Several political and economic concerns arise when an individual or corporation operates outside its own country. However, tax is also one of the biggest concerns among all. Before further discussing this topic, let us have a look at the definition of a tax.
James (1998) defined tax as a compulsory levy imposed by the public authorities with no immediate monetary gain. So taxes are necessary, as the government has to spend resources for the public benefits to continue to govern. Likewise, taxes are by far the most significant source of assets for the government.
Taxing the public would be partly strategic but are often based more on sound economic principles. The biggest concern of the government at all times is the public welfare and the economic uplift.
The tax thus is an integral part of government revenue. A sound and perfect taxation system are what every country strives to have. Taxation is not a new thing. History tells a lot about how the concept developed eventually. Therefore, we cannot deny or ignore the role of taxation.
History of Taxation:
Samson (2002) thoroughly explained the history of taxation and how the various forms of taxes emerged from time to time. He defined that taxation appears in history as a component of an ancient culture.
Archaeologists found evidence of taxes dating back to King Scorpion, the first empire in southern Egypt between 3300 and 3200 BCE. Clay tablets, postage stamps, jars and vases uncovered in King Scorpion tomb contain the archaeological record of taxes. The discovery is significant not only because of the taxes but also because the tablets, bowls, and vases contained the earliest examples of the hieroglyphic script, which used symbols to describe constants and shape syllables. Similarly, there were records show King Scorpion I receiving linen and oil as tithes-taxes. A list of names of subordinate and next to the log of numbers are the billing organisations.
Besides, the King used to view the residents as part of his property, over which he had complete control. Building pyramids, participating as soldiers in military wars, and designing levees were examples of public and government tasks carried out by people providing services. The citizens had to do these acts as an obligation to the sovereign. At that time, providing services to the government was much like paying taxes.
Tithing was another term used for donations to the temple in the bible. That was both a kind of tax and donation. Because of inadequate historical records and the societal nature of ancient time, the exact date from which governments enacted tax is unknown.
Over time, the people progressed to the extent that asking everybody to work on the pyramid seemed unrealistic and impractical. Therefore, the government found it more economical to employ certain civilians to do the necessary duties.
While most of the workforce engages in other tasks, they all contributed to the government budget. As a result, the tax is not a modern concept; it has a long tradition that dates back decades.
With the contribution of both public and the government, the country is supposed to rise only. Otherwise, it sounds impractical for a country to prosper without any source of income. So, taxation is not a new thing to practise. The practice of taxation was always there in some form or the other.
Meanwhile, it is the responsibility of the public to cooperate with the government and honestly clear their tax obligations. Countries also need to be honest and follow taxation principles to alleviate corruption globally.
So, the Tax ideas were created in one time and place and then introduced in other times and places.
Let us have a look at the definition of the term International Taxation.
Kelvin Holmes, in his book, gave his definition of international tax. He defined it as the body of legal provisions from various countries governing the taxation of cross border transactions.
Typically, the international tax rules apply to two types of operations.
- The rules apply to the practices of a resident in foreign countries.
- The activities of non-residents in that country.
However, countries do manipulate the taxation system in their desired benefits. Meanwhile, they also try to avoid taxes which further leads to injustice. Let us have a detailed look at what do we mean by using the word corruption and how countries can tackle this;
Gangsterism in the International business Income Tax – A Case of Developed Countries with Business Interests in Third World Countries.
Gangsterism on a global level points out the underworld political corruption, corporate greed, and unavoidable suffering all over the world. The concept of the term Gangsters evolved from its common roots. We get to know many stories and historical figures to fully understand this concept.
The gangsters here mean the economic gangsters who develop their corrupt mechanism for achieving their desired objectives. Similar is the case with gangsterism in the corporate sector. They enforce their agendas on innocent people through undeniably unethical processes. More specifically, they are seasonal traffickers who avoid taxes by repackaging smuggled goods as less expensive commodities. So, there exists a never-ending trail of abuse in the import and export business alone.
Miguel, in his book, defined gangsterism to be one of the reasons the poor is becoming poorer. He said it is not due to the lack of effort or interest but rather the outcomes of violence and corruption they face. The majority of the countries are as poor on average as they were decades ago. Instead of improvement in their economy, we witness a continuous deficit in their budgets.
Kenya is a prime example of this kind of disappointment. They are now as poor as they were in the 1960s. They have also not fully reaped the gains of global growth.
