handbook-tb

Wei CuiA second, more important challenge for taxing non-residentson capital gains lies elsewhere: namely, the tax can be difficult toenforce, and the dynamics of engagement between tax administratorsand taxpayers in collecting the tax can be quite different from normaltax administration. These difficulties may provoke questions aboutwhether the likely revenue payoff from the tax justifies the resourcesneeded for its enforcement. The difficulty of enforcing the capital gainstax on non-residents may sound clichéd; however some of the morefamiliar descriptions of the administrative difficulties may not beaccurate. For example, it is unclear whether developing countries aremore likely to be at a disadvantage in administering the tax. The presentchapter analyses the pros and cons of the various mechanisms foradministering the capital gains tax for non-residents and argues thatbuyer withholding is a more effective enforcement mechanism thantactics that focus on the transferred assets. Moreover, ways in whichvoluntary compliance in this area may be improved are considered.Tax avoidance poses the third challenge for taxing non-residentson capital gains. The typical strategies for legally avoiding atax on capital gains imposed by a source country are neither complexnor difficult to identify. They include treaty shopping and the use ofoffshore holding companies. However, the incentives for taxpayers toadopt such strategies may vary as a function of the severity of the firsttwo challenges. If there are basic inconsistencies in the rules adoptedby domestic law and by tax treaties towards capital gains taxation, andif the enforcement of such tax rules is inadequate, taxpayers may havegreater incentives to engage in avoidance. Moreover, the feasibilityof avoidance behaviour could also depend to a substantial extent onnon-tax characteristics of the business and the legal environment forinvesting in a country: some countries witness the use of extensive offshoremarkets through which investments are channelled into thosecountries, while others do not experience such practices. The presentchapter will discuss both specific and general anti-avoidance rules formaintaining the integrity of a tax on capital gains earned by foreigners,as well as how to choose among these rules in light of the circumstancesthat generate tax avoidance.Section 2 of the present chapter examines the general principlesfor taxing non-residents on capital gains realized on the dispositionof domestic assets. It considers the relationship between capital110