As discussed in previous chapters, source-based taxation faces many difficulties: it is increasingly difficult—conceptually and practically—to allocate profits to where they originate (see Chapter 5). Multinational enterprises can take advantage of such ambiguities by shifting reported profits to jurisdictions with lower tax rates. Countries then face an incentive to compete for tax bases—both reported profits and real investment (see Chapter 6). This chapter turns to residence-based taxation—the other important historical concept for corporate income taxation—to assess the difficulties that have been encountered in its implementation.
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