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NAFTA & TAXATION.
Term Paper ID:27005
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Essay Subject:
Indirect impact of free trade treaty on U.S. taxation, based on member parties' negotiation of separate bilateral tax treaties.... More...
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6 Pages / 1350 Words
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Paper Abstract:
Indirect impact of free trade treaty on U.S. taxation, based on member parties' negotiation of separate bilateral tax treaties.
Paper Introduction:
NAFTA IMPACT ON US TAXATION
Executive Summary
The impact of the NAFTA on United States taxation related to international transactions was examined. The NAFTA is not a tax treaty, and taxation is not addressed in the treaty. The signatory nations to the NAFTA, however, renegotiated bilateral tax treaties subsequent to the implementation of the treaty to address taxation issues that were affected by the provisions of the treaty.
The impact of the NAFTA on United States taxation related to international transactions, therefore, was inferred on the basis of the comparison of tax treaties between Canada and the United States and between Mexico and the United States in existence prior to the ratification of the NAFTA with protocols of those treaties n
Text of the Paper:
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http://www.oecd.org/dat/ fa/stats/fsi.htm United States Department of the Treasury. United StatesTax Treaties, (IRS Publication 9 1). United States Department of the Treasury. Convention betweenthe Government of the United States of America and the Government of theUnited Mexican States for the Avoidance of Double Taxation and thePrevention of Fiscal Evasion with Respect to Taxes on Income. United States Department of the Treasury. Introduction This research examines the impact of the North American Free TradeAgreement (NAFTA) on United States taxation related to internationaltransactions. This rule is consistent with the asset-use and businessactivities test. Further, the United Statesposition is that the other Contracting State's covered taxes are incometaxes for United States taxation purposes (United States Department of theTreasury, 1997). The changed law is a follows: (a) With respect to items of income obtained by said citizen that are exempt from United States tax or that are subject to a reduced rate of United States tax, Mexico shall allow as a credit against Mexican tax, subject to the provisions of Mexican tax law regarding credit for foreign tax, only the tax paid, if any, that the United States may impose under the provisions of this Convention, other than taxes that may be imposed solely by reason of citizenship of the taxpayer; (b) For purposes of computing United States tax, the United States shall allow as a credit against United States tax the income tax paid to Mexico after the credit referred to in subparagraph a); but the credit so allowed shall not reduce that portion of the United States tax that is creditable against the Mexican tax in accordance with subparagraph a; (c) For the exclusive purpose of relieving double taxation in the United States under subparagraph b items of income referred to in subparagraph a shall be deemed to arise in Mexico to the extent necessary to avoid double taxation of such income under subparagraph b. Except asprovided in Article 13 (Capital Gains), the preceding sentence is subjectto such source rules in the domestic laws of the Contracting States asapply for purposes of limiting the foreign tax credit (Convention BetweenUnited States and Mexico for Avoidance of Double Taxation and Prevention ofFiscal Evasion with Respect to Income Taxes, Including Protocol, 1992). (1997 July). (1999a). The signatory nations to the NAFTA, however, renegotiatedbilateral tax treaties subsequent to the implementation of the treaty toaddress taxation issues that were affected by the provisions of the treaty. Washington: United States Departmentof the Treasury. Ottawa,Ontario: Department of finance Canada. Under the source principle, onlythat income derived from activities conducted within a taxing jurisdictionis subject to taxation by that taxing authority. The 1997Protocol preserves each country's exclusive right to tax its residents inthese circumstances (Department of Finance Canada, 1997). Taxation Issues Related to Source Income The Organization for Economic Cooperation and Development (OECD)observed that globalization, the deregulation of financial markets, andfinancial innovation have led to major changes in the volume, compositionand direction of international capital flows, which places increasingdemands on taxation systems. In1995, however, Canada announced income tax amendments that would tax non-residents' gains on shares of some non-resident companies. (1999 July).Foreign source income. Washington: United States Department of the Treasury. (1998 April). United States Tax Treaties, (IRSPublication 9 1). Further, subsequent to the implementation of theNAFTA in 1994, the United States revised upward duty free limits forpersons from signatory countries bring goods into the United States asindividuals from other signatory countries (United States Department of theTreasury, 1998). (1992 September). TechnicalExplanation of the United States Model Income Tax Convention of September2 , 1996. Canada, United States signtax treaty. (1999b). Tax Treaty: Backgrounder. Paris: Organization for Economic Cooperation andDevelopment. Source income policies at both national and sub-jurisdictional levels(federal and state in the United States) can create liability for suchtaxes in some instances. This language incorporates the arm's-lengthstandard for purposes of determining the profits attributable to apermanent establishment. Report onpersonal allowance parity among NAFTA parties. The signatory nations to theNAFTA, however, renegotiated bilateral tax treaties subsequent to theimplementation of the treaty to address taxation issues that were affectedby the provisions of the treaty. 