INTERNATIONAL TAXATION LAW

Lesson #1
ITL doesnt mean common legal rules but what we refer to as ITL is the international aspect of a National
Tax Law. Every Nation has a set of rules that deal with international situations.
Anyway, there are some exceptions:
EU LAW
TAX TREATIES
They have common legal basis for more than one country. Why most of the time TT (tax treaties) are
bilateral? Because many times it is a matter of coordination between the source state and the residence
state of the taxpayer.
There are 2 international dimensions of income taxation:
1. taxation of residents on income arising in foreign countries
2. taxation of non-residents on income arising domestically.
Lesson #2,#3,#4
Who has the jurisdiction to tax?
SJ: taxes are due to the country where products are made. There is a nexus between a country and
the activities that generated the income
RJ: taxes are due to the country where manufacturers live, the person is typically taxable on both
domestic-source income and foreign-source income ( Worldwide Income taxation principle the
state residence has the power to tax the WWI). There is a nexus between a country and a person
earning the income.
Citizenship Jurisdiction: a country asserts the right to impose its taxes on the WWI of its citizens
because it offers a bunch of services all over the world ( e.g. USA) were not interested in this
one.

Overlapping jurisdictions give rise to DOUBLE TAXATION but national legislation and TT tend to mitigate it.
However, incoherent national jurisdictions may lead to international tax planning, avoidance and evasion.
The resulting undertaxation is unfair and unefficient but some countries increase the risks of undertaxation
by operating as tax heavens. Tax heaven countries adopt bank secrecy rules and similar non disclosure rules
that facilitate tax avoidance and tax evasion. In order to contrast this kind of policy, the other countries
tend to replete their own tax codes with anti-avoidance provisions.
In order to reduce Double Taxation, SJ prevales on RJ the income source state has the primary right to
tax.
RESIDENCE OF INDIVIDUALS:
An ideal test of residence should give certain and fair results, in order to catch those who have an
economic or social connection with the territory of the state.
(certain=the concept must be easy and cleary to apply)
(fair=it should find a true connection with the territory of the state)

A very common test is based on the number of days of presence in a territory: at least 183 days of the
taxable year. (difficult to measure because of no border controls)
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Other common criteria include:

A dwelling or abode available for the taxpayers use

The location of the family
The social life
The economic interests or activities

The Italian Income Taxation Code (ITC) establishes that a person is deemed resident if, for the majority of
the taxable year (183 days), he alternatively:
1. Is registered in the public registers of Anagrafe Comunale (formal link)
2. Has his residence in the state (habitual abode: place where he habitually lives)
3. Has his domicile in the state (center of gravity: main center of economic activities or interests)

Even one of
these its
enough to
consider you
resident

RESIDENCE OF LEGAL ENTITIES:

CORPORATIONS
Their residence is determined by 2 main tests:

Place of incorporation: where they are

created
Place of management: where decisions
are taken

OTHER LEGAL ENTITIES

The tests vary from one country to another, the
most common are:
Place of management
Place of organization

The ITC establishes :

A corporation or legal entity is deemed resident if, for the majority of the taxable year (183 days), it
alternatively has in the territory of the state:

Its legal seat (formal link)

Its place of administration
Its main object (where activities are carried)

SOURCE JURISDICTION primary right to tax income that has its source in that country:

Employment and personal services income: it is a matter of establishing where the income is
sourced. General rule: income from services has its source in the country where the services are
performed.
Business income: it is taxed if its attributable to a Permanent Establishment in that country.
Investment income (dividends, interests, royalties): the income derived by non residents is
generally taxed at source through a WHT (with-holding tax).

JURIDICAL (or Legal) IDT: the imposition of comparable income taxes by two or more countries on the
same item of income of the same taxpayer
ECONOMIC IDT: every time the same economic item of income is taxed by more than one
country but in the hands of different taxpayers. (e.g. dividends paid by corporations to shareholders)
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We focus on JDT, that can rise from:

