Introduction to International Tax
Jakarta, Ideatax -- In early August 2023, the Government of Indonesia successfully organized the 17th ASEAN Forum on Taxation (AFT) in Jakarta. With the theme of Epicentrum of Growth, the Government of Indonesia appointed as the mandated holder of the ASEAN chairmanship in 2023 strived to realize collective efforts in encouraging and enhancing tax cooperation in the Southeast Asian Region. The Head of BKF, Febrio Kacaribu, conveyed that taxation plays an important role in economic development and stability in the Southeast Asian Region (Kontan, 2023). This is proved by the adaptability of countries facing economic turbulence due to the COVID-19 pandemic. Therefore, international tax cooperation between Southeast Asian countries is needed to achieve mutual prosperity.
Unfortunately, not much is known about international taxation. The term international taxation appears often with the increase of globalization activities marked by the advancement of communication and transportation. In addition, the term international tax also appears along with the increase in trade and resource mobility between countries.
According to Darussalam et al (2010), international taxation is a terminology that refers to the international aspects of each country's tax provisions. Furthermore, IBFD (2015) in IBFD International Tax Glossary states that international taxation traditionally refers to the provisions of treaties between countries that discuss the elimination of double taxation. In broader terms, international taxation includes domestic regulations that address foreign income received by residents and domestic income received by non-residents.
Arnold and McIntyre (1995) in International Tax Primer stated that the term international tax is a misleading term. This is because there is no single international tax law. This is because tax laws are made by each country. The more acceptable term is international tax law or provision which refers to the international aspect of a domestic tax law.
In general, international taxation of a country covers two broad aspects. First, the taxation of domestic taxpayers on income from abroad (outward or outbound transactions). Second, taxation of foreign taxpayers on income from within the country (inward or inbound transaction). In a simple way, the dimension of tax imposition can be described by the following matrix:
Based on the matrix above, it can be seen that if a resident earns income from within the country, the domestic tax provisions apply. Furthermore, if the resident earns income from abroad, the international tax provisions apply. This is in line with the principle of world-wide income which regulates that the state has the right to collect taxes from its residents on all income received by the resident both from within (inward) and outside of the country (outward).
Conversely, international tax provisions also apply to non-residents who earn income from within the country. Both domestic and international tax provisions do not apply to non-residents who earn income from abroad.
According to Prof. Rochmat Sumitro (1987), there are five principles of taxation on international transactions or income. The first is the domicile principle. According to this principle, the tax subject is determined based on the domicile of the tax subject. In addition, this principle also recognizes that income tax is imposed in the country of domicile, whether the income comes from within the country or from abroad (world-wide income). Some of the countries that adopt the domicile principle include Indonesia, Greece, Korea, Mexico, Poland and Chile.
The second principle in international taxation according to Prof. Rohmat Soemitro (1987) is source, which states that tax is imposed based on the place where the source of income comes from. The third principle is the principle of citizenship which states that tax imposition is based on a person's citizenship status. Thus, even though a person has become a resident of another country, his/her home country still has the right to impose tax on the income received. One of the countries that adopts the citizenship principle is the United States.
The fourth principle in international taxation is the territorial principle which states that tax is only imposed on income earned from the territory of a country. Some countries that adopt the territorial principle include Australia, Canada, Spain, Sweden and the United Kingdom. The last principle in international taxation is the combination of the above principles.
The differences in principles adopted by countries in the world in an international transaction causes double taxation in which the same tax subject is imposed with the same tax in several countries. Thus, arrangements and agreements between countries are needed to eliminate the double taxation. In its development, the agreement between countries to minimize double taxation is referred to as tax treaty.
There are two main tax treaty models adopted by countries in the world: UN Model and OECD Model. The OECD Model generally prioritizes the interests of developed countries. This can be understood considering that most of the OECD members are developed countries where the domicile of capital flows is located. Unlike the OECD Model, the UN Model generally accommodates the interests of developing countries as well as developed countries.
That's a tiny bit about international taxation. In the next article, we will discuss more about tax treaty, multilateral instrument (MLI) and mutual agreement procedures.
Arnold, B., & Mclntyre, M. (1995). International tax primer. Kluwer Law International.
Darussalam, Septriadi, D., & Hutagaol, J. (2010). Konsep dan aplikasi perpajakan internasional. Jakarta: Danny Darussalam Tax Center.
IBFD. (2015). IBFD International Tax Glossary 7th Edition. London: IBFD.
Kontan. (2023, Agustus 07). Indonesia Bersama Anggota ASEAN Bahas Tantangan Perpajakan ke Depan. Retrieved from Kontan: https://nasional.kontan.co.id/news/indonesia-bersama-anggota-asean-bahas-tantangan-perpajakan-ke-depan
Rochmat Soemitro, R. (1987). Asas dan dasar perpajakan. Bandung: Eresco.
Hello, is there anything we can help?