handbook-tb

Chapter IIITaxation of non-residents’ capital gainsWei Cui*1. IntroductionDesigning and enforcing a legal regime for taxing non-residents oncapital gains realized from domestic sources is a topic of vital importancefor developing countries. The reason is that non-capital-gainincome that may be derived from a given country can generally be crystalizedin the form of capital gains on the disposition of the incomegeneratingasset. 1 This is true of most important types of income, be itrent, interest, royalty, dividend or business profit. Taxing capital gains,therefore, is invariably needed to ensure that income from assets in thesource country is properly subject to tax. In this sense, capital gainstaxation of non-residents is inherently a measure for protecting thatcountry’s tax base from erosion.This perspective, however, cannot be said to be clearly reflectedin the prevailing international tax regime. There is a well-known principlethat if the non-capital-gain income from an asset is taxable in asource country (for example, because the asset is properly viewed asbeing located in that country), then the capital gains from the dispositionof that asset should be taxable in the same country. 2 This principle,*Associate Professor of Law, University of British Columbia Faculty ofLaw, Canada.1The intrinsic connection between income derived from an asset andcapital gains realized on the disposition of the asset is grounded in a basictenet of modern finance theory, namely, that the value of an asset simply isthe present discounted value of future income that the asset can be expectedto generate.2“It is normal to give the right to tax capital gains on a property of agiven kind to the State which under the Convention is entitled to tax boththe property and the income derived therefrom.” See paragraph 4 of theCommentary on Article 13 of the United Nations Model Double TaxationConvention between Developed and Developing Countries (United Nations107