source-source conflicts both countries claim that the income is sourced in their country and both
want to tax it;
residence-residence conflicts (dual-resident taxpayer)both countries claim that the taxpayer is a
resident of their country and both want to tax him;
residence-source conflicts (most frequent)1 country claims the right to tax foreign-source income
(WWI principle) because the taxpayer is resident of that country while the other country claims the
right to tax it because it has the source in its country
National legislators tend to avoid DT unilaterally (State R gives relief by using the 3 relief methods) or by
entering into specific bilateral agreements (TT).
The 3 relief mechanisms:
Deduction method: the resident country considers taxes payed abroad deductible from
income ( they are considered expenses) and levy taxes on the income before tax. Its not neutral in
terms of allocation of resources between countries.
Exemption method: the country of residence exempts its residents from foreign-source
income, it eliminate DT. These countries are said to tax on a territorial basis only and
not on a WWI basis. In exemption with progression method the foreign income is taken into
account from residence country in determining the applicable tax rate to the taxpayers other
income.
Credit method: foreign taxes paid by a resident taxpayer on foreign-source income
reduce domestic taxes payable by the amount of the foreign taxes. The credit never legitimates for
reimbursement (=the credit for foreign taxes paid is usually limited to the amount of domestic tax
payable on the foreign source income).

ITALIAN LEGISLATION ABOUT CREDIT METHOD ( art 165 ITC)

Par 1: maximum credit= Nation tax*(Foreign income/ Total income) #national tax=(income S+R)*rR
Par 2: mirror approach: An income is considered to be foreign on the base of the same criteria set to
determine whether an income is domestic. (art. 23 ITC)
Par 3: Per country limitation: the deduction must be calculated separately for each foreign country involved
Par 4&8: Tax return limitations: 4: provide that the taxes have been paid abroad and 8: if tax return
(dichiarazione dei redditi) is missing or not displaying foreign income, deduction of par 1 is not allowed.
Par 10: Per item limitation: if foreign income is partially taxable in Italy, the foreign income tax should be
reduced in the same percentage.
TAX SPARING CREDIT / MATCHING CREDIT
The tax rate applicable from residence country is equal to the previous tax rate minus the tax
rate of the developing country, while in the developing country the tax rate become 0. This is a
way to grant foreign credit or investments to developing countries.
Create a friendly environment for
Developed C.
Developing C.
foreign investors lower or null tax
investiment
Tax rate
Tax rate
rates. But pay attention, the taxes paid
40%
20%-->0%
are always a combination between taxes
Income=1000
of both countries and in this case, if
developed country not guarantees a
credit, there is no advantage. So, in
order to make the developing country to
enter in an agreement, the credit in the
delevoped c. is guaranteed even if the
taxpayer doesnt pay any taxes in the 3

investment

foreign country.

Lesson #5, #6
Tax treaties are bilateral agreements to avoid double taxation.
Tax Treaties are agreements on taxation methods focused on reducing or eliminating JDT. The
overwhelming majority of them is based on OECD MC. Multilateral agreements are:
the Convention on mutual administrative assistance on TAX matters related to
information exchange
WTO, related to custom duties
DTC are international agreements concluded between States and governed by international law.
Their creation and their consequences are determined according to the rules stated in the
Vienna Convention on the Law of Treaties (VCLT).
Tax treaties confer rights and impose obligations on the Contracting States, but first the treaty must be
enacted into law by the 2 states with their national law establishing the application of the treaty, otherwise
the agreement is not applicable.
THE MAKING OF A TAX TREATY: 5 different steps
1. Negotiations
OECD MC is the starting point, then the Ministry of foreign affairs and of finance are responsible
for the negotiation. Less important results are presented in a Agreed protocol or in a Final
protocol, that is equally binding (different from the main text, they refer to specific situations).
2. Authentication (Initialling)
The leaders of the two countries authenticate two copies of the agreed tax treaty by initialling
each page. Authentication does not create obligations for the contracting states.
3. Conclusion (Signing, ratification)
Initialing does not commit the state to conclude the treaty, it comes into being with the signing
and ratification of the treaty. For important treaties, such as tax treaties, the conclusion takes place only
with the exchange of instruments of ratification of the contracting parties.
4. Enactment
In many legal system the internal applicability of the treaty is achieved through enactment of
implementing domestic legislation
5. Entry into force
The treaty text provides an entry into force date, which is commonly bound to ratification.
Legal nature of the tax treaties:
The rules determining which national law applies are said to be conflict rules while a tax treaty
limit the content of the tax law of both contracting states, consequently, they are said to be
limitation rules. Tax treaties are primarily relieving (so they dont impose taxes, at maximum they limit
them) in nature and do not override national rules, however Treaty should prevail in the event of a
conflict between the provisions of domestic law and a treaty
The objectives of DTC is to facilitate cross-border trade and investments by eliminating tax
impediments. This is made with the:
elimination of DT most important
prevention of fiscal evasion not really clear
elimination of discrimination against foreign residents

