BUSWEL Policy Brief: Corporate Tax Avoidance

Abstract

Taxing multi-national corporations poses a challenge for national governments since multi-national corporations are often able to shift their incomes to low-tax jurisdiction using a variety of accounting techniques. Tax competition between national governments relies on companies making use of such techniques. This policy brief provides an overview of the topic of corporate tax avoidance. It consists of three parts. First, it provides a non-technical overview of the most common methods that multi-national corporations use to legally minimize their tax liabilities. Second, it discusses the main regulatory initiatives at the global and European levels that aim to tackle the challenge of eroding revenues from corporate income tax due to companies shifting profits to low-tax jurisdictions. These efforts to stop corporate tax avoidance have gained considerable momentum since 2013 but are likely to turn out as insufficient to stop corporate tax avoidance. The regulatory initiatives adopted or currently discussed at the international level pursue a piecemeal approach of closing loopholes in the existing system of international corporate taxation. However, low-tax jurisdictions may respond to these closing of loopholes by a further lowering of statutory tax rates or an expansion of preferential tax arrangements, thus potentially neutralizing regulatory efforts by inducing a shift from profit shifting to investment shifting. This policy brief presents a proposal for a more radical overhaul of global corporate taxation consisting of a combination of a global unitary tax and a limited range of statutory tax rates, whereby the rates permissible will be adjusted to a jurisdiction’s level of economic development, allowing less developed countries to use tax incentives to attract investments within defined limits. Public country-by-country reporting and a global register of beneficial owners are proposed to augment a global unitary tax.