FUNDAMENTALS OF INTERNATIONAL
TAXATION
Taxation – Lecture 1
About the course
• Required literature:
 RADVAN, Michal. Czech Tax Law - 3rd ed. 3. vyd. Brno:
Masarykova univerzita, 2010. 65 s. Fac. of Law Publ. no. 4
(Edition of textbooks). ISBN 978-80-210-5269-7.
 Recent tax policy trends and reforms in OECD countries. Paris:
Organisation for Economic Co-operation and Development,
2004. 170 s. ISBN 9264016570.
 MCGEE, Robert W. The philosophy of taxation and public
finance. Boston: Kluwer Academic Publishers, 2004. viii, 313.
ISBN 1402077165.
• Recommended literature:
 OECD/G20 Base Erosion and Profit Shifting Project 2015. Final
Reports.
http://www.oecd.org/ctp/beps-reports-2015-executive-
summaries.pdf
About the course
• Requirements for successful accomplishment of the course:
 85% participation at seminars is required.
 60% of final grade can be received during final exam and 40%
of final grade can be received during seminars. 40% is splitted
into 2 midterm tests (10%) and 1 presentation (20%) or activity
at the seminars (20%).
 Minimum required amount of for the midterm test is 60% of
correct answers.
 Final test is a written exam.
Content
• Fundamentals of taxation
• Tax system and its components
• International tax legislation and its harmonization
• Tax residents and nonresidents
• Tax planning activities of MNCs
• Literature
• Appendix: double agreement of CR
Fundamentals – role of government
• One of the threshold questions one must ask when discussing the
role of taxation and public finance is: "What should government
do?" This question is important because anything that government
does must be paid for by someone. The more things that
government does, the more things that people must pay for. Getting
back to the question, the easy answer is that government should do
things that individuals cannot do for themselves. This argument is
basic and pervasive within any society. The problem is that all
services which government provides cost money. A better
question would be: Should someone do something to alleviate
this perceived problem, and if so, who should do it?
 Private sector - the evidence is clear that the private sector
can do just about anything better and cheaper than the
government. The post office is one of the easiest targets.
Where private letter delivery has been tried, it has been found
to be faster, more efficient and cheaper. The problem with
Fundamentals – role of government
private delivery is that government arrests anyone who tries to
compete against its first class mail delivery service
monopoly by offering better service at lower cost.
 Government – since the private sector can do just about
anything better than government, the question then becomes
what do we need government for? Government should fulfill
functions that benefit the vast majority of the people:
protecting things like property and contract rights,
preventing internal violence and fraud by criminals and
external violence by foreign armies. Those are the only
functions that benefit the vast majority of the people. Every
other thing that government does protects some special
interest, usually at the expense of the general public.
 Doing nothing – perhaps, some things should not be done
at all, either by governments or by individuals. To rephrase
the argument in clearer terms: Something is not perfect;
Fundamentals – role of government
therefore, somebody has to do something about it. That
somebody may be government, but it may also be someone
working in the private profit sector or in the nonprofit sector. Or
it may be nobody at all. Just because someone perceives
that something is not perfect, it does not follow that
anything needs to be done to improve the situation.
Sometimes inaction is better than taking action. That is
definitely the case when any action taken will make things
worse rather than better. So the argument that something is
wrong, therefore someone must do something about it is
structurally defective because it omits one possibility – do
nothing.
Fundamentals – tax evasion
• Can tax evasion be ever justified on moral grounds?
 Is taxation a theft? - Theft is generally defined as the taking of
property without the owner's consent. But when it is some
government that does the taking, it is called taxation.
However, there is a difference between taxation and robbery
because robbery is a one-time thing, whereas taxation is
something that occurs at regular intervals, which makes it
more akin to exploitation or slavery.
 Is tax evasion always unethical or only sometimes? Certainly
if tax evasion is never unethical, it logically follows
that someone who is guilty of it should not be punished by
the profession. But what if it is illegal? Illegal activities
should be punished. Or should they?
