International Tax and the Roles of International Tax Policy and Tax Treaties

• Author: David Kerzner, David W. Chodikoff
• Pages: 29-46

29

chapter two

INTERNATIONAL TAX AND THE ROLES

OFINTERNATIONAL TAX POLICY AND

TAXTREATIES

A. INTRODUCTION

This chapter examines the basic concepts in international tax law and the

roles of international tax policy and tax treaties. It also reviews the princi-

pal theories in international tax policy and provides some commentaries on

what scholars are saying today about these theories.

The interaction between taxpayers and multiple jurisdictions necessar-

ily gives rise to many questions under international law, and international

taxation. These transnational fact patterns also create complex economic,

political, and legal choices for policy-makers, especially those focused on f‌is-

cal sovereignty. Some of these interesting questions and challenges are the

following: What is the legal basis for either country to impose its f‌iscal laws

upon the foreign activities of its residents and citizens? What is the legal

basis for either country to impose its f‌iscal laws upon individuals who reside

in a foreign country, or persons (e.g., corporations) that have been formed

in a foreign jurisdiction? What happens when taxpayers are subject to the

f‌iscal tax laws of two nations at the same time? What happens when the gov-

ernment of one country cannot ever learn about the foreign activities of its

residents and citizens (especially when the taxpayers intentionally decide to

hide their foreign income, activities, or assets)? What happens to principles

of fairness in a society when a government has, after providing a taxpayer

with full rights of appeal under the law, obtained a judgment against the tax-

payer but when the taxpayer’s assets, which could satisfy the judgment in

whole or in part, lie in another jurisdiction?

Answers to these questions from Canadian and US perspectives may be

found in the domestic tax laws (including statutes, judicial decisions, and

30 • InternatIonal tax evasIon In the Global InformatIon aGe

administrative positions) dealing with international law, conf‌licts of law, and

tax treaties of both nations. As international taxation must concern itself

with either foreign jurisdictions or foreign persons, or both, an understand-

ing of the principles of law that may relate to these international aspects of

taxation is important to understanding this subject and to understanding the

role of exchange of information, which has become a vital subtopic in today’s

war against international tax evasion.1 Increasingly, both the Canadian and

the American governments, among others, have been concerned with en-

forcement of their f‌iscal laws to prevent erosion of their tax base, to combat

illegal tax evasion and other criminal behaviour, and to maintain equity in

the system. Information regarding the foreign accounts, entities, and income

of taxpayers is a vital component to determining their compliance with Can-

adian and US reporting and tax laws. Once f‌iscal authorities can determine

that a taxpayer is delinquent regarding these laws, enforcement measures

(including those under domestic law, treaty law, and international law) may

be undertaken.

B. SOURCES OF INTERNATIONAL LAW

1) International Tax and International Tax Law

International taxation concerns the f‌iscal relationship between a taxpayer

and his personal ties with or economic activities in two or more nations.2

Both Canada and the United States impose taxation on a worldwide basis on

their residents. As a result, both countries tax income wherever it is earned.

Primary liability for tax in Canada is based on residency. Individuals resi-

dent in Canada are taxed on their worldwide income. Corporations formed

in Canada, which are also regarded under Canadian common law as managed

and controlled in Canada are also taxed on their worldwide income.3 In the

1 See, for example, Chapter 3 for a historical background to the initiatives of the OECD on

harmful tax competition.

2 International taxation deals with the tax aspects of international commerce and investment:

see Jinyan Li, Arthur Cockf‌ield, & J Scott Wilkie, International Taxation in Canada—Principles

and Practices, 2d ed (Markham, ON: LexisNexis, 2011) at 1.

3 See Brian J Arnold, Reforming Canada’s International Tax System: Toward Coherence and Sim-

plicity (Toronto: Canadian Tax Foundation, 2009) at 13. The term “resident” is not def‌ined in

the Income Tax Act, RSC 1985, c 1 (5th Supp) [Act]. Rather, residence is determined on facts

that under Canadian law may connect an individual to Canada and also on certain statutory

provisions in the Act that may if met deem an individual to be resident in Canada. See, gener-

ally, ch 4, dealing with residence, in David S Kerzner, Vitaly Timokhov, & David W Chodi-

kof‌f, eds, The Tax Advisor’s Guide to the Canada–U.S. Tax Treaty (Toronto: Thomson Reuters

Carswell, 2008) (loose-leaf).