Defense of Primary Taxing Rights

Abstract

The OECD’s Global Anti-Base Erosion (GloBE) proposal develops rules providing that countries can tax income where other countries do not exercise their primary taxing rights over that income. What can affected countries with primary taxing rights do in response? One option is to let other countries receive the taxes they choose not to collect. This means that they will suffer the economic harms of taxation without receiving the tax revenues. Another option is to increase their taxes, so the primary taxing rights will be “fully” exercised. However, this option might not be desirable or feasible for various reasons, including the broader implications for domestic taxpayers. This article explores a third option: introducing a new defensive tax which would apply to the income that would be taxed under GloBE in the absence of this tax. The result would be that the country with the primary taxing rights would collect the tax revenues. This tax would not materially affect the multinational enterprises’ overall tax liability and incentives or create much additional complexity. Countries that may be adversely affected by the recent international tax developments should consider adopting this tax to defend their primary taxing rights.