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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: active income

Reuven S. Avi-Yonah

Extract

Active (business) income is supposed to be taxed at source based on the benefits principle. However, from the 1930s it became clear that some minimal threshold of presence in the source jurisdiction is required to justify source-based taxation, because otherwise isolated sales into a country could subject a taxpayer to the costs of preparing and filing a tax return, which in that situation could exceed the income from the transaction.

Thus, from the mid-1930s on, two thresholds generally have been used. Under a country’s statutory law, where no treaty is applicable, the threshold is whether the taxpayer has a trade or business (TB) in the taxing jurisdiction. Where a treaty applies, the threshold is whether the taxpayer has a permanent establishment (PE) in the taxing jurisdiction. In general, the PE threshold is higher than the TB threshold. Both, however, require a physical presence (directly or through an agent) in the source jurisdiction, and in the age of electronic commerce this rule may pose a significant impediment to source-based taxation of active income. This is why the EU is currently debating replacing the PE threshold with a “digital PE” for corporations engaged in electronic commerce.

In addition, because a taxpayer that has a TB or PE in a source country can be audited, a question arises whether in that situation all of the taxpayer’s income from that country, including passive income (which ordinarily would be taxed on a gross-income basis under withholding tax rules), should be taxed...

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