21). The NAFTA is not a tax treaty,and taxation is not addressed in the treaty. Issues Related to Double Taxation With respect to relief from double taxation, the position of theUnited States, subject to tax treaty negotiation, is to allow to its owncitizens and residents a credit against United States tax for income taxespaid or accrued to the other Contracting State. With respect to international transactions andchanges in taxation in the United States subsequent to the implementationof the NAFTA, the issues of special interest were those related to taxationon the basis of source income and to the amelioration of double taxation. Protocol, signedMarch 17, 1995, amending the Convention between the United States ofAmerica and Canada with respect to Taxes on Income and on Capital, signedSeptember 26, 198 (Third Protocol). "Taxes are an important consideration inforeign direct investment (FDI) and in cross-border portfolio investmentdecisions of financial and non-financial corporations and individuals. References Department of Finance Canada. Protocol to Canada-U.S. (1997). While theUnited States adheres to the source principle, complex legal definitionsmust be applied to determine income sources. Further, the position of the United States is that nobusiness profits can be attributed to a permanent establishment merelybecause it purchases goods or merchandise for the enterprise of which it isa part (United States Department of the Treasury, 1997). Prior to 1995, neither countrytaxed non-residents' gains on shares of non-resident corporations. NAFTA Impact on US Taxation Executive Summary The impact of the NAFTA on United States taxation related tointernational transactions was examined. AProtocol negotiated to the Mexico-United States Tax treaty in 1996 changedand strengthened the double taxation provision where a citizen of theUnited States is a resident of Mexico. Tax-driven investment and savings decisions raise concerns about economicefficiency and equity, as well as problems of evasion and avoidance"(Organization for Economic Cooperation and Development, 1999, p. The NAFTA is not a tax treaty, and taxation is not addressedin the treaty. Mexis On-Line.www.mexis.com/aws_usmex_taxtreaty.html Organization for Economic Cooperation and Development. Convention Between United States and Mexico for Avoidance of DoubleTaxation and Prevention of Fiscal Evasion with Respect to Income Taxes,Including Protocol. The relevant concept of income involves the distinction between the"source" and the "unitary" principles. The impact of the NAFTA on United States taxation related tointernational transactions, therefore, was inferred on the basis of thecomparison of tax treaties between Canada and the United States and betweenMexico and the United States in existence prior to the ratification of theNAFTA with protocols of those treaties negotiated subsequent to theratification of the NAFTA. United States Department of the Treasury. The business profits attributed to a permanent establishment includeonly those derived from that permanent establishment's assets oractivities. Tariffs and other custom duties frequently function in amanner similar to taxation; however, with respect to taxation oninternational transactions, tariffs and other customs duties were notconsidered as taxation in this examination. The primary focus of the NAFTA was on the reduction and eventualelimination of tariffs and other customs duties on trade between thesignatory countries. The computation of business profits attributableto a permanent establishment under this paragraph is subject to the rulesfor the allowance of expenses incurred for the purposes of earning theprofits (United States Department of the Treasury, 1997). Amendments to the Canada-United States Tax Treaty in 1995 providedthat, where a United States citizen is a resident of Canada, the followingrules shall apply in respect of the items of income that arise in theUnited States and that would be subject to United States tax if theresident of Canada were not a citizen of the United States, as long as thelaw in force in Canada allows a deduction in computing income for theportion of any foreign tax paid in respect of such items which exceeds 15per cent of the amount thereof: (a) The deduction so allowed in Canadashall not be reduced by any credit or deduction for income tax paid oraccrued to Canada allowed in computing the United States tax on such items;(b) Canada shall allow a deduction from Canadian tax on such items inrespect of income tax paid or accrued to the United States on such items,except that such deduction need not exceed the amount of the tax that wouldbe paid on such items to the United States if the resident of Canada werenot a United States citizen; and (c) For the purposes of computing theUnited States tax on such items, the United States shall allow as a creditagainst United States tax the income tax paid or accrued to Canada afterthe deduction referred to in subparagraph (b). When that condition is met, theState in which the permanent establishment is situated may tax theenterprise, but only on a net basis and only on the income that isattributable to the permanent establishment (United States Department ofthe Treasury, 1997). For the purposes of allowing relief from double taxation, the Mexico-United States Tax Treaty of 1992 provided that income derived by a residentof a Contracting State which may be taxed in the other Contracting State inaccordance with this Convention (other than solely by reason ofcitizenship) shall be deemed to arise in that other State. If a producer made a sale over the Internet andcollected the funds from within the producing country over the Internet, asan example, source income and transaction taxes likely could be avoided.If the producer either establishes a sales and collection processingoperation in a second country or contracts with a global bank to processsuch transactions within a second country, however, a second countrygovernmental jurisdiction likely would contend that the producer was doingbusiness in the jurisdiction and, therefore, was liable for transaction andincome taxes on the sales within that jurisdiction. Washington: United StatesDepartment of the Treasury. The impact of the NAFTA on United States taxation related tointernational transactions, therefore, is inferred on the basis of thecomparison of tax treaties between Canada and the United States and betweenMexico and the United States in existence prior to the ratification of theNAFTA with protocols of those treaties negotiated subsequent to theratification of the NAFTA. The position of the United States, subject to negotiation in taxtreaties, is that the business profits of an enterprise of one ContractingState may not be taxed by the other Contracting State unless the enterprisecarries on business in that other Contracting State through a permanentestablishment situated in the other state. With respect to capital gains, the 1997 treaty Protocol limits thecapital gains that each country can tax. (United States Department of the Treasury, 1999a). With respect to business profits, the position of the United Statesfurther is that the Contracting States will attribute to a permanentestablishment the profits that it would have earned had it been anindependent enterprise engaged in the same or similar activities under thesame or similar circumstances. The credit so allowed shallreduce only that portion of the United States tax on such items whichexceeds the amount of tax that would be paid to the United States on suchitems if the resident of Canada were not a United States citizen (UnitedStates Department of the Treasury, 1999b). With respect to international transactions andtaxation in the United States, the issues of special interest are thoserelated to taxation on the basis of source income and to the ameliorationof double taxation. Washington: United States Department of the Treasury. Under the unitaryprinciple, however, income derived from sources outside a taxingjurisdiction may be subject to taxation by that authority.
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