handbook-tb

Wei Cui3.2 Special issues in taxing transfer of interests in entitiesTaxing share sales creates the possibility of excessive taxation of theappreciation experienced by the assets held by the target company(whether immovable properties, operating businesses or some othertype of assets): the appreciation may be taxed at both the corporateand the shareholder levels. In fact, the problem arises even for businessentities (for example, partnerships) that are not themselves subject totax: the sale of the assets of a partnership and the sale of the partnershipitself are both ways of realizing a gain from the appreciationof partnership assets. Both need to be subject to tax to prevent taxpayermanipulation. 30 However, this means that the same economicgain might be taxed more than once. If such excessive taxation is to beavoided, then potentially complex measures — involving conformingthe “inside” and “outside” cost basis of assets and shares — may have tobe applied to ensure that a gain that has been taxed at the shareholderlevel is not taxed again at the entity level (and vice versa).Such measures are adopted in domestic contexts by somesophisticated tax systems (such as those implemented in Australia andthe United States) within regimes for group consolidation or “flowthrough”taxation. However, such regimes rarely extend to foreignentities. In domestic contexts, the ability of corporations to claimlosses also sometimes mitigates the problem of excessive taxation ofcorporate assets. If foreign shareholders (or foreign owners of interestsin other forms of business entities such as partnerships) are taxed ona gross-income basis and cannot offset losses against gains, however,corporate assets that are ultimately foreign-owned are again morelikely to be subject to excessive taxation in this respect. In general,few countries that tax foreigners on the disposition of companies thathold domestic assets (such as immovable property) have systematicallycommitted to mitigating potential excessive taxation.One approach suggested later in the present chapter (see section6) in connection with the taxation of indirect share transfers is toimprovements are added to the purchase price.” However, the same paragraphacknowledges that “the Article does not specify how to compute a capitalgain, this being left to the domestic law applicable.”30See David A. Weisbach, “The Irreducible Complexity of Firm-LevelIncome Taxes: Theory and Doctrine in the Corporate Tax,” supra note 21.122