{"id":22703,"date":"2013-10-14T09:06:53","date_gmt":"2013-10-14T08:06:53","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=22703"},"modified":"2013-10-14T09:08:23","modified_gmt":"2013-10-14T08:08:23","slug":"the-chance-to-review-international-tax-architecture-seems-to-come-about-once-a-century-should-not-be-ducked","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2013\/10\/14\/the-chance-to-review-international-tax-architecture-seems-to-come-about-once-a-century-should-not-be-ducked\/","title":{"rendered":"The chance to review international tax architecture seems to come about once a century and should not be ducked"},"content":{"rendered":"

The IMF's Fiscal Monitor report published last week entitled Taxing Times<\/a> has to be quoted at length when it comes to the reform of the international tax system:<\/p>\n

One set of gaps that has received particular attention\u00a0in the aftermath of the crisis\u2013reinforced, as was the\u00a0case with financial sector taxation earlier in the crisis,\u00a0by a strong public sense of injustice39\u2013are those in the\u00a0international tax framework. There are broadly two sets of\u00a0issues. One\u2013discussed in the next subsection\u2013is (illegal)\u00a0evasion by individuals. The other is avoidance by multinationals\u2013legal (or, cynics might say, not obviously illegal).<\/p>\n

Google, Starbucks, and other household names have\u00a0famously managed to pay very little corporate tax. But\u00a0of course, they are far from alone in this. Importantly,\u00a0the issue is not just one for advanced economies:\u00a0indeed, it is likely an even greater concern for developing countries, typically more reliant on corporate tax\u00a0receipts. Nor is the issue new: U.S. President John\u00a0F. Kennedy argued for fundamental reform 50 years\u00a0ago. What is new is the attention.\u00a0<\/em><\/p>\n

Some of the strategies that multinationals use to\u00a0reduce their tax liabilities\u2013by base erosion and profit\u00a0shifting, in the current jargon [can become]\u00a0mind-bogglingly\u00a0complex..... All this is symptomatic of\u00a0an international tax order under stress\u2013unsurprisingly,\u00a0since it was built piecemeal on the basis of principles\u00a0that have become increasingly outdated (as a result,\u00a0among other things, of the increased importance\u00a0of intrafirm trade, of services that can be delivered\u00a0remotely, of the easing of capital movements, and of\u00a0massively increased financial sophistication).<\/em><\/p>\n

Assessing how much revenue is at stake is hard. For the\u00a0United States (where the issue has been most closely studied), an upper estimate of the loss from tax planning by\u00a0multinationals is about US$60 billion each year\u2013about\u00a0one-quarter of all revenue from the corporate income tax\u00a0. In some cases, the revenue at stake is very\u00a0substantial: IMF technical assistance has come across cases\u00a0in developing countries in which revenue lost through\u00a0such devices is about 20 percent of all tax revenue.\u00a0<\/em><\/p>\n

With strong support from the Group of Eight (G8)\u00a0and Group of Twenty (G20), the Organisation for\u00a0Economic Co-operation and Development (OECD)\u00a0has developed a two-year action plan<\/em>\u00a0to address key aspects of base erosion\u00a0and profit shifting. This is an important exercise\u2013and\u00a0a difficult one, both technically and politically.\u00a0<\/em><\/p>\n

The fundamental difficulty in this area is the lack\u00a0of cooperation in setting tax policies\u2013tax competition, in a broad sense. Many of the devices facilitating\u00a0base erosion and profit shifting are not unintended\u00a0loopholes; they are there to secure national advantage.\u00a0(Examples would be invidious, since so many countries\u00a0have something on offer.) The spillovers that arise from\u00a0noncooperative tax setting mean that the gains to one\u00a0country come at the expense of others\u2013and the sum\u00a0of the losses likely exceeds the gains.\u00a0<\/em><\/p>\n

Tax competition and spillover issues go far beyond\u00a0the devices that are the focus of base erosion and\u00a0profit shifting. A number of advanced\u00a0economies, for instance, have moved or have been\u00a0urged to move away from a \u201cresidence-based\u201d system\u00a0for taxing active business income, under which they tax\u00a0such income arising abroad but give a credit for foreign\u00a0taxes paid, to a \u201cterritorial\u201d one, under which they simply exempt such income from tax in the home country.\u00a0Such a shift can have significant implications for host\u00a0countries, since any tax they charge will now remain\u00a0as a final burden for the investor rather than be offset\u00a0by reduced taxation in the investor\u2019s home country. As\u00a0a result, these countries, anxious to attract investment,\u00a0may face greater pressure to offer tax incentives, lower\u00a0tax rates, and take other measures that erode their\u00a0revenue bases. Likewise, even if countries have doubts\u00a0about the effectiveness of tax incentives in attracting\u00a0foreign direct investment\u2013the evidence is that other\u00a0factors are much more important41\u2013they will hesitate\u00a0Klemm and van Parys (2 find that tax measures have\u00a0attracted foreign direct investment in lower-income countries, and\u00a0to eliminate them unless their neighbors do the\u00a0same. In the event, closing off just some loopholes may make competition through other means more intense.<\/em><\/p>\n

Tax competition can simply result in tax rates\u2019\u00a0ending up too low. In the limit, all countries could be left with perfectly aligned tax rates and territorial base<\/em>and no compliance problems. There would then be no<\/em>revenue loss from base erosion or profit shifting and no<\/em>distortion of real decisions\u2013but there would still be<\/em>a social loss suffered, since effective tax rates would be<\/em>below the levels to which a collective decision would<\/em>have led.<\/em><\/p>\n

Achieving meaningful cooperation in identifying<\/em>ways in which to beneficially constrain tax competition will not be easy, to put it mildly. National<\/em>self-interest, of course, always looms very large. But<\/em>deep technical issues need to be faced head on. For<\/em>instance, a system in which countries can differentiate in their tax treatment between highly mobile and<\/em>
\nimmobile activities\u2013perhaps not far from the current<\/em>situation\u2013can lead to less-damaging outcomes than<\/em>one in which they must treat all investments equally. \u00a0And formula apportionment of a multinational\u2019s taxable profits across jurisdictions can lead to more<\/em>
\naggressive tax competition than the current arm\u2019s length principle. But the gains from closer cooperation may be considerable\u2013strengthened corporate<\/em>taxation, especially as it bears on rents, could be a<\/em>much-needed efficient source of additional revenue.<\/em><\/p>\n

The chance to review international tax architecture<\/em> seems to come about once a century; the fundamental<\/em> issues should not be ducked.<\/em><\/strong><\/p><\/blockquote>\n

My emphasis added.<\/p>\n

But so true.<\/p>\n

And it's also true that there is likely to be no one technical solution. But the first acknowledgement is that we don't even have an adequate way of recording corporate income for tax as yet.<\/p>\n

And that has to, in my view, be the start point for this journey.<\/p>\n","protected":false},"excerpt":{"rendered":"

The IMF’s Fiscal Monitor report published last week entitled Taxing Times has to be quoted at length when it comes to the reform of the
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