Taxation of Non-Residents

Taxes constitute the states major revenue source and guarantee their functioning leading to social equality, peace and economic growth. A state is allowed to design its tax system the way it considers it appropriate. This general assumption is based on the principle idea of state sovereignty in international law. However, the states freedom to draft its tax law is not completely unrestricted. While it is commonly accepted that resident tax payers can be taxed on their world-wide income, the question whether and to which extent non-resident tax payers can be taxed is disputed. In a globalized economy defining the legal basis on which ground a non-resident should be taxed and how this tax liability is enforced, poses a great challenge to national legislators. Hence, this research project will by means of legal interpretation structured in three parts answer eight research questions and establish which limitations to the states right to tax non-residents exist. The first part will lay down and explore the fundaments of a states jurisdiction to tax in international law. Thus, the first decisive step within the research project will be taken by identifying the existing concepts found in national tax laws for taxing non-residents. Part two, which forms the projects core, analyzes the limitations set by international and European law for the taxation of non-residents. The fundamental question is, whether international law requires the existence of a certain genuine link to the state, which assumes a right to tax the non-resident. Can a state tax a non-resident on his world- wide income, although only this income shows no economic or physical link to this state? For the purpose of answering this question, the existing concepts for taxing non-residents under national law and the rules granting taxing rights to the source state vis-à-vis non-resident tax payers in international tax law will be analyzed. In addition, it will be analyzed which limitations to taxing non-residents are foreseen by European law. Both steps will take into account the limitations set by the need to effectively enforce the tax liability. Depending on the whether the genuine-link criterion is found to form binding international law, the third part will establish a conceptual framework for drafting taxation rules for non-resident tax payers, which are both in line with international and European tax law as well as the underlying policy intention to realign value creation and taxation. This research project thus will give answers to pressing questions both of great academic and political importance. Hence, the answers found to the research questions will foster the academic debate and will give policy makers clear guidance when drafting new tax rules for non-residents. 1

The set of rules applicable to cross-border situations found both in treaty and domestic tax law have in recent years - in an unprecedented manner - been the object of political, academic and legislative scrutiny. At the core of this global tax policy debate lies the ubiquitous claim that the current allocation of taxing rights between jurisdictions is "outdated" and "inappropriate". Originally designed to be applied to a "brick and mortar"-economy, digitalization has rendered the system's reliance on physical criteria for allocating taxing rights meaningless. In the digital age, companies are able to be significantly engaged in another jurisdiction without any physical connection. Combined with the ability to allocate valuable intangible property like trademarks, patents or algorithms to subsidiaries in low tax jurisdictions, particularly the major global digital enterprises are able to achieve very low overall levels of taxation. In response, a variety of reform proposals have been formulated, however without either of them being able to find the necessary approval in the respective rule-making fora. Analyzing the reform proposals discussed at the level of the OECD and in academic writing shows that all of them are based on a set of assumptions. These assumptions concern three strongly interconnected issues: (1) The justification of taxation as such, (2) the necessity of reform and (3) the principles the reformed allocation should be based upon. Repeatedly the proponents of reform proposals argue that change is necessary in order to promote the system's "fairness" or "economic efficiency". Behind this background, the research project asked two fundamental questions: (1) What is the underlying theoretical understanding of law the debate is based upon? Put differently: Why should "fairness" or "economic efficiency" be of any legal relevance to begin with? (2) Moreover, the project assessed the limitations any proposal to reform the allocation of taxing rights is subjected to under existing international and EU law. The project was able to show that the current tax policy debate and tax scholarship is characterized by an implicit parallel use of both natural law-based and a positivist understandings of international taxation. A fact that stands in the way of reaching consensus due to the lack of a common staring point. In order to overcome this shortcoming the research project advocates a positivist understanding of international tax law focusing on the proposed rules' recognition and acceptance as law. The project thus aligns its two core research questions, since in order to fit into the proposed positivist model a proposed rule needs to show its compatibility with superior existing law. The analysis shows that while international public law does not pose substantive limitations, EU primary law significantly restricts the freedom of domestic legislators in designing their tax system.