Fundamentals – tax evasion
From existing views it is evident that individuals act
unethically just because they broke some law. It depends
on what law they violated, if the law is unjust, then there
seems to be no ethical problem with breaking such a law.
 Jewish view on ethics of tax evasion – based on
interpretations of the Jewish literature on tax evasion it is
possible to conclude that in most cases tax evasion is
unethical, but there are some exceptions. For example,
the state is supposed to be the servant and the people the
masters. If and when it gets to the point when the state
starts acting like the master and starts treating the
people like servants, perhaps tax evasion is not
unethical.
 Christian view on ethics of tax evasion - Christian
writers cannot agree on whether, and under what
circumstances, tax evasion might be unethical: some
Fundamentals – tax evasion
Christian scholars believe that there is nothing ethically
wrong with evading indirect taxes and others think that it
is ethically improper to evade any tax, even if the state
does evil things with the proceeds.
 Islam view on ethics of tax evasion - according to Islam,
people have a moral obligation to pay zakat for the
support of the poor and for the legitimate functions of
government. Thus, evading one’s duty to pay zakat is
classified as an immoral act. The Islamic system of
taxation is a voluntary one, although Islamic literature
makes it clear that a government is justified in forcing
people to pay taxes if the amount raised by zakat is
insufficient to cover all the legitimate costs of
government. However, “This right of interference with
the individual’s personal property will be limited to the
extent required by the general welfare of the society
...”
Fundamentals – tax evasion
 Emerging economies view on ethics of tax evasion – in
many emerging economies people do not pay taxes
because of the widespread feeling that the government
does not deserve the fruits of people's labor. There are
a variety of reasons why this feeling is so widespread but
the basic reasons revolve around corruption and the
lack of services.
 Is aiding and abetting tax evasion illegal? – If there is
nothing ethically wrong with tax evasion, it seems to follow
that attorneys, accountants and financial planners should
not be penalized for advising their clients to evade taxes,
or even for helping them to evade taxes. Yet it is probably safe
to assume that the vast majority of professional codes of
ethics for attorneys, accountants and financial planners perhaps
all - would consider any kind of activity that aids in
tax evasion to be unethical and subject to sanction.
Tax system - tax vs. fee
• Tax is an obligatory amount with a laid down rate which is more or
less regularly collected from the incomes, value and property of
economic subjects to the public budgets on the irrecoverable
principle.
• Fee is an obligatory irrecoverable amount collected by the state or
other public corporations for certain legal acts.
• To tell the truth, the difference between “tax” and “fee” is really
more theoretical than practical. For example in a lot of towns the
“dog charge” is in fact the “dog tax”: the holders of dogs do not get
any plastic bags for the excrements, municipality does not install
waste baskets, does not clean pedestrians etc. On the other hand,
the “road tax” is rather “road fee” because the whole revenue must be
invested by the State Fund of Transport Infrastructure to
modernization of existing roads and building new ones.
Tax system - functions of tax
• There are three functions of tax:
 The fiscal function is the most important. Its purpose is to
guarantee the incomes of the state and municipal budgets
and other budgets because taxes are the most important
incomes for these budgets.
 Regulation function is closely connected with fiscal function.
Using taxes, the state can effectively correct the incomes
while transferring money between economical subjects
and public funds. A good tax system can affect the
effectiveness of economy. But the state must be very careful in
tax rates: the tax burden must respect the tax capacity. Too
high taxes do not motivate people to work, to run a
business.
 Stimulation function means using tax instruments to
impress an economic subject. It is realized in using several
tax rates that can stimulate the development of some
activities or stifle others.
Tax system - components of tax
• The basic structural components are (based on evidence from CR):
 Subject of taxation - is a legally relevant situation described
by law that is connected with a tax duty. It is usually obvious
what the object of taxation is just from the title of the tax.
Incomes, possession or using property, transfers with property,
consumption, etc. can be the object of taxation.
 Correction components - are some possibilities for the
taxpayer not to pay the tax or pay less than it is usual. Tax
reduction and exemptions from taxation are most common.
