The Concept of Tax Jurisdiction
A national government will reserve the right to tax based on two important concepts in international tax law:
1) The residence of the company; and,
2) The source of the income.
The concept of residency is a central component of determining where, when, and how much income is taxable in one country rather than another.
A company that is considered resident in the United Kingdom that earns income from UK sources will undoubtedly be taxed in the United Kingdom.
However, what about a company that is resident in the United States that sends temporary workers to the UK? What about a company that through extremely poor tax planning (or clever, depending on the jurisdictions), is resident in two countries at once?
This seemingly simplistic concept of residency takes on a new level of detail and when combined with the concept introduced in the following paragraph, will serve to create a steady flow of income for practitioners of international tax around the world.
Source Of Income
It can also be said that all tax systems in the world, in one form or another, reserve the first right to tax income arising from sources arising within its borders.
For example, income from selling real estate in Country A will almost always be considered as sourced in Country A. Real estate is considered immovable property. It is hard to imagine that a house that is built in Country A is more closely connected to another country even if your company is resident elsewhere.
In the case of the provision of services that are provided in Country A, they will often (but not always) be considered to be sourced in Country A.
Governments that have income sourced in their country will often have the first right to tax that income but may concede this right under a negotiated tax treaty with another country (explained later).
About the author: Christian Wunderley, LL.M. is an international tax consultant and Managing Partner of the U.S tax firm, CD Tax Associates. He has several years of experience working in both financial services and international tax, including firms such as PricewaterhouseCoopers, BDO, and Citigroup. His specializations include withholding tax, particularly for non-U.S. businesses and investors that want to invest in the United States.