engleski

Nexus requirements for taxation of non- residents' business income: a normative evaluation in the context of the global economy

Main research question of this thesis is the following: what are the appropriate nexus norms for taxing non-residents' business income, in the light of developments in the contemporary global economy? The answer is provided by conducting a normative legal analysis, i.e. using a value-oriented approach. The thesis focuses on the relationship between a state and persons who are beyond the sphere of its personal sovereignty, i.e. foreign persons. Moreover, it is concerned only with persons who do not have territorial link with the state in the form of fiscal residence, denoting a significant presence in the state territory, often considered as a substitute for personal attachment. Thus, the only legal justification for taxing income of these persons is based on the presumed economic attachment they have with the state, subjecting them to state’s territorial sovereignty. When it comes to taxation of cross-border income, the latter justification is usually referred to as the “source principle”. As a matter of general public international law – as explored in part two of the thesis – states have the right to tax income which is derived from sources within its territory. Because of various reasons – limited administrative abilities and the objective of avoiding potential multiple taxation being the principal ones – enforcement jurisdiction of “source states” is limited both unilaterally, by provisions of domestic law, and bilaterally, by tax treaties. Part three of the thesis provides an overview of nexus requirements enshrined in domestic law of selected countries. Using the comparative research method, four basic approaches (models) have been identified and illustrated on the example of at least one representative country. As far as particular international law of taxation, i.e. tax treaty law, is concerned, it is generally required that the source state refrains from taxing non-resident’s business income unless he/she has a permanent establishment (PE) located in that state. Therefore, the PE requirements, embodied in Art. 5 and Art. 7 of the OECD Model Convention, are analysed in part four of the thesis. Furthermore, deviations from OECD’s PE requirements in tax treaty practice, as well as special distributive rules of tax treaties applicable to some types of business income, are also explored. Part five of the thesis lays down a normative framework used for appraisal of different nexus norms. In doing so, we depart from the general criteria used to evaluate tax policy: 1) tax equity ; 2) tax efficiency and 3) administrability. The content of these abstract ideals is explored in relation to the research problem at hand. Part six of the thesis explores the challenges that modern global economy poses to the above mentioned legal framework. With regard to nexus requirements, such as the PE concept, of special importance are the following: 1) rapid increase in the volume of cross-border trade in services ; 2) advent and expansion of electronic commerce and 3) development of new business models, based on the fragmentation of value added chains. These and other phenomena make the application of traditional nexus norms highly problematic from a policy perspective, as evidenced by special tax planning structures used by taxpayers in order to avoid the PE status in a country. Part seven provides a normative analysis of nexus norms, both those currently contained in international tax law as well as most prominent reform proposals, with the aim to analyse which norms are more appropriate against the backdrop of normative benchmarks explored in earlier parts of the thesis. It is submitted that the PE nexus is inappropriate for taxing non- residents' business income, mainly due to misalignment between the requirements inherent to 'fixed place PE' and 'agency PE' on the one hand and the precepts of tax equity and tax efficiency on the other. It is further submitted that the most desirable way forward is to introduce new nexus requirements in tax treaty law, in the form of a new PE-deeming rule giving far more taxing rights to the so- called “market states”. In this regard the proposal for a “significant presence PE”, new PE-deeming rule based on a de minimis revenue threshold, holds the most promise. It is also pointed out how several instruments may be used to overcome foreseeable administrative difficulties associated with the introduction of a new nexus. Against this backdrop a proposal for a design of new nexus requirements – to be implemented both on tax treaty level and on a domestic level – is presented.

international tax law; income tax jurisdiction; source principle; income tax nexus; permanent establishment; withholding tax; tax equity

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