Lesson #7, #8, #9, #10

There are two models of tax treaties: OECD (on income and capital) and UN (between developed and
developing countries). The OECD published the first MC (model convention) in 1963.
A commentary (with the meaning of the articles), organized on a article-by-article basis, accompanies the OECD
Model Treaty. It has assumed great importance for the interpretation and application of tax treaties.
Convenient if the states
have reasonably equal
flows of trade and
investments developed
to developed countries.

OECD MC favours capital exporting countries over capital importing countries, eliminating double
taxation by requiring the source country to give up some or all of its taxes.

Developing countries are net capital importers so they tend to use the UN model because it allocates more
power to the source state. imposes fewer restrictions on tax jurisdiction of the source country there is a trade off
between source jurisdiction and residence jurisdiction: if you eliminate one, you cant increase the other

OECD MC
PRO: standardization of many international agreements that lead to a reduction of DT
CONS: embodies compromises and it is in some parts vague, if the model change each
treaty is not automatically changed and to change the model unanimity is required.
The TAX TREATY is only a
legal text

The OECD MC is only a

model, a starting point, it has no
obligations for states

The unanimity rules is mitigated by reservations and observations. These are found in
the commentary, a reservation indicates that a country does not intend to adopt the particular
provision of the Model in its Tax Treaties. The observation means that a countrys interpretation
of a provision differs from the interpretation of the majority of the members countries. this time the
provision is included in its tax treaties.

INTERPRETATION OF TAX TREATIES we must consider:

1.
2.
3.

The meaning of words

The context
The purpose

Tools of interpretation are not domestic. It is used:

1. VCLT, art. 31 primary interpretative tools: a treaty shall be interpreted in good faith with the ordinary
meaning to be given to the terms of the treaty in their context and in light of its objectives and purposes.
art. 32 supplementary tools: it is given great importance to the commentary of the OECD MC
2.DTT, specificationsart 3 par 2 of model (domestic rule of interpretation): requires 3 stage processes:
1.
2.
3.

Does DTC provide a definition of the term?

If not, what is its domestic meaning?
Does the context require a different meaning?

The OECD MC and the majority of the treaties are organized in 7 chapters:
1.
2.
3.
4.
5.
6.
7.

Scope of convention
We will analyze these ones
Definitions
Taxation of income
Taxation of capital
Elimination of DT: for dividends and interests (credit method) and for royalties (exemption with progression)
Special provisions: regarding mutual agreement, exchange of information and mutual assistance
Final provisions: It regulates the entry into force and the termination of the treaty
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CONTENTS OF A TAX TREATY

1. Chapter 1 Scope of the convention
This convention shall apply to persons who are residents of one or both of the contracting
states. Person means individual, company, body of persons. Resident means any person who is
liable to tax therein (by reason of domicile, residence, place of management etc). A problem arises with partnerships (lookthrough entities = special business structure used to reduce effects of DT), because they are not liable to tax (partnership is
considered a person but it may not be a residentits not the partnership who pays the taxes but the partners), hence no benefits from
DT is granted.
2. Chapter 2 Definitions
Definitions of treaty terms. Treaty shall apply to taxes on income and on capital.
There are clauses of automatic adaptation (adaptation to the treaty for identical or similar taxes) which avoid a new
treaty in case of a changing in a national tax.
Persons (for those resident in both countries). In order to assign residence jurisdiction to one country
most treaties provide a tie-breaker rule. It is set in a progressive manner (permanent home,
centre of interests, habitual adobe, country of citizenship, mutual agreement).
Legal entities (for those resident in both countries). place of incorporation as tie-breaker rule or place of
effective managementwatch them in order to assign residence
PE. A material PE is defined as a fixed place of business. If a PE exists the State has
the power to tax the profits that are attributable to the PE. If a treaty exists, the definition
of PE has to agree with both domestic law and treaty provisions. In addition to a fixed
place of business the definition of PE contains:
o existence of a place of business
o the place must be fixedfor a reasonable duration of time
o
the carrying on through the fixed place of substantial business activities (not
auxiliary activities such as storage etc)

Building site, minimum duration requirements is more than 12 months.

