For the worldwide/global operation of firms, taxation plays a vital role. International taxation has become the core of various financing decisions which includes international investment decisions, international working capital decisions, fund raising decisions and the decisions related to dividend and other payments. The tax decision is also relevant in domestic firms also.
The managing of taxation is an extremely difficult issue for the international corporations. The various reasons are given as follows:
- The firms are supposed to work in several tax jurisdiction or authorities where the tax rates are diverse and also the administration of the tax system is not uniform.
- The ultimate load of tax in the framework of international firms is determined by means of a more complex interaction of varying descriptions of the tax base.
- The difference in tax treatment in different nations will direct to distortions in worldwide trade and investment. The companies which are situated in the low-tax country can have a periphery over other firms in worldwide market. There are possibilities to divert the investment to those countries that have low cost rates.
- The overlapping takes place between the international firms with different tax jurisdictions, utilize the arbitrage opportunities and retain an edge over the domestic firms.
The bases of international tax system are:
- Tax neutrality – The neutrality of international tax system is important because it must not affect the economic efficiency. If the tax is neutral then it will not influence the locality of the investment or nationality of the investor. The capital can shift from a nation with lesser return to a nation with higher return. Therefore, resources will be allocated well, and the gross world output in turn will be high.
- Tax equity – The principle of tax equity states that all equally positioned tax players contribute in the cost of operating the government according to the equal rules. The idea of equity can be understood in two ways. The first one states that the input of each tax player must be consistent with the amount of public services as received. The second idea is that the contribution of each tax player must be in terms of their ability to pay. The ability to pay means the one with greater ability is likely to pay a larger amount of tax.
- Avoidance of double taxation – The avoidance of double taxation states that one must not be taxed twice for the same income. However, if the post-tax income is sent to the foreign countries then in that case the receiver of such income is taxed again. This implies the same income is subjected to double taxation. As an alternative, the requirements of foreign tax credits may be formed in the domestic tax system.
There also exist some tax laws which prevent the tax through artificial transactions such as transfer pricing. In addition, the corporate structures will help to reduce the overall tax burden to the enterprise.