Many factors add to the dissatisfaction in Kenya. Some of the inevitable factors are ethnic conflict, bribery scandals, and other official embezzlement scandals. Out of all these, corruption is the biggest reason.
More specifically, we find Multinational Corporations (MNCs) are under criticism when it comes to gangsterism in the international business income tax.
As clarified by Jerry Brown that the global companies do regulate. Multinational corporations have power over the online media, legislators, authority over the examples of consumption and entertainment.
Solomon (1976) explained how developed countries blame international companies for resource transfers from developing to developed countries. Even after the end of formal colonial relations in the post-World War II era, developing countries see multinational corporations and the global capitalistic system as the reasons for their dependence on developed nations. Instead, the developed nations should work with developing countries for overall economic growth. On the contrary, they keep on ruling and dictating the developing countries.
Furthermore, opponents argue that such companies are not favouring workers in developed countries. Their effect on the number of employees is minimal. They often discourage small firms by successfully competing with them in local capital markets by buying existing corporations, hiring away local skilled workers, and employing expatriatemanagers rather than training local administrators.
Ferdausy and Rahman (2009) argued in their study that the global counterfeit goods market provided coordinated cheating in developing countries. As a result, they created a highly lucrative source of income for themselves.
International companies have an impact on the political dynamics of various governments and nations. These corporations have a history of using their authority to convince politicians to help them become more effective by enforcing national policies that support their overall objective of being more competitive.
People believe MNCs to be the extreme version of western colonialism but in a more nuanced way. MNCs, analysts contend, increase the balance of payments on both the current and capital accounts, rather than improving it. One of the main disadvantages of such reforms being a significant drop in any socio-economic reforms. As MNCs continue to evolve economically and internationally, state oversight and obligations are becoming more numerous.
As multinational corporations continue to dominate most business operations, a new generation of challenges has emerged. MNCs are a negotiation powerhouse due to their vast investment portfolios, and most developed countries are unable to compete with them, allowing MNCs to gain the upper hand. As a result, they can compel the government to enact measures that benefit them to the detriment of local business and market. So far, developing countries need to deal with all these negative situations that are a hurdle on their way to economic prosperity.
Principles of Taxing International Business Income
The subject of taxing international business income has remained under discussion since the beginning of income taxation. We, however, see numerous debates over this concern. Many of the parties support the global tax system. Others go with the notion of taxing income only in the source country. So, when it comes to the ideal way to tax foreign income, none of the parties shares a common ground. The disputes are indeed never-ending ones.
The primary objective of the tax is to generate income for the government. For this purpose, several tax policy considerations exist. Following those factors, a state will progress in enforcing an exemplary tax scheme.
However, Adam Smith (The Father of Economics) already presented some precise rules for taxation to be exemplary. The guidelines which are internationally trusted or followed are known as Principles of Taxation.
The universally accepted principles on which the taxation system relies are; Equity, Certainty, Fairness, Neutrality, Simplicity, Efficiency and Effectiveness.
Both kinds of tax structure, vertical or horizontal tax structure, are in practice. Vertical equity is concerned with how the government charge citizens with various income classes. Horizontal equity examines whether a tax scheme is equal or makes unfair distinctions among taxpayers (Kabinga, 2016).The second principle is Efficiency Principle. Since economic agents try to lessen market distortions, a tax is effective and efficient if it distorts market dynamics as little as possible (Nhekairo, 2014, p. 3).
The aim of taxation should be to be neutral and equal in all types of business practices. A good tax structure should collect revenue while still encouraging or supporting investment growth. Without a tax scheme, there would be a distortion and a resulting deadweight reduction. The tax code increases taxes while diminishing prejudice in favour of or against specific economic decisions.
Furthermore, the taxation should be neutral and equal in all types of business practices. A good tax structure should collect revenue while still encouraging or supporting investment growth. Moreover, the countries, as a result, need to develop a predictable tax structure. That would help them in better business planning and achieving their economic goals in the best possible ways.
According to the author, taxation is critical in fostering equality. Adam Smith went on to say that each state should contribute to the government funding in a proportion that is as close as possible to the income they receive under state security. Inequality harms people. It affects our cultures and relationships. Meanwhile, an improper tax structure would affect the deprived sections.
That is why the tax scheme should be straightforward, simple, and easy to comprehend for the average taxpayer. Calculating and determining their tax obligations should not be difficult for an average taxpayer to understand. The pursuit of simplicity in a tax system does not conclude with legislation; it also includes tax administration. It will necessitate a significant amount of ongoing restructuring in the Revenue Administration. Each Revenue Department is in charge of this.