A personal PE is a person who act on behalf of an enterprise and has the authority(that
habitually exercises) to conclude contracts in the name of the enterprise (dependent agent who
may or not may be an employee independent agent both legally and economically, who acts on behalf of the
enterprise but on the ordinary course of his business)
3. Chapter 3 Taxation of incomeDISTRIBUTIVE RULES
Distributive rules regard income tax. There are two structures available:
the other state must exempt
exlusive power to tax, complete legal consequences, SHALL BE TAXABLE ONLY that income from its tax
shared power to tax, open legal consequences, MAY BE TAXED IN is completed by
art. 23 of the DTC. This article provides two relief mechanisms that must be coordinated with
national legislation, exemption and credit.
Other articlesart 6 reserves to the source-country the right to fully tax income derived fromimmovable
property which means agriculture, forestry and natural resources, while art 13 that of capital gains; art. 5
disposes that business profits shall be taxable only in the resident state, unless the enterprise has a PE in
the other contracting stateSJ: that state can tax only the profits of that PE; art 8: profits from operating ships or
aircraft in international traffic shall be taxable only in the state where the effective place of management is
situated; art 9 associated enterprises: antiavoidancetransfer pricing and arms length principle; art
10,11,13 passive income (dividends , interests and royalties) shared taxation with a limitation on
sourcethe treaty sets the maximum with-holding rates
OECD MC provides maximum WHT rates, hence the tax rate of the source country have to be
lower than the one stated by the Model. There are two specific topics that stand for a reduced
WHT and that need to be explained:

1. The treaty benefits can be accrued directly if the limitation of WHT is applied at source
by the payer or indirectly when the payer is witholding the full amount of WHT (taxpayer is paying the full
amount of foreign tax) and then is up to the taxpayer to apply in the source state for a tax refund. This second
way produces evidently financial disadvantages.
2. Tax avoidance schemes are curtailed because only residents of a contracting state are
entitled to benefit from reduced WHT rates granted by a DTC. Taxpayers that are not residents of a
contracting state try to obtain the benefits of the treaty by organizing corporations or other legal entities in
one of the contracting statesthey create a conduit. Thanks to this taxpayer should avoid treaty shopping
and create conduit, however the only countermeasure (in OECD MC) is the beneficial ownership. According
to art. 10 a beneficial owner is a person who gets dividends for himself and not for tax avoidanceother
countermeasures must be fin in domestic anti-avoidance legislation

The commentary of OECD MC suggests a LOB (limitation on benefits) clause which provides
that treaty protection is not denied to a corporation resident of 1 contracting state if the income obtained
in the other contracting state derives from the active conduct of a trade or business (not investment).
If the corporation fails the active business test, there are 2 conditions to have the treaty benefits:
1. Gross income not used to pay interests, dividends and royalties to persons non entitled to treaty
protection;
2. 50% of the shares must be owned by persons resident of one of the contracting states.
art. 21 is called catch-all clause because it close the system stating that: items of income of a
resident of a contracting state, that not deal with the aformentioned articles, shall be taxable
only in that state.

Lesson #13, #14

TRANSFER PRICE: is a price set by a taxpayer when selling to, buying from or sharing
resources with a related person (=who share the same interests). A market price is a price set in the marketplace for
transfers of goods and services between unrelated persons.
Juridical entities that belong to the same economic group are likely to structure the price in order
to minimize the overall tax burden. Aco. might avoid to pay tax in a country by shifting income to
Bco (Aco which has higher taxes sells goods to Bco which has lower taxes at a lower price, this way it has
less income to tax). This is called Income shifting. It is aimed to lower tax rates and tax benefits in general
(the total tax burden is reduced).
The legal countermeasure is that of a transfer pricing legislation. The intragroup transactions
must be accounted for, for tax purposes, at market value, using the arms length principle.
( It means that transfer pricing should reflect the prices of unrelated parties acting independently).
Tax law values are normalized through the application of market values, replacing effective prices of
transaction. If the income tax base is decreased as a result of the application of correlative adjustments the
item of income shall be accounted for at the normal value.
Given the difficulties in defining the market prices, the OECD provides the OECD Transfer
pricing Guideline in which there are 5 methods of determining the arms length principle: 3
methods are traditional while the other 2 should be used as a last resort:
1. CUP (Comparable uncontrolled price) method
In order to find the mkt price, use as a comparison the sale of similar products between unrelated parties in
similar circumstancesnot suitable for taylor-made products (intermediate, highly sophisticated and unique goods)
2. Resale price method
The arms length is found by subtracting an appropriate markup from the price at which goods are
ultimately sold to unrelated parties
The taxpayer sells his manufactured goods to a
7
related party acting like a distributor and the
related party sells them to final customers
without adding anything the goods

