handbook-tb

Wei Cuihave always fitted uneasily within the above conventions. On the onehand, capital gains are often a form of passive investment income. Onthe other hand, the computation of the amount of gain will almostalways require the taxpayer to submit information about the originalcost of the investment and not just the amount of the gross proceeds. Incontrast to dividends, interest and royalties, it is difficult to collect taxon capital gains through final withholding. But once the non-residenttaxpayer is already required to file a tax return (because it has crossedthe administrative threshold), it can be fairly asked whether netincome-basedtaxation may be more sensible. This may mean allowingoffsetting capital losses from the country against the capital gain; itmay also mean permitting other types of expenses to be deducted. Onthe other hand, it may require a higher tax rate to be applied.Countries differ widely in this regard in their approaches totaxing non-residents on capital gains. China and Japan, for example,require the reporting of a taxable capital gain by a non-resident, butstill apply a reduced rate to such capital gains and do not allow offsettinglosses. This can be viewed as being at one end of the extreme. TheUnited States, by contrast, treats capital gains on the disposition ofcertain real estate-related (FIRPTA 25 ) property realized by foreignersas though they are simply business income, and allows other lossesrealized in connection with a United States trade or business of theforeigner to be offset against such capital gain. This can be viewed asbeing on the opposite end of the spectrum from China and Japan. 26There are important arguments in favour of allowing foreignersto reduce their taxable capital gains by their capital losses from thesource country. To begin with, recognizing gains but ignoring lossesmay discourage investors from taking risks. Moreover, taking lossesinto account allows a more accurate measurement of the income ofthe non-resident that has been realized in the country, and impartsgreater legitimacy to taxing capital gains. However, allowing loss offsetsdoes reduce the revenue potential from taxing non-residents oncapital gains. Moreover, because the tax on capital gains is difficult to25United States Foreign Investment in Real Property Tax Act (FIRPTA).26Canada allows the offsetting of losses from a given period from thedisposition of similar investments (taxable Canadian property).120