More Specifically, if we discuss international business income taxation in the UK. A limited company that operates globally need to contribute its revenues to the net earnings of the company. Meanwhile, the company would also be subject to foreign taxes on income earned abroad.
The taxation of company profits started in the early twentieth century. Following World War-I, the direct income tax became prominent. Many countries levied income taxes on all types of income, including income earned overseas, and the United Kingdom is no exception.
The Broad Residence Rule in Britain:
Britain was unique in that it also had a general income tax, enacted by Pitt and Addington after the Napoleonic Wars. Though it never generated more than about 15% of government revenues during the nineteenth century. It was critical in creating a single generable tax on all taxes from all sources for all residents. However, raises during the Boer War fueled calls for a graded tax system.
In 1909, Lloyd George’s people budget included a supertax, which went into effect only after a constitutional battle with the House of Lords between 1906 and 1918. Only after a legislative dispute with the House of Lords did the base levy rise from one shilling to six shillings in the £ (i.e., from 5% to 30%), with a supertax of 4/6 (a peak rate of 55%). The overall yield grew seventeen-fold as a result.
As a result, the worldwide income of British residents is subject to broad and straightforward taxation legislation. They clearly defined that all UK citizens would be taxed at the same level, regardless of the origin or source of income.
So, let us have a look at how a common resident in the UK would be taxed if he is operating internationally as well;
Double taxation and the Issue of Double Taxation in taxing International Business Income
Taxes are the primary source of government funding and source of revenue. Therefore, regardless of where you do business, you must pay income tax on your international earnings. Anything you receive outside of your home country is considered foreign revenue. As a result, the UK government will almost certainly tax you on foreign revenue, foreign investment income, overseas lands, and overseas pensions. That creates the issue of double taxation for the taxpayers who operate globally as well.
That is why the tax officials are also concerned with the issue. They try to come up with appropriate methods of managing and preventing double taxation. They aim to protect their tax interests and also the rights of taxpayers. Meanwhile, they ensure that taxpayers pay their equal tax payments to their places of residence and origin.
So, being a United Kingdom citizen, it becomes your responsibility to pay income taxes. In this case, you are taxed twice: first by the UK government and then by the country from which your money originates.
So, any firm operating outside the United Kingdom be taxed twice on their international business income. That is how the concept of Double Taxation works. Thus, the UK government has the power to tax the income received by UK citizens and residents. That will result in double taxation, where the taxpayer is required to pay both the UK and international taxes.
That is because you have to inform HMRC (HM Revenue and Customs Department) about your foreign incomes. Similarly, the country where you are running your business will have its own income tax rules.
It is not only your income that will be taxed twice. We already discussed the property that you own abroad would also be taxed twice. For example, if a UK resident owns property in the USA, the resident needs to pay both HMRC tax on their global income. Similarly, the resident will also pay taxes on rental income in America.
Double taxation might bring serious impediment to the growth of cross-border commerce and investment. Secondly, it might lead to income tax evasion. As a result, the sovereign states can enter into a mutual agreement known as the Double Taxation Treaty or Double Taxation Agreement. The purpose behind this is to eliminate the pressure of double taxation. That is the ideal way to address the issue of double taxation. Likewise, they would better remove tax barriers between nations and encourage trade between the two.
According to Braun and Zagler (2014), the number of double taxation treaties has increased dramatically over the last two decades. The number of treaties signed has reached 3000, accounting for up to 65 % of all treaties signed worldwide, where developing and developed countries are gradually cooperating.
Similarly, according to Pham, Pham, & Ly (2019), double taxation might cause a hindrance in the growth of foreign trade. Trading within state borders would become preferable since the seller only pays tax in one state. International trade is a widely accepted business fact that benefits the countries economically.
Therefore, the Countries must embrace the concept of international trade and businesses. Meanwhile, they also argued that if the trade level grows, then the two states should enter into a double taxation treaty. The countries prefer tax treaty as it is ideal in achieving economic goals.
The economists and other tax specialists prefer tax treaties since they will establish the taxation rights between two contracting parties. The double taxation treaty establishes the taxing rights between signatories for any form of income and asset. Additionally, the treaty aims to harmonise the meanings of tax terminologies among contracting states. The repayment of tax debts will be made possible as a result of uniform rules and procedures.
