handbook-tb

Taxation of non-residents’ capital gainsprice, buyers are willing to pay in view of the expected tax on income,then the seller still realizes a gain and the seller’s ownership of the assethas generated a form of income for him or her that is not captured by thetax imposed on future income. Indeed, in this example, since the burden(economic incidence) of the tax on dividends has already shifted ontothe seller by being capitalized into asset value, it is clear that only a taxon capital gains can reach the additional income realized by the sellerin the form of gain. Thus insofar as gains arise as a result of changes inexpectations, there is a unique role for the tax on capital gains — one thatcannot be played by the tax on investment income such as dividends. 152.2 Why do source countries tax non-residents so little oncapital gains?If capital gains taxation is not redundant, and if, moreover, capitalgains may arise not only in connection with immovable property,then it is striking how little source countries are expected to tax nonresidentson capital gains under prevailing international norms. Mostimportantly, many developed countries do not tax capital gains realizedby non-residents on the disposition of shares of domestic (that isto say, resident) companies, with the exception of companies that holddomestic real estate. There are a number of independent reasons for theadoption of this policy, most of which are not necessarily persuasive inthe context of developing countries. For example, developed countriesgenerally prefer residence-based taxation, vis-à-vis themselves anddeveloping countries. 16 In the European Union, there has even been acoordinated move towards residence-based taxation, removing the taxmany empirical confirmations of the capitalization of different types of taxesinto the value of different types of assets, for example, real estate and companyshares.15To put it differently, a tax on dividends will tax a given amountof dividend the same way, no matter how the shares yielding the dividendsare acquired. For income tax purposes, however, how the shares areacquired — with how many previously taxed funds — does matter.16If investment flows between two developed countries are roughlyequal, it makes sense for them to forgo source-country taxation; thereby theywill save administrative costs without losing revenue overall.115