 Czech tax administration knows two types of taxpayers:
 a natural person or legal entity whose income, property
or legal acts (legal transactions) are object of taxation,
 a natural person or legal entity that has responsibility to
calculate the tax, collect it or withheld it and transfer it
in time to the tax administrator.
Tax system - components of tax
 Tax base - the quantity of the object of taxation. As the tax
base is usually economic income (for income taxes), value
(for VAT, inheritance tax, gift tax, real-estate transfer tax, partly
excise taxes), area (real-estate tax) or something different (for
example combination of weight and number of axles or engine
capacity for the road tax).
 Tax rate - determines the amount of the tax to the tax base.
Several kinds of tax rate are distinguished:
 fixed tax rate - fixed amount of money irrespective of
the quantity of the tax base,
 percent tax rate - tax includes several percent of the tax
base; in CR there are 3 possibilities for percent tax rate:
 linear tax rate - the same percentage for a different
tax base,
 regressive tax rate - the higher the tax base, the
higher the percentage,
Tax system - components of tax
 degressive tax rate - the higher the tax base, the
lower the percentage (this kind of tax rate is not used
because of its injustice).
 Conditions of payment - are usually terms and
fundamentals of payment. Some taxes are paid in one term,
others can be paid in several part payments. Sometimes the
taxpayer is obliged to pay advance payments before he
knows his annual tax duty.
 There are numerous tax administrators in CR but most often
the tax administrator is the tax office. In other situation taxes
can be administrated by other public administration
bodies, by courts or by customs offices. The most important
task for a tax administrator is to make everything so that all the
taxes will be collected in time and in the right amount.
 The budget destination is very important for all citizens; it
means which of the public funds will get collected money.
Tax system – DT and inDT
• Direct tax is a tax paid directly by an individual or organization to
the imposing entity. A taxpayer pays a direct tax to a government for
different purposes, including real property tax, personal property tax,
income tax or taxes on assets. A direct tax cannot be shifted to
another individual or entity. The individual or organization upon
which the tax is levied is responsible for the fulfillment of the tax
payment.
• Indirect tax is a tax that increases the price of a good so that
consumers are actually paying the tax by paying more for the
products. An indirect tax is most often thought of as a tax that is
shifted from one taxpayer to another. Indirect taxes can also be
defined as fees that are levied equally upon taxpayers, no matter
their income. This is a primary reason why they are thought of as
taxes that are passed on, as the price of the tax is compensated
for by simply increasing the overall price of the good or service.
Some economists argue that indirect taxes lead to an inefficient
marketplace and alter market prices that don't match their equilibrium.
International tax legislation
• First tax provisions could be find in articles 95 – 98 (99 with effect
from July 1, 1987 in Single European Act) of Treaty of establishing
The European Community.
• Some tax provisions were changed during the years. The most
significant ones were:
 The Treaty of the European Union (92/C 191/01) in
Maastricht.
 The Treaty of Amsterdam (97/C 340/01).
• Tax harmonization in Treaty of establishing the European Community
is supported by Articles 94-97 (new numbering), which converges
legislation.
• Basic tax provisions were not substantively affected by Treaty of
Lisbon (2007/C 306/01) December 13, 2007 with effect from
December 1, 2009.
Harmonization - DT and inDT
• Highly divergent direct tax rates across Europe have raised
questions about the limits of national sovereignty over direct
taxes and the need to harmonize corporate taxes.
• The new wave of flat tax regimes, implemented by some of the new
EU Member States, has intensified the necessity of corporate tax
base harmonization.
• Decreasing direct tax rates have attracted more investors to
these countries even if the tax regime is not the only factor for
such a decision.
• For the first major step in harmonization of direct taxes can be
considered the acceptance of Arm´s length Standard (ALS) in 1963.
• A major breakthrough in deepening cooperation between Member
States caused Directive 77/799/EEC, which introduced a
mandatory exchange of information on the main direct taxes.
Harmonization - DT
• The new Directive 2011/16/EU:
 is valid from January 1, 2013 and repeals directive 77/799/EEC.
 from 2015, it orders reciprocal exchange of all available
information concerning majority of income.
 applies to all taxes and insurances other than VAT and
excise duties.