Secondly, the double taxation treaty also prevents tax evasion and avoidance by exchanging information on taxpayers and providing a legal mechanism for administrative cooperation and assistance in tax matters between the two governments. As a result, the treat is supposed to aid the establishment of economic ties between signatories.
Thirdly, the tax treaty leads towards promoting tax equality. The convention on double taxation ensures that taxpayers with multiple citizenships in the same case are treated equally in terms of taxation. The treaty will effectively preclude conflicts between citizens of the contracting parties. It will define the forms of taxable income and assets along with the delimitation of taxing rights.
Due to tax treaties, contracting states have agreed on a system for resolving disputes arising from relevant party’s tax laws to cross-border transactions. The resolution of conflicts arising out of the tax treaty is dependent on a joint arrangement between the competent authorities of both tax parties.
Likewise, to solve this double taxation issue, the United Kingdom made agreements with several countries. These treaties/agreements seek to eliminate the problem of double taxation on your international business income. The company can also seek exemption from any tax that they would otherwise pay twice (i.e., first in the foreign jurisdiction and again in the UK. That would greatly help a UK corporation having a branch in a foreign jurisdiction in which the UK has a double taxation treaty/agreement. The treaty would specify which country has the authority to collect taxes.
However, there are no hard and fast rules governing how these operate. Different forms of revenue are taxed twice if there is double taxation. In many cases, the parties may have taxing privileges, so you will be entitled to exclude some of the tax collected.
Objectives of International Tax Rules:
Kelvin Holmes explained why taxation is necessary and also defined the objectives of international tax rules. Kelvin Holmes pointed out the first objective as;
- National Wealth Maximisation
International taxation must ensure that a country receives equal shares of earnings from cross-border transactions. Meanwhile, international taxation improves the well-being of the citizens. Along with that, there would be an improvement in the domestic tax base of the country also.
- Tax Justice or Equity
Imposing the same level of taxes on the taxpayers who have the same income level or ability to pay leads towards tax equity. The taxes must be equal for all regardless of the origins of income. However, this is only possible for the government to impose a tax on its citizens, but the government has no say when it comes to non-residents.
- Economic Efficiency
Economic efficiency is associated with the improvement of the domestic economy. According to Kelvin Holme, the imposition of tax must be neutral between the range of various investment opportunities that an investor faces obtaining an impartial result.
As a result, overseas taxation is the most effective way to boost the economic situation. Meanwhile, the government should consider various taxation options to raise domestic revenue. International taxation affects a country’s spending level. The global investment would be enticed even further by a sound and realistic taxation mechanism. That is beneficial to both the government and the general public.
Justification for Taxing International Business Income & Transparency in Taxing Policies, Processes, and Implementation
Eskelinen & Laitinen (2015) attempted to defend global taxation from a just standpoint. They offered rational conceptual motives for taxation justifications. They defined that taxes are the best way to ensure something. It is perfect for providing social and humanitarian support to meet people’s basic needs. So, it is something that government should impose.
The taxation helps the government in facilitating the less deprived. Meanwhile, it is the taxation revenue through which the government funds all the grants and other necessary payments. The same applies when it comes to meeting universal rights. The writer says that universal rights are highly dependent on global taxes. As a result, a rational taxation scheme should be there to guarantee the continuation of these rights.
When a local authority fails to meet basic needs or respect universal rights, another international body or organisation steps in to fill the void.
After all, expecting the individual states alone to solve every issue on their own is impractical.
Under these rights, the public would have access to necessities such as food, shelter, education, and water. Government funds for meeting public needs are necessary. People also find taxation a better way of helping the deprived and low-income groups. It is preferable to grants or charitable contributions. All of these opportunities must be easily accessible to the needy. The government must fulfil its obligations to assist those who are less privileged.
That is how one finds the taxation beneficial and justified both on a domestic and international level.
Second, taxes help in the provision of public services. There may not be a more well-known example of wealth redistribution. This justification is unarguably applicable to the global domain. Examples of such goods include the police, the jurisdiction, infrastructure, and so on. There are some of the services that no private company provides. The public is dependent on the government when it comes to public goods.
Affecting the distribution of income and wealth is another justification behind taxation. Thus, taxation is a good way of promoting social justice and also ideal for income redistribution. Besides, the government can use taxation to encourage or discourage patterns of economic behaviour. For example, an increased VAT discourages consumption and promotes savings over it. All in all, taxation is the most reliable tool for the redistribution of income.