3. Cost plus method

Given the costs of the seller, an appropriate amount of profits is added to them by multiplying
the sellers costs to an appropriate profit percentage
The taxpayer sells his manufactured goods
to a related party and the related party
sells them to final customers but first he
adds his brand name on the goods

4. Profit split method

The worldwide taxable income of related parties is allocated between them in proportion to the
contribution they made in earning that incomedistinctive feature: this method is used for aggregate profits from a series of
transactions and not only for 1 transaction like in the first 3 methods

5. TNMM, transactional net margin method (also known as CPM, comparable profit method)
Used to determine the transfer pricing for tangible and intangible properties. How? By comparing the net
profitability of the taxpayer with the rate of profitability established by the tax authoritiesif his profits are
outside their range, they adjust those transfer prices in such a way that they fall within their range.

A tax payer wanting prospective approval of its pricing methodology in respect to international
transactions must submit a request to tax authorities, an APA (Advanced pricing agreement)explaining while
such methodology would produce appropriate arms length results.
Italy provides an APA mechanism called International ruling after the presentation of the request, the parties have 180
days to negotiate the agreement which will be binding for 3 years

Lessons #15
TAX AVOIDANCE ( avoid the obligation/ stop the problem to arise) is against the spirit of the law but formally it is
legitimate because its made in a formally lawful manner in order to gain tax benefits (its about using the words of
the rules in your favour). Tax evasion is illegal and it involves fraud or intentional non disclosure of income.
There are some reasons in tax planning:
1. Greater tax saving in according to the law
2. Financial related issues
3. complains, documents, claims
How DTC react against tax avoidance and tax evasion?

Treaty shopping
LOB clauses
Exchange of info and mutual administrative assistance

ANTI-AVOIDANCE LEGISLATION
1. transfer pricing legislation (national anti-avoidance legislation)
2. Thin capitalization rules
In financing a company the choice is between debt and equity. When interests is payed by a resident
corporation to a non-resident taxpayer, the interest is deductible in his income. The problems arise when
the shareholder is a non-resident lender and the corporate tax of the resident corporation may be seriously
eroded by the payment of interests . In order to avoid this indirect influence thin capitalization rules
provide a limit on D/E ratio over which the deduction for interests is denied if the equity compared to the dept is
too small, you treat interests as dividends and this means that you dont deduct them from the income

3. CFC legislation
CFC stands for Controlled foreign companies, domestic tax on foreign source income can be
deferred or postponed by establishing a foreign corporation to receive the income.
8

Because these are considered to be separate legal entities the controlling shareholders are not
taxable until they dont receive the distribution of income. time benefit advantage
Solutions: CFC legislation
look-through approach: the existence of the legal entity in the tax haven is disregarded by the country
of the shareholder the CFC is not subject to tax in the country of the shareholders and they are
taxed on their proportionate share of CFC income
personal scope CFC legislation refers to entities that are residents in a tax heaven, that are
corporations taxed separately from their owners, and that are controlled by domestic shareholders
(ownership of more than 50% of voting shares).
Tax heaven defined as a national jurisdiction with very low tax rates that provides little or no
assistance to tax authorities of shareholders country of residence
Exemptions granted if CFC is engaged primarily or exclusively in a genuine business activity
Relief In order to avoid DT some countries do not tax dividends distributed by the CFC because these
dividends are already taxed through the transparency principle.
In Italy there is a special tax heaven provision Italian enterprises cannot deduct payments made to tax
heaven entities unless the taxpayer establishes that 1) the transaction effectively took place, 2) the tax
heaven entity is carrying a genuine economic activity, 3) the operation itself has genuine economic reason.

Lesson #16, #17

EUROPEAN TAXATION LAW
European law is easier to understand because there is one economic key idea: the creation of a common
market (best mechanism of allocation of resources) that maximizes the benefits of the Community.
Taxation has to be made in such a way that it does not create distortion or alter the allocation provided by
the market. taxation as a problem to be kept under control: it has to achieve NEUTRALITY
In order to reach NEUTRALITY, EU legislation must lead an INTEGRATION process made by:

POSITIVE INTEGRATION (legislative)provisions, rules given by the primary and secondary EU law:
Primary EU law

TEU
TFEU

Secondary Eu law

Regulations
Directives
Decisions

NB:
regulations have general application, are binding in their entirety and are directly applicable in
the MS.
Directivesthe results to be achieved are binding but the form and the methods used are a choice
of the national authorities (exception: self executive directive)
Decisionsare binding in their entirety.
We have 2 groups of provisions:
1. Art 110-115 TFEU: tax provisions 113 deals with HARMONISATION (indirect taxes) ..adopt
provisions for the harmonization of legislation concerning turnover taxes, excise duties and other
forms of indirect taxation.. (direct taxes: income, capital and any other direct indicator of the
ability to pay of the individual while indirect taxes: consumption, transfer of goods and any other
indirect indicator of the ability to pay of the individual) while art 115 deals with APPROXIMATION
(direct taxes). The difference between A and H is that H disciplines the tax in its entirety, it provides
the whole model of the tax while A only certain single aspects (VAT vs PS (only dividends and not with the entire
income))

Pay attention, the tax treaties prevails on the domestic provisionsprimaut of Eu law over domestic provisions

2. Custom duties provisions the custom duties are about goods (and not services) crossing the
borders of EU. The idea of a common and internal mkt implies the concept of external borders: no
duties are being applicable on internal transactions (custom unions) but if external goods are
entering in EU territory duties must be applied (these duties depend on the nature and quantity of
the goods) . The biggest part of EU provisions related to custom duties is set by the Community
Customs Code.

CUSTOMS CODE: Common Customs Tariff duties shall be fixed by

the Council

General provisions:
customs procedure
release for free circulation
special procedures: transit, storage, specific use and processing
export
community goods: imported or created in the EU territory

Methods of levying dutiescustom tariff origin important: because of agreements with

other countries on special tariffs

Formalities and supervisioncustom declaration

the act where a person indicates the

wish to place the goods under a given customs procedure.

Lets analyze the special procedures

TRANSITinternal or external: seal the goods into a container until you cross the territory
STORAGEput the imported goods into a warehouse of tax auth. so you dont pay
dutiesfinancial advantage (but you must not transform the goods)
SPECIFIC USE goods with temporary admission and end-use (eg cars of tourists and fuel for
motorbikes competition)

PROCESSINGproductions processes moved from EU territory to non EU territory and

viceversa (respectively, outward and inward processing). No custom duties at exit, but when you come
back you must pay duties for the additional value achieved in that process.

NEGATIVE INTEGRATION (judicial- EUCJprohibitions): a matter of not doing something, of not

interfering with the general economic principles set by the treaties. advantage: it doesnt require
unanimity.

Lesson #18, #19, #20, #21

Lets now analyze an indirect tax (in art 113 TFUE its called turnover tax): the VAT. It is a part of positive
integration of Harmonisation. But unlike custom duties, VAT is harmonized by directives and not
regulations. the mainly harmonized indirect taxes are custom duties, VAT and excise duties ( excise
duties are applied on: energy products, alcohol and tobacco).
VAT wasnt introduced with only one and unique directive but with a long series of directives and the first
one was in 1967. Since there were too many directives available, the EU institutions decided to merge all
of them in a single one VAT CODE (DIRECTIVE 2006/112)
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VAT is a double side tax: its a tax on consumption and on the added value (economic & juridical approach)
and a tax on a single transaction and on aggregate transactions (static & dynamic approach). What does
double side mean? It means that is difficult to understand VAT because its logic depends on the point of
view youre adopting. its a matter of choosing the correct perspective.
Scope of application: you have to apply to goods and services a general tax on consumption exactly
proportional to the price of the goods and services. What about the transactions between entrepreneurs?
They are taxed but since VAT must be neutral, entrepreneurs have the right to DEDUCTION. When they
issue a invoice, VAT represents a credit toward tax authorities compensation between VAT DEBTS and
VAT CREDITS. VAT is not a cost for the entrepreneur but only a financial matter (it is a cost for the final
consumer) so it is neutral inside the value chain. see invoice document and Pinocchios case.
TAXABLE PERSONS: any person who, independently, carries out in any place any economic activity, no
matter the purpose or the results of that activity.

