Letters to the Editor

Cross-border taxation questions

Sir - Now that European railways are becoming truly international and (hopefully) profitable, companies involved in the international rail transport of freight and passengers will have no alternative but to face the mind-boggling complexities of international taxation.

Under the current general rules of international taxation, a railway company involved in international transport will not only be subject to tax in its home jurisdiction, but also in another jurisdiction if it has a permanent establishment there. This is generally the case if it has a sales office in that other country, but it may also have a permanent establishment if it is running its operations in a joint venture with another company in the other country.

As most of the new cross-border rail transport projects are structured as cross-border joint ventures, most of the international railway transport companies will end up having a permanent establishment and will consequently also become subject to tax in the other country.

Although the double taxation that results from this rule is generally mitigated by the application of bilateral tax treaties that seek to allocate income between the various countries involved, the way these rules work in practice is far from clear and usually results in endless discussions with the tax authorities. Does a railway company have to allocate its income on the basis of time spent or train-km operated, or should the allocation depend on the level of sales actually realised in that other country?

Admittedly this problem will only become real when the companies really start making profits, but wouldn't it be much easier if one could avoid the problem altogether?

That this is possible is demonstrated by the airline and shipping industries that have faced exactly the same issues in the past. These sectors forced their respective governments to create a separate, industry-specific, treaty rule for the taxation of the airline and shipping industries. The rule simply says that all income from airline and shipping activities may only be taxed in the country where the company is based, regardless of whether the company did or did not have a permanent establishment in another country.

That this alternative can also be a solution for the railway industry is clearly demonstrated in North America. In the tax treaty between the USA and Canada, it is specifically agreed that railway profits may only be taxed in the country where the company is based. Wouldn't this be a solution for the European industry as well?

Robert Tieskens
Tax partner, Houthoff Buruma

Slightly older

Sir - I am afraid you are eight days late.

On February 15 1804, Richard Trevithick ran his Pen Y Darren locomotive on a trial run, and mentioned in a letter to a friend than the first trial had taken place 'the Monday before'. The latter day fell on February 13, and hence the 200th anniversary of 'the first journey of a steam locomotive running on rails' (RG 2.04 p74) was on February 13 2004.

As far as I know, only in Asunción, Paraguay, was the anniversary celebrated, by the running of a special steam-hauled train on the right day.

Ian Thomson
Transport Economist
Jefe, Unidad de Transporte CEPAL
Santiago Chile