handbook-tb

Wei Cuicompanies among companies that hold substantial immovable propertyin the source country — the source country is allowed to tax thecapital gains realized on the sale of all such companies in accordancewith Article 13 (4) 32 — the distinction is in fact highly relevant to thepolicy of taxing share sales, when that policy is motivated by antiavoidanceconsiderations. 333.4 Whether to tax foreign exchange gainsMeasurements of capital gains or losses are sometimes affected by foreignexchange gains or losses. 34 For example, local assets purchasedwith US$ 1 million may sell later for more than that amount, notbecause the assets have appreciated within the local market (they mayeven have suffered a slight loss), but because the local currency hasappreciated against the United States dollar. Conversely, a real capitalgain may be hidden by a foreign currency loss. In designing therules of taxing capital gains, a country will want to consider how todeal with foreign currency gains or losses. For example, if a countryis expecting a steadily appreciating currency against the currency inwhich the investment is initially denominated, it will collect more revenueby measuring gain in the foreign currency than in the domestic32See section 5 below.33See Article 13 (4) of the United Nations Model Convention. The UnitedNations Committee of Experts Paper surveyed a number of countries regardinghow Article 13 (4) was implemented, and one set of questions posed to thecountries related to how shareholders can learn that the companies they ownderive their values principally from immovable property in a given country.These questions seem to be pertinent mostly for publicly traded companies,and it seems debatable whether the sale of shares of these companies shouldbe taxed in the source country.34See paragraph 4 of the Commentary on Article 13 of the UnitedNations Model Convention, quoting paragraph 11 of the Commentary onArticle 13 of the OECD Model Convention. (“The Article does not distinguishas to the origin of the capital gain …. Also capital gains which are dueto depreciation of the national currency are covered. It is, of course, left toeach State to decide whether or not such gains should be taxed.”) See alsoparagraph 4 of the Commentary on Article 13 of the United Nations ModelConvention, quoting paragraphs 16 and 17 of the Commentary on Article 13of the OECD Model Convention.124