An Analysis of Income Tax Issues of Cross-Border Financial Derivatives Transactions:Reflections on Tax Treaty Mechanism
Based on the main types and characteristics of financial derivatives,this paper discusses the tax issues on character,source and tax jurisdiction of financial derivatives income.Unlike traditional loan or equity transactions,it is difficult to characterize financial derivatives as dividends or interest,making the current tax treaty rules on dividends and interest unable to be applied to cross-border financial derivatives transactions,and the source state will face tax losses.At the same time,financial derivatives could provide taxpayers with tax avoidance chances,and there is uncertainty of the anti-avoidance rules based on the PPT.Therefore,it would be more specific to have detailed provisions in tax treaties or domestic laws for financial derivatives transactions.In addition,when a non-resident financial institution obtains a substantial amount of operating profits from a market jurisdiction through remote financial derivatives trading,it is similar to that of an enterprise that carries out business activities in a market jurisdiction to which the Pillar One Amount A rules apply.Therefore,the international community can draw on Pillar One Amount A rules to allocate certain operating profits of financial institutions among market jurisdictions.
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