• Directive 20010/24/EU, which is valid from January 1, 2012 contains
recovery of claims.
• In the year 1990 was signed Convention on the elimination of
double taxation in connection with adjustment of profits of
associated enterprises (90/436/EEC), which is valid from year 1995
and sets out principles and methods on how to avoid double
taxation. The validity of Convention 90/436/EEC is always
automatically renewed after 5 years. From 1993 for easier information
tax identification number is being used.
Harmonization - inDT
• The first Council Directive 67/227/EEC on the harmonization of
legislation of Member States concerning turnover taxes was accepted
April 11, 1967. This Directive defines the value added tax as a
general turnover tax on consumption specified by percentage of
selling price.
• Second Council Directive 67/228/EEC defines the subject of VAT
and defines the basic components such as: place of taxation, the
national territory, the supply of goods and services and taxable
person. Latter this Directive was replaced by Directive 2006/112/EC
on the common system of VAT with effect.
• Sixth Directive 77/388/EEC is deepening harmonization of VAT
and eliminates taxation of imports.
• Directive 92/12/EEC was crucial for harmonization of excise
duties. Directive laid down a general scheme for collection of
taxes, adjusted the production, processing, holding and
movement of products subjected to excise duty.
Harmonization - inDT
• Directive 2008/118/EC on general arrangements for excise duties
has replaced Directive 92/12/EEC. Excise duties: Mineral oils,
Alcohol, Tobacco products, Energy products etc.
Tax residents and nonresidents
(Based on evidence from CR)
• Tax residents – natural persons with a residential address in the
CR or individuals who usually stay in CR (it means for at least 183
days in the relevant calendar year, either continuously or
intermittently), these persons are liable to tax on income arising
from sources in both CR and abroad.
• Tax non-residents – natural persons not mentioned above as tax
residents, students from abroad or patients staying in CR for the
purpose of medical treatment, they are liable to tax incomes
arising only from sources in the Czech Republic.
Tax plan-g activity of MNCs – tax plan-g
• The debate 
In recent years, the international tax planning strategies of
multinationals have become a source of international debate:
What is the international tax planning debate about? Who
are the key players? And importantly: what do companies
actually do when they engage in international tax
planning? The debate in international tax law has largely
focused on the tax-paying morale of multinationals.
 Over the years countries worldwide have been taken
legislative actions to reduce the international tax planning
opportunities for multinationals as tax planning can
significantly reduce tax revenues for countries. Sometimes,
countries undertook such action on their own, other times, they
work together internationally.
 The fast pace in which globalization of multinationals is
taking place, and the growth of the digital economy have
Tax plan-g activity of MNCs – tax plan-g
increased the possibilities for multinationals to engage in
tax planning activities. The debate regarding the tax morale
of multinationals, with the intensity and with the emotion that it
has now, came to full force when the recent financial crisis
hit national economies.
 Recently, fueled by the momentum created by the financial
crisis, the work of the EU and in particular, the OECD's work
on addressing aggressive tax planning has taken flight at
the request of the G20. On July 19, 2013, the OECD
released an action plan, identifying 15 action points to
address what the OECD calls Base Erosion and Profit
Shifting, or BEPS, that is addressing the tax reduction
strategies of multinationals. Since that time the OECD has
been working continuously with member, non-member
countries, and other stakeholders to develop the 15 action
points into international tax law changes that can be jointly
implemented by countries worldwide.
Tax plan-g activity of MNCs – tax plan-g
• OECD –
 As the end of the 19th century and the beginning of the
20th century saw an uprise in post-war economic activity,
the issue of international juridical double taxation became
more pressing. Consequently, individual states entered into
bilateral agreements for the avoidance of double taxation.
First bilateral treaties were concluded on a relatively small
scale between neighboring countries.
