayers should help pay the cost of operating a government.

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