handbook-tb

Taxation of non-residents’ capital gainsgains and other forms of income from an asset, as well as the questionwhy immovable property has been regarded as a special asset class forsource-based taxation of capital gains. Section 3 analyses specific legaldesign issues for taxing capital gains, including whether to assimilatesuch taxation to gross- or net-income-based taxation, and issues arisingfrom the taxation of shares of companies. Section 4 considers thefundamental administrative issues in taxing non-residents on capitalgains. Whereas the issues described in sections 2–4 below normallyneed to be addressed under domestic legislation, section 5 brieflyreviews Article 13 of the United Nations Model Convention — highlightingsome shortcomings of the Article from the source-countryperspective — as well as treaty practices among developing countrieswith respect to taxing capital gains. Section 6 turns to tax planningcommonly adopted to avoid the tax on capital gains. It pays particularattention to policies recently adopted by a number of developingcountries aimed at taxing indirect transfers of the shares of residentcompanies. Section 7 briefly examines the issue of departure taxes forindividuals. Section 8 concludes by offering some reflections on howto view the pursuit by developing countries of capital gains taxation ofnon-residents.2. General principles for taxing non-residents oncapital gains2.1 The economic substance of capital gainsIn thinking about taxing non-residents on gains realized on the dispositionof domestic assets, it is useful to keep in mind what assets tendto generate capital gains in the first place and why. For instance, massproduceddurable assets (for example, machines, computers, householdappliances, vehicles, ships and aircraft) generally see their valuesdepreciate over their useful lives because of wear and tear and newer,better products becoming available on the market. Even the value ofbuildings as physical structures — if the value of the land they sit onis disregarded — generally declines instead of increases. By contrast,the value of the ownership (for example, through company shares) ofbusinesses may increase, if the businesses are successful, as may thevalue of land in locations that experience economic growth. Other111