Tuesday, November 28, 2006
Kim Brooks (University of British Columbia) presents Recognizing the Incentive Programs of Other States: Should High-Income Countries Feel Obligated to Protect the Tax Incentives of Low-Income Countries? at the University of Toronto today as part of the James Hausman Tax Law and Policy Workshop Series. Here is the abstract:
Tax treaties are used to prevent double taxation, facilitate trade between two nations, and allocate the resulting tax revenue between them. In preventing double taxation, most tax treaties allocate the jurisdiction to tax to the source country, or to the residence country, or to both. Where both the source and residence countries are both permitted to subject a particular type of income to tax, a tax credit granted unilaterally by the residence country generally relieves the taxpayer of double taxation. Where both the source and residence country are granted the jurisdiction to impose income tax under a tax treaty on a particular type of income, it is impossible for the source country to provide a tax incentive to encourage investment. If the source country forfeits its right to tax the income, the residence country simply collects more tax. Unlike countries like the United States, Canada has entered into numerous treaties with developing countries that offer those countries "tax sparing". The tax sparing provision of a tax treaty effectively requires the residence country to grant a foreign tax credit for the taxes that would have been paid in the source jurisdiction, had the source jurisdiction actually imposed a tax at source. In other words, tax sparing provisions allow the source country to provide a tax incentive to promote a particular type of activity within its borders without the residence jurisdiction simply collecting the forfeited source tax. This paper explores whether Canada should continue to grant tax sparing provisions to developing countries.