 After the First World War an extensive treaty network
developed in central Europe (e.g. Germany-Italy,1925; UKIreland,
1922; USA-Sweden and USA-France, 1939). This
patchwork of differing bilateral treaties stimulated the League
of Nations (predecessor of UNO) to develop a kind of
uniform, model tax treaty. In 1921, it asked four experts on
public finance (Rotterdam, Turin, New York, and London) to
prepare a report of double taxation which led to a famous
Tax plan-g activity of MNCs – tax plan-g
publication. This publication became a foundation for the first
model treaty in 1928 and for the model treaty of Mexico in
1943. In 1946, the model treaty of London was completed.
 After the Second World War the work on the model tax
treaties was continued by the Organization of European
Economic Cooperation (OEEC) and its successor
organization, the OECD. In 1963 this led to a complete
model tax treaty. In an official recommendation the council of
the OECD recommended its member states to use this model
and commentary as a basis for their bilateral tax treaty
negotiations..
 In 1992 the Model Tax Convention was published in a loose
leaf format and the impact of the OECD's Model Tax
Convention has extended far beyond the OECD area. It has
been used as a reference document in negotiations
between OECD member countries, between OECD member
Tax plan-g activity of MNCs – tax plan-g
countries and non-member countries, and even between
non-member countries. Also, the subsequently developed by
UN Model Double Taxation Convention between developed
and developing countries has been influenced greatly by
the OECD model.
• BEPS –
 The work of the OECD on BEPS started with the G20 Finance
Ministers Meeting in Mexico in 2012. In 2013, the OECD
released a report addressing base erosion in profit shifting,
identifying six key areas of concern:
 Mismatches in entity and instrument characterization.
For example, where an instrument is created which
generates deductible payments in one country, while
the payments are treated as non-taxable receipts in the
hands of the recipient in another country.
 Taxing profits from the delivery of digital goods and
Tax plan-g activity of MNCs – tax plan-g
 services. For example, in the situation where a
company's selling on the internet generates huge
sales in a country, but does not have any taxable
presence, for example, under the current taxing principles.
 Intra-group debt financing and captive insurance.
Notably, where interest deductions erode the tax basis
in a high-tax jurisdiction, while the receipts are taxed
in the hands of a related party in a low-tax jurisdiction.
 Transfer pricing. For example, regulates to determining
the value of creation of intangibles.
 Anti-avoidance measures.
 Harmful preferential regimes, or tax havens and
preferential selective regimes in countries attracting
investment away from countries with an ordinary tax
system.
Tax plan-g activity of MNCs – tax plan-g
 Following up on that report, on July 19, 2013, the OECD
released and action plan, breaking down the key areas into
15 action points. Since that time, the OECD has been working
continuously, publishing additional reports, requesting public
and expert feedback, et cetera, to meet its self-imposed
deadline of completing the work on the action items.
 Problem with BEPS problem itself - Obviously the OECD
views base erosion and profit shifting as a serious risk. In this
respect the OECD has said that BEPS is a risk to tax
revenues, tax sovereignty, and tax fairness for OECD
member countries and nonmembers alike. In particular, the
following consequences of BEPS worry the OECD:
 The question of fairness - Taxes paid in a country are
used to provide services to its residents (for example,
healthcare, education etc.). If multinationals do not
contribute their fair share in taxes, the service level of
the government decreases, or residents
Tax plan-g activity of MNCs – tax plan-g
need to pick up the tab. As a result, BEPS can also
negatively impact tax compliance of individuals who will be
reluctant to pay taxes where international companies can
easily avoid them.
 BEPS can distort competition - Companies that
operate in more than one country may benefit from the
rules of international tax law giving them a competitive
advantage over companies that do business in one
country only. and cannot use these rules.
 From an economic perspective BEPS can distort
investment decisions, where companies choose to do
business based on tax rather than genuine business
considerations.
Tax plan-g activity of MNCs – transfer pr-g
• Transfer pricing (TP) –
 A transfer price is what one unit of a business charges
another unit of the same business for a good or
service. The transfer price is usually close to the prevailing
market rate when different divisions of the same business
are evaluated separately for profit and loss. Transfer pricing
may thus be used to shift income from one country to
another. This can be avoided by use of arm's length
principle which is the international standard adopted by the
OECD and by many countries worldwide.
• The arm’s length principle (ALP) 
ALP is the condition or the fact that the parties to a
transaction are independent and on an equal footing. It is
used specifically in contract law to arrange an equitable
agreement that will stand up to legal scrutiny, even though
the parties may have shared interests (e.g., employeremployee)
or are too closely
Tax plan-g activity of MNCs – transfer pr-g
related to be seen as completely independent (e.g., the
parties have familial ties). What does ALP mean? When
conditions are made or imposed between the two enterprises in
their commercial or financial relation which differ from those
which would be made between independent enterprises, then
any profit which would, but for those conditions, have accrued
to one of the enterprises, but, by reason of those conditions,
have not so accrued, may be included in the profits of the
enterprise and taxed accordingly. ALP is, therefore, based on
the comparison between the terms and conditions set in
the intra-group transaction with the conditions that
independent parties would have entered into under
comparable circumstances.
 The OECD transfer pricing guidelines provide the
internationally agreed principles for the application of ALP.
ALP applies to all forms of intra-group transactions, from
the sale of goods and provision of services
Tax plan-g activity of MNCs – transfer pr-g
to business restructuring. Comparability is the core of the
application of ALP:
 A comparable transaction must occur between
independent parties. This means that in many cases, a
competitor cannot represent a comparable.
 Comparability exists only if there are no differences
liable to affect economic conditions. Where such
differences exists, two transactions can be
comparable only if reliable adjustments can be made.
Reference is made to internal comparability when a
transaction's similar to the intra-group transaction takes
place between one of the parties involved in the intra-group
transaction and a third party. For example, Prada sells
bags to its related distributors, and at the same time, sells
the same bags to independent distributor under
comparable circumstances. Reference is in turn made to
Tax plan-g activity of MNCs – transfer pr-g
external comparability, when the comparable transaction
takes place between two independent parties, none of
which is part of the intra-group transaction under review.
For example, where two group entities enter into a
transaction, the object of which is a commodity, the listing
price of such a commodity represents an external
comparable. The OECD guidelines identify five main
comparability factors that has to be taken into
account:
 characteristics of property of services
 functional analysis
 contractual terms
 economic circumstances and business strategies.
The extent to which each of these factors matters in
establishing comparability will depend upon the nature
of the transaction under review, and upon the transfer
pricing method adopted.
Appendix: double agreements of CR
• Czech Republic is the signatory to a treaty for the Prevention of
Double Taxation with many countries all over the world, not only in
Europe.
• Every double taxation prevention treaty uses one or more of the
methods of double taxation prevention:
 Full exemption – income liable to tax in abroad is not liable to
tax in the Czech Republic
 Exemption with progression – income liable to tax in abroad
is not liable to tax in Czech Republic but the taxpayer must use
the tax rate for both incomes from abroad and from the Czech
Republic.
 Full credit – all the taxpayer´s incomes are liable to tax in the
Czech Republic and from the final tax can the taxpayer deduct
the tax paid in abroad.
 Ordinary credit – both the taxpayer´s incomes from abroad
and from Czech Republic are liable to tax in the Czech
Republic.
Literature
• MCGEE, Robert W. The philosophy of taxation and public finance.
Boston: Kluwer Academic Publishers, 2004. viii, 313.
ISBN 1402077165.
• RADVAN, Michal. Czech Tax Law - 3rd ed. 3. vyd. Brno: Masarykova
univerzita, 2010. 65 s. Fac. of Law Publ. no. 4 (Edition of textbooks).
ISBN 978-80-210-5269-7
• OECD/G20 Base Erosion and Profit Shifting Project 2015. Final
Reports.
http://www.oecd.org/ctp/beps-reports-2015-executive-summaries.pdf
• Coursera: Rethinking International Tax Law. Universiteit Leiden
https://www.coursera.org/learn/international-taxation/
http://www.bbc.com/news/business-20288077
https://www.youtube.com/watch?v=3TeZlt3dRig