Harmful Tax Competition Research Articles

Preferential Personal Income Tax Regimes in the European Union: A New Form of Permitted (Harmful) Tax Competition?

The aim of this contribution is to examine whether the current normative framework of the European Union is adequately equipped to deal with the potentially harmful effects of the so-called preferential personal income tax regimes (PPITRs). For that purpose, after providing an overview of these special tax measures within the EU landscape, the article analyses whether these regimes could be considered a new form of harmful tax competition under the international soft law instruments developed by the OECD and European Union. It is highlighted that these instruments at present do not cover personal income tax rules, although the effects of PPITRs can be as harmful as those of preferential corporate income tax regimes. With regard to other EU instruments (State aid rules, fundamental freedoms and the fundamental right to equality), it is concluded that they are not adequate to tackle in a systematic way the potential harmful effects of special tax regimes targeting individuals. To remedy this hiatus, a proposal is made to extend the mandate of the EU Code of Conduct and adapt the currently applicable criteria under the Code to enable it to capture harmful PPITRs.

System of sources and principles of international tax law

In international cooperation on taxation, countries strive to achieve equality in international taxation and, thus, create the basis for a fair international tax system. Justice exists in an international system of taxation only when states allocate taxing powers among themselves in a manner consistent with dominant views of justice internationally. A fair international tax system will not exist until there is some international consensus on how countries should allocate taxing powers among themselves. International cooperation allows countries to improve the coordination of tax policy at the international level. We can talk about several types of coordination. For example, one type aims to make a country’s tax system more similar to others - in other words, to harmonize taxes. Other types aim to establish minimum or maximum tax rates to avoid double taxation of cross-border income streams, prevent transfer pricing, coordinate arrangements with competent authorities and limit harmful tax competition. The current official agreements mean business activities through a permanent establishment and give the source country the primary right to tax profits from this operation. The country of residence is obliged to exempt these profits from tax, at least to the extent that they were taxed by the country of source. A tax treaty also often provides for an exemption from taxation of the employee’s income from personal services provided the employee is in the country for no more than a specified period of time and the compensation is received by a non-resident employer without a permanent establishment. The treaty usually reduces or eliminates withholding tax on at least some items of investment-type income, such as interest, dividends, rents and royalties, that are not attributable to business carried on through a permanent establishment. The tax treaty also provides that the country of residence can tax capital gains.

Profit shifting to tax havens: Withholding tax impact on passive flows from Poland

This paper aims to identify determinants and channels of tax avoidance through passive flows to tax havens using harmful tax competition, considering the effect of changes in withholding tax regulations. For the empirical analysis, we exploit the data of 110 ​907 nonresidents from 134 countries that gain passive flows paid by Polish taxpayers. We utilise data from IFT-2R returns on withholding tax (WHT) for 2012–2019. We use a two-stage Arellano-Bond estimator of the Generalised Method of Moments (GMM) with instrumental variables for dynamic panel data and the difference-in-differences method. We show that the amendment to the withholding tax legislation, preceded by a no-avoidance clause in 2017, reduced passive flows overall and separately from the manufacturing and service sectors, primarily profit-shifting through interest, royalties and intangible services payments. Moreover, our results confirm that the tax system tightening against aggressive tax competition has reduced passive income transfers from service companies, not manufacturing companies. Instead, the latter make higher transfers to tax havens included in both Polish and the E.U. list of countries applying harmful tax competition.

Sustainable Growth and Fair Competition: The Dark Side of the Digital Revolution

Digitalization has led to a “revolution” over the last few decades: physical distances have been deleted; access to information and services has become easier; