The arising basis of taxation is a fundamental principle in many countries’ tax systems. Under this system, taxpayers are obligated to pay tax on their global income, regardless of the source or where the income is received.
Historical Context
The concept of taxing global income can be traced back to early forms of governance, where rulers would levy taxes on their subjects’ wealth and earnings to fund state activities. With the expansion of trade and the globalization of economies, the need to establish comprehensive tax frameworks became imperative. The arising basis became a standard to ensure that individuals and businesses contribute fairly to the national revenue, regardless of where they operate.
Types/Categories
- Resident Taxation: Applies to individuals or entities that are considered residents of a particular country. They are taxed on their worldwide income.
- Non-Resident Taxation: Generally, non-residents are taxed only on income that originates from within the country.
- Domicile Considerations: In some jurisdictions, tax liability may depend on whether an individual is domiciled in that country.
Key Events
- 1913: The introduction of the federal income tax in the United States included provisions for taxing citizens’ global income.
- 1986: The Tax Reform Act in the U.S. further clarified rules regarding international income and taxation.
- 2008-Present: Various global initiatives, such as the Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA), emphasize the need for transparency and reporting of global income.
Detailed Explanations
Under the arising basis, taxpayers must report all forms of income, including salaries, dividends, interest, and rental income, from both domestic and international sources. Tax treaties and credits are often in place to prevent double taxation, where the same income is taxed by more than one jurisdiction.
Example Calculation
A U.S. citizen earning income both in the U.S. and abroad:
- U.S. Salary: $50,000
- Foreign Salary: $30,000
- Total Income: $80,000
The taxpayer will report and be taxed on the total $80,000, with possible credits for taxes paid to the foreign country.
Charts and Diagrams
graph LR
A[Global Income] --> B[Domestic Income]
A --> C[Foreign Income]
B --> D[Taxed in Home Country]
C --> E[Taxed in Home Country]
C --> F[Foreign Tax Credit]
Importance
The arising basis ensures tax equity and prevents tax avoidance. It upholds the principle that taxpayers contribute to the public funds of their resident country, supporting infrastructure, public services, and social programs.
Applicability
- Individuals: Most commonly applies to residents and citizens of a country.
- Corporations: Businesses may also be subject to similar rules, with considerations for international operations and subsidiaries.
Examples
- An American citizen working in Germany must report their German income to the IRS.
- A British citizen with investment income from the U.S. will need to declare this on their UK tax return.
Considerations
- Double Taxation Treaties: Agreements between countries to reduce tax burdens and avoid double taxation.
- Foreign Tax Credits: Credits provided to offset taxes paid to foreign governments.
- Tax Residency: Determination of where an individual or business is considered a resident for tax purposes.
Related Terms
- Domicile: Legal residence of an individual for tax purposes.
- Tax Residency: Status that determines tax obligations based on residence.
- Foreign Earned Income Exclusion (FEIE): A provision that allows qualifying U.S. citizens and residents to exclude a certain amount of foreign earned income.
Comparisons
- Arising Basis vs. Remittance Basis: Under the remittance basis, only income brought into the country is taxed, unlike the arising basis where all income is taxed regardless of location.
Interesting Facts
- The United States and Eritrea are two of the few countries that tax their citizens on worldwide income regardless of residence.
- Tax treaties often play a critical role in facilitating international trade and reducing tax burdens.
Inspirational Stories
- Many expatriates diligently report and pay taxes on their global income, contributing to their home country’s economy and demonstrating civic responsibility.
Famous Quotes
- “The avoidance of taxes is the only intellectual pursuit that still carries any reward.” — John Maynard Keynes
Proverbs and Clichés
- “Nothing is certain except death and taxes.”
Expressions, Jargon, and Slang
- Tax Haven: A country with low or no taxes where individuals and companies may seek to shelter income.
- Double Taxation: Being taxed twice on the same income by different jurisdictions.
FAQs
Q: How does the arising basis of taxation affect expatriates? A: Expatriates must report all global income to their home country’s tax authority and may need to pay taxes on this income, though they may receive credits for foreign taxes paid.
Q: What are tax treaties? A: Tax treaties are agreements between countries to resolve issues of double taxation and tax evasion, providing clarity and relief for taxpayers.
References
- Internal Revenue Service (IRS) - www.irs.gov
- HM Revenue & Customs (HMRC) - www.gov.uk/government/organisations/hm-revenue-customs
- Tax Foundation - www.taxfoundation.org
Summary
The arising basis is a comprehensive tax principle ensuring that all income, regardless of its origin, is taxed by the taxpayer’s home country. It promotes fairness in the tax system, ensures adequate revenue for public services, and maintains compliance in an increasingly globalized world.
