Ruud de Mooij, Mr. Alexander D Klemm, and Ms. Victoria J Perry
In recent years, newspaper headlines have featured terms such as “digital service taxes,” “paradise papers,” and “tax wars,” all referring to various issues in international taxation. These and related topics have long been discussed among tax experts from academia, businesses and policy circles. Recently, increased strains on government budgets after the global financial crisis and information that journalists have revealed about the very low global taxation of some large and profitable multinational corporations have triggered political and popular upheaval going far beyond the small group of tax insiders.
Technology is being harnessed to redefine traditional business models and provide new ways for buyers and sellers to interact both locally and globally. The result has been the emergence of a handful of firms—the so-called tech giants—that are capitalizing on first mover advantages and network externalities to boost profitability, capture market share, and turn themselves into the world’s most highly valued companies. They have inevitably captured the attention of policymakers, and in the realm of international taxation, the debate has coalesced around a number of issues that are driving the debate over whether and how countries should be able to tax the returns to highly digitalized multinational businesses (IMF 2014, 2019). More generally, an increasing number of firms are digitaliz-ing, leading to several issues that raise or intensify challenges for the international tax system.
Source-based taxation lies at the heart of the current international tax architecture (see Chapter 3), and its importance has further risen with the abolition of worldwide taxation of active business income by essentially all of the major capital exporting economies, including now the United States, the United Kingdom, and Japan.1 Notwithstanding its importance, defining the source of income is increasingly problematic, as discussed in Chapter 5. It has been made more difficult by the increasing importance of intrafirm cross-border trade and complex production chains, the increasing contribution of hard-to-value and easily mobile intangible assets to value added, and the increasing digitalization of the economy—and this increasing digitalization means that the old idea of physical presence as the main criterion for source is outmoded (see Chapter 10).
Kiyoshi Nakayama, Ms. Victoria J Perry, and Mr. Alexander D Klemm
The world is in a state of fairly deep confusion regarding whether the international tax system is to be moved toward or away from residence-based corporate taxation. Chapter 7 outlined the parameters of that confusion and described the historical and recent steps that have been taken to strengthen the application of the residence basis; these steps have included combatting both the erosion of the tax base and the practice of shifting taxable profits. This chapter explores ways in which those efforts could be, and are being, strengthened still further. Yet, at the same time, as also described in Chapter 7, most advanced economies—the primary capital exporters—have now moved away from worldwide taxation toward territorial systems that in theory tax active business income at the source only, by one mechanism or another, largely for reasons of tax competition.
Country-specific origin-based profit taxes are marked by profit shifting and tax competition (see Chapter 6). Incentives for profit shifting can be mitigated, but not eliminated, by stricter rules and strengthening tax administration, while coordination can reduce the scope of tax competition but is hard to agree on (Chapter 11). Moreover, tighter anti-tax-avoidance rules often raise compliance and administrative costs and may intensify tax competition (Chapter 9).
Ms. Thornton Matheson, Sebastian Beer, Maria Delgado Coelho, Ms. Li Liu, and Ms. Oana Luca
The current international tax system, which is based on separate accounting for corporate affiliates trading at arm’s length prices, is increasingly viewed as prone to abuse, as noted in Chapters 5 and 6. Multinational enterprises have become adept at manipulating the rules of the current system to shift profits from high-tax to low-tax (or no-tax) jurisdictions. Several recent studies of worldwide revenue losses due to profit shifting suggest that short-term losses range from 5 to 10 percent of total corporate income tax revenues (Cobham and Janský 2018; Crivelli, De Mooij, and Keen 2016; OECD 2015; Tørsløv, Wier, and Zucman 2018; UNCTAD 2015).1 On average, revenue losses in OECD countries are found to be about twice as high as those in developing countries; however, revenue losses as a share of GDP are about one-third higher for developing countries (Crivelli, De Mooij, and Keen 2016).
Resource-rich countries can collect revenues from natural resources to support economic development and structural transformation, although often the revenue potential is not fully realized. Profit shifting often poses a challenge undermining the ability to effectively apply the fiscal regime.1 Multinational enterprises through tax planning and transfer pricing may shift profits away from the source country, conflicting with the government’s objective of collecting a fair share of economic rents realized from the resource extraction. Further complicating this, the concept of where value is added as natural resources are extracted is not always straightforward to establish.
Mr. Christophe J Waerzeggers, Mr. Cory Hillier, and Mr. Irving Aw
This chapter brings a legal perspective to the pressures in the international corporate tax system that have been discussed in other chapters largely from an economic point of view. In addition to the economic drawbacks of the current architecture, the current system is also marked by major legal weaknesses leading to continued uncertainty and providing opportunities for ongoing tax arbitrage and aggressive tax planning. The proliferation of anti-avoidance rules to combat these opportunities has made the international corporate tax system more complex. Failure to address the core structural weaknesses in the system has intensified the debate surrounding the fair allocation of taxing rights, particularly over lightly taxed residual profits—amplifying the need for fundamental reform.
The question whether countries should tax corporations on their income is an old one, yet it has never been more topical than it is today. Tax competition is driving down corporate tax rates in a race to the bottom, and 12 countries today levy no corporate income tax at all. The pressure from tax competition and the major complications that arise in administrating and enforcing current corporate income tax systems are so vast that one may wonder whether it is worth dealing with them or whether it would not be much easier simply to give up on taxing corporate income, replacing lost revenues with other taxes.