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Advanced Introduction to International Tax Law, Second Edition

Reuven S. Avi-Yonah

This second edition of the Advanced Introduction to International Tax Law provides an updated and succinct, yet highly informative overview of the key issues surrounding taxation and international law from Reuven Avi-Yonah, a leading authority on international tax. This small but powerful book surveys the nuances of the varying taxation systems, offering expert insight into the scope, reach and nature of international tax regimes, as well as providing an excellent platform for understanding how the principles of jurisdiction apply to tax and the connected tools that are used by countries in imposing taxes.
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Inbound taxation: passive income

Reuven S. Avi-Yonah

Extract

The main distinction between taxation of residents and non-residents is that while residents may be taxed on worldwide income, non-residents as a jurisdictional and practical matter can only be taxed on income from sources within the taxing jurisdiction. Initially, non-residents were taxed on domestic source income in the same way as residents, in other words, on a net basis, although the tax was from the beginning enforced by withholding on payments at source. However, it soon became obvious that it was difficult for tax authorities to audit deductions of non-residents who had no business presence in the taxing jurisdiction. Therefore, since the 1930s, non-residents who receive passive income have been taxed on a gross basis, by withholding, and this tax is a final tax with no deductions allowed. For purposes of the foreign tax credit, it is treated as a tax imposed “in lieu of” the income tax on residents. This enables the withholding tax to be credited even though it is not an income tax since it does not allow for deductions.

The scope of the withholding tax on non-residents is in general quite broad. Under US law, the tax is imposed on “fixed or determinable, annual or periodic” (FDAP) income from sources within the US (defined under the rules set out in Chapter 2). While originally the definition of FDAP was intended to limit the scope of the tax, court decisions have determined that “fixed or determinable” means determinable in hindsight (when the payment is made)...

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