TAXABLE TRANSACTIONS:

Supply of goods
Place of supply without transport: where the goods are located when the supply takes place; with
transport: where the goods are located when their dispatch to the customer begins

Intra-EU acquisition of goods

This is a peculiar regime introduced in 1992 and it was supposed to be transitory (only 4 years) but today it
is still there. Why? The main idea behind the intra-EU acquisition was to make transactions between MS
treated as domestic transactions with the deduction method. EG:
The problem here is that E1 issues an invoice with italian VAT.
Price 100, VAT 22%. Italian Entrepreuner pays the VAT to
Italian authorities. In France, E2 receives the invoice and
assumes it as a credit. What is the problem of this 22% credit?
In France theres another VAT and other Tax Authorities.
these 2 taxes derive from directive 112 but they belong to
different legal systems. Solutions: reverse charge.

There are 3 requirements:

1. Supply of goods
2. B2B transactions
3. Transportation of goods from MS1 to MS2 who purchase the goods

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Reverse charge: The supplier issues the voice without applying VAT (only the taxable amount)exemption
at origin. The buyer applies his national VAT to the taxable amount already displayed by the supplier VAT
applied at destination. At the end, no VAT is materially paid because the buyer has the right to deduct it
debit=credit: its a compensation.

Supply of services
Place of supply B2B: where is located the one who buys; B2C: where is located the one who sells
located means where they established their business

Importation of goods
The chargeable event shall occur and VAT shall become chargeable when goods are imported. VAT is
always applicable, no matter who is doing the importation (it may or may not be a taxable person). Why is
VAT always applicable on importation? To maintain neutrality: because the price of the goods imported
would be lower if we dont apply VAT.
PAY ATTENTION: First you have to pay custom duties for the release for circulation of the goods, and after

that you must apply VAT. What about exportation? MS shall exempt the supply of goods outside the Union.
VAT WAREHOUSE:

Its the equivalent of the custom warehousesuspend VAT: freeze the tax obligation when you put the
products in a warehouse under the control of tax authorities. The only difference is that now you have an
advantage For custom duties you cannot transform the goods, when they are released they must be the
same. While now, you can apply transformation and only when you release your transformed products you
apply VAT.
AN OVERVIEW OF INCOME TAXATION
Now we talk about direct taxes (art 115 TFUE), which have a limited positive integration. In fact were
dealing with approximation instead of hamonisation. (approximation uses directives and not regulations)
The most important directives in the field of income taxation are:

90/434 (now 2009/133) Mergers & Acquisitions: regime of neutralitythey dont give rise to
taxable income
90/435 Parent Subsidiary: No taxation on intragroup dividendsthe aim of PS directive is to
eliminate the juridical and economical Double Taxation.

Participation 10%

Parent
company A

Subsidiary
company B
Dividends

The Dividends paid have a special regime: The company distributing

the dividends is paying corporate income tax. Upon the distribution,
the dividends will pay a WHT (paid by the shareholders because
dividends form an income sourced in the state). After that, the
dividends become income of the parent company and it must be
taxed. Problem: INTERNATIONAL DOUBLE TAXATION solution:
PS DIRECTIVE: it eliminates the economical and juridical double
taxation. How?-->Prohibition of WHT at source and making
dividends exempt in the income of the parent company

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90/436 Arbitration Convention: not a directive but a multilateral treaty involving all EU states
(not EU law). It establishes a procedure for the application of transfer prices between EU borders.
2003/49 Interests & Royalties: It has the same mechanisms of the PS directive with one
differenceIts not about the 2 types of IDT but only 1. Why? Because there is no a problem of
economical double taxation, since interests and royalties are deductible (they are considered
expenses). There is only the problem of juridical DT which is solved with the prohibition of the
WHT.
2003/48: Council Directive on taxation of savings income in the form of interest payments.

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