International Tax Topics: Key Issues and Policies Explained

Taxes on international business and investment can be complex, with different countries imposing their own rules. Companies and individuals operating across borders must navigate overlapping tax systems, potential double taxation, and evolving regulations aimed at ensuring fair contributions to government revenues.

Governments use policies and agreements to determine how income is taxed across jurisdictions. Understanding key issues like transfer pricing, digital services levies, and withholding taxes is essential for businesses and investors looking to comply with the law while minimizing tax burdens.

Double Taxation Agreements

When individuals or businesses earn income in multiple countries, they often risk being taxed twice—once in the country where the income is generated and again in their home country. To prevent this, many nations have established Double Taxation Agreements (DTAs), which allocate taxing rights and provide relief mechanisms such as tax exemptions or credits. These agreements reduce financial burdens on taxpayers and encourage cross-border trade and investment.

DTAs typically follow the OECD or UN Model Tax Conventions, which outline how different types of income—such as dividends, interest, royalties, and capital gains—should be taxed. For example, under many treaties, dividends paid by a foreign subsidiary to its parent company may be subject to a reduced withholding tax rate, often between 5% and 15%, instead of the standard domestic rate. Similarly, cross-border interest payments may qualify for lower withholding tax rates, making international financing more cost-effective.

A key provision in DTAs is the tax credit method, which allows taxpayers to offset foreign taxes paid against their domestic tax liability. For instance, if a U.S. company pays a 10% corporate tax on profits earned in Germany, it can claim a foreign tax credit against its U.S. tax obligations. Some treaties also include tax exemption provisions, where certain types of income are taxed only in one jurisdiction, particularly for pension income, government salaries, and specific capital gains.

To benefit from a DTA, taxpayers must prove tax residency and obtain a certificate of residence from their home country’s tax authority. Many treaties also include anti-abuse provisions, such as the Principal Purpose Test (PPT) and Limitation on Benefits (LOB) clauses, which prevent companies from structuring transactions solely to exploit treaty benefits. These measures have become stricter following the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, targeting tax avoidance strategies.

Permanent Establishment

When a company operates in a foreign country, determining whether it has a taxable presence there is a fundamental question in international taxation. This concept, known as Permanent Establishment (PE), dictates when a business is liable to pay corporate taxes in a jurisdiction where it has economic activity. Without a PE designation, a company may not be subject to local corporate tax, even if it generates revenue within the country.

Tax authorities assess PE based on physical presence, duration of activities, and the nature of business operations. A fixed place of business, such as an office, branch, factory, or construction site exceeding a specified timeframe—often six to twelve months—typically qualifies as a PE. Even without a physical location, a company can establish PE if it has dependent agents in the country who habitually conclude contracts on its behalf. This is particularly relevant for businesses operating through sales representatives or local intermediaries.

The interpretation of PE has evolved with digital business models. Many multinational corporations provide services remotely without maintaining a physical presence, leading some countries to introduce economic nexus rules. These regulations expand PE definitions to include companies with significant digital revenues from a jurisdiction, even if they lack a traditional office or workforce there. India’s Significant Economic Presence (SEP) rules and the EU’s discussions on digital PEs reflect this shift.

Tax treaties and domestic laws often include exemptions to prevent an overly broad application of PE rules. For example, preparatory and auxiliary activities—such as warehousing, purchasing offices, or data storage—may not trigger PE status. However, tax authorities increasingly scrutinize whether companies structure operations to avoid PE designation. The OECD’s BEPS Action 7 specifically addresses this issue, closing loopholes that allow businesses to fragment activities across multiple entities to bypass taxation.

Transfer Pricing Policies

When multinational corporations conduct transactions between subsidiaries, the prices set for goods, services, intellectual property, or financial arrangements must adhere to transfer pricing regulations. These rules ensure that intra-group transactions are priced as if they were conducted between unrelated entities under market conditions. Without proper oversight, companies could manipulate transfer prices to shift profits to low-tax jurisdictions.

Tax authorities use the arm’s length principle as the standard for evaluating transfer pricing arrangements. This principle, established by the OECD Transfer Pricing Guidelines and incorporated into many national tax laws, requires that related-party transactions be priced similarly to those between independent companies in comparable circumstances. Businesses rely on methodologies such as the Comparable Uncontrolled Price (CUP) method, Resale Price Method, and Transactional Net Margin Method (TNMM) to determine appropriate pricing.

Regulatory scrutiny has increased following the OECD’s BEPS Action Plan, particularly Action 13, which introduced country-by-country reporting (CbCR). Multinational enterprises with consolidated group revenue above €750 million must provide tax authorities with detailed reports breaking down revenues, profits, taxes paid, and economic activity across jurisdictions. This transparency measure enables tax authorities to identify inconsistencies and potential profit shifting.

Non-compliance with transfer pricing regulations can lead to financial penalties, tax adjustments, and reputational damage. Many jurisdictions impose penalties based on a percentage of the understated tax liability, with some, like Germany, levying fines of up to 10% of the tax shortfall. Additionally, interest charges on unpaid taxes can further increase financial exposure. To mitigate these risks, companies often enter into Advance Pricing Agreements (APAs) with tax authorities, securing pre-approved transfer pricing methods for a specified period.

Digital Services Levies

Governments have struggled to tax digital businesses effectively, as traditional tax frameworks were designed for brick-and-mortar operations. Many tech companies generate significant revenues from users in a country without a physical footprint, allowing them to minimize local tax liabilities. To address this, several countries have introduced Digital Services Taxes (DSTs), which impose levies on revenue derived from online activities such as digital advertising, data monetization, and online marketplaces.

These taxes typically apply to large multinational firms exceeding revenue thresholds, such as France’s 3% DST on companies with global revenues above €750 million and French revenues over €25 million. The UK has a similar 2% levy on digital service revenues exceeding £25 million domestically. Unlike corporate income taxes, which are based on net profits, DSTs are calculated on gross revenue, meaning businesses must pay the tax regardless of profitability. This structure has raised concerns about double taxation, as affected companies still face corporate tax obligations in their home jurisdictions.

International efforts to create a unified approach have led to the OECD’s Pillar One framework, which seeks to reallocate taxing rights, ensuring that highly digitalized businesses pay a portion of their taxes in countries where they generate revenue. Some nations have agreed to roll back DSTs once this framework is implemented, but delays in global consensus have left unilateral measures in place.

Controlled Foreign Corporations

Governments impose tax rules on Controlled Foreign Corporations (CFCs) to prevent multinational businesses from shifting profits to low-tax jurisdictions. These regulations target foreign subsidiaries that are majority-owned by domestic shareholders, ensuring that passive income—such as dividends, interest, royalties, and certain capital gains—is taxed in the parent company’s home country, even if the earnings remain offshore.

CFC rules vary by jurisdiction but generally apply when domestic shareholders own more than 50% of a foreign entity. The U.S., for example, enforces CFC taxation through Subpart F of the Internal Revenue Code, which requires U.S. shareholders holding at least 10% of a foreign corporation to report and pay tax on certain undistributed income. The Global Intangible Low-Taxed Income (GILTI) provision, introduced under the Tax Cuts and Jobs Act of 2017, further expanded taxation by imposing a minimum tax on foreign earnings exceeding a 10% return on tangible assets. The European Union has similar provisions under the Anti-Tax Avoidance Directive (ATAD).

Withholding Taxes

Cross-border payments of dividends, interest, and royalties are often subject to withholding taxes, which require the payer to deduct a percentage of the payment and remit it to the tax authorities of the recipient’s country. These taxes ensure that income derived from domestic sources is taxed before it leaves the country.

Rates vary widely depending on the jurisdiction and the type of payment. The U.S. generally imposes a 30% withholding tax on payments to foreign entities, though this rate can be reduced under tax treaties. To claim reduced rates or exemptions, recipients must provide proper documentation, such as the IRS Form W-8BEN for foreign individuals or W-8BEN-E for foreign entities receiving U.S. income.