handbook-tb

Protecting the tax base of developing countriesway as if the gain had arisen with respect to assets located directlyin the country. This approach may be difficult to enforce, especiallyif there is no requirement under local law for the sale of shares to bereported by the domestic corporation. In addition, tax might be collectedby a withholding tax obligation on the purchaser to withholdand remit the appropriate amount of tax. However, in the case of asale between two non-residents, this obligation is difficult to enforce inpractice. Additional administrative issues are involved if the decisionis made only to tax the sale of the shares in cases where there is a taxavoidance element.8.3 Multiple taxation of the same economic gainAn additional structural issue is the impact the sale of the sharesshould have on the tax status of the underlying assets of the corporation.If the sale of the shares is taxable but no adjustment is made inthe tax cost of the underlying assets, a second tax would be due on thesame economic gain when the assets are sold. Whether or not this patternof taxation is appropriate will depend on the general structure ofcorporate-shareholder taxation in the country.8.4 Shares of a foreign corporationAssuming the decision is made to tax the sale of shares of domesticcorporations in certain circumstances, a separate question is how totreat the sale of shares of a foreign corporation that has a domesticpermanent establishment or owns the shares of a domestic corporation.There are significant administrative difficulties in implementinga tax on such transfers as a general matter, both in terms of obtainingthe necessary information to assess the tax and implementing effectivemethods for collection. Regardless of how the issue of the taxabilityin general of such transactions is resolved, it may be desirable tohave a provision that imposes tax where the transaction can be viewedas involving tax avoidance — for example, where the transfer of theshares of the domestic corporation to a foreign corporation is followedby the immediate sale of the foreign shares, or in situations where theforeign corporation is merely a shell corporation.35