Every country has its tax policies; however, the process, procedures, or implementation might vary. The tax policies that government devise should follow the basic principles of taxation. That is how the government can alleviate corruption and introduce transparency in tax division and implementations. We cannot deny the importance of a transparent tax policy. It is the most vital tool for the country. Likewise, the tax policy should encourage savings and investments. The investments would directly uplift the economy and lead the country towards economic prosperity. Also, it is an investment-friendly tax policy that increases revenue for the government. Therefore, if the government wants to encourage investors and reduce the hindrance or unpredictability in the face of investment, they need to devise a clear and effective tax policy. That would for sure increase the growth potential of any economy. Too much regulatory power in the hands of tax officials hinders the impedes the governance goals. The tax authorities, instead, need to encourage favourable choices to support investment. The policymakers need to be effective in making the policies and implementing them. That is how the nations prosper. Meanwhile, the tax burden should be equally divided on various income groups to ensure equality and just in the taxation system. The correct policy rules are as important as the taxation system itself.
Discussion and Conclusion
From the above discussion, it is evident that tax is mandatory both for the government and the citizens. Economic prosperity is dependent on government revenue. Well, tax forms one of the parts of government revenue. To keep the nation and its economy running smoothly, the government collects taxes. The tax amount is helpful to raise public welfare and the economy at all levels. Thus, we cannot ignore the importance of a sound and flawless taxation system. It is not a new term; we witness that taxation has already been a part of ancient cultures.
Though, the precise date when governments began enacting taxes is unclear. Providing services to the country was a form of taxation, much like we pay taxes now. Global taxation is not free of corruption. Political corruption and financial greed are still evident among the nations. The direct influence of developed countries in developing countries would only make them vulnerable. On average, the majority of countries are now as bad as they were decades before.
Following and devising tax policies based on principles of taxation is the only solution. That is how nations would benefit without harming each other. In addition, the basic principles of taxation would reduce discriminations against particular countries.Fairness and equity are the only ways to accomplish the goal of taxes.Coming towards UK residents, if you operate outside the UK, you will have to face the double taxation issue. That is why the UK government agreed to the taxation treaty. That is the best possible way to alleviate the burden of double taxation. As a result, we cannot deny the significance of taxes. Taxation aids the government in every way possible to develop the country and improve the overall economy.
By Joseph E Attah, BSc, ACA, ACIB, AAIA, MBA
Lead Consultant/CE, Adroit Accountants Ltd, Ipswich England.
The writer, Joseph Attah is the pioneer Managing Director/CE of Adroit Accountants Limited. An accountancy and taxation service provider firm in the heart of the city of Ipswich in Norfolk county of England.
References:
Samson (2002), history of Taxation, The International Taxation System pp 21-41,
https://link.springer.com/chapter/10.1007/978-1-4615-1071-0_2
Kelvin Holmes, International tax policy and double tax treaties, https://books.google.com.pk/books?id=4jZ1z4JnvAAC&printsec=frontcover&redir_esc=y#v=onepage&q&f=false
The Chittagong University Journal of Business Administration, Vol. 24, 2009, pp. 111-137
Impact of Multinational Corporations on Developing Countries
Shameema Ferdausy1
Md. Sahidur Rah
Ferdausy and Rahman (2009), impact of Multinational Corporations on Developing Countries, the Chittagong University Journal of Business Administration, Vol.24, pp.111-137.
Braun and Zagler (2014), An Economic Perspective on Double Tax Treaties with(in) Developing countrie, 6(3), https://www.ibfd.org/IBFD-Products/Journal-Articles/World-Tax-Journal/collections/wtj/html/wtj_2014_03_int_4.html
Anh D. Pham & Ha Pham & Kim Cuong Ly, 2019. “Double Taxation Treaties as a Catalyst for Trade Developments: A Comparative Study of Vietnam’s Relations with ASEAN and EU Member States,” Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 12(4), pages 1-16 https://ideas.repec.org/a/gam/jjrfmx/v12y2019i4p172-d290195.html
Eskelinen and Laitnen(2015), Taxation: its justification and application to global contexts, Philosophical Explorations of Justice and Taxation. National and Global Issues. Springer. pp. 219-236 (2015)
Kabinga, Paper 5 of the Introduction to the Project “Tax Justice & Poverty” Principles of Taxation, https://www.taxjustice-and-poverty.org/fileadmin/Dateien/Taxjustice_and_Poverty/Introduction/05_Principles.pdf
Nhekairo, W. A. (2014). The Taxation System of Zambia. Lusaka: Jesuit Centre for Theological Reflection.
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