Friday, October 26, 2012
In order to avoid international double taxation on business income, the Spanish Corporate Tax basically combines the tax credit (and eventually the indirect credit) with the exemption of foreign active business income (derived through permanent establishments abroad or repatriated as dividends or capital gains). The exemption was originally intended not just to avoid international double taxation but with the aim of fostering the internationalization of resident companies, in order to promote their competitive position in a global market.
Some of the most sensitive areas in which international double taxation may arise relates to the source and nature of income and the allocation of expenses. Apparently, the non-existence of source rules for the purposes of the tax credit leads to a situation in which foreign income taxes are always credited. No evidences can be found in practice that the tax credit is rejected when the State of Source applies his own domestic legislation. To the contrary, when a tax treaty applies, the nature and the source of income play a key role and eventually the tax credit is denied. On the other hand, the domestic legislation does not rule the allocation of expenses to foreign income. This is a common issue to both the tax credit and the exemption. In practice those economically related expenses are allocated to the foreign income, in order to protect the primary right to tax domestic income and the residual right to tax foreign income.
Another sensitive topic makes reference to the foreign taxes which can be credited (basically any personal and direct tax on income qualifies). The exemption relies on a subject-to-tax clause which apparently on a similar requirement. However, caution must be exercised when bringing any conclusions out of the more detailed subject-to-tax clause.
The ordinary tax credit is subject to a per-country limitation (except for business profits obtained through permanent establishment which are subjected to a “per PE limitation”) which provides with a greater simplicity to the cost of a limited crosscrediting. From CEN, the result is inferior as the taxpayer may still find an incentive to invest abroad (rather than domestically). On the other hand, in order to protect the domestic tax base a recapture rule applies (also when the exemption) when any losses from foreign permanent establishments have been previously offset. Traditionally, tax credit has been regarded as a more complex solution; however, the current implementation of the exemption also involves a great complexity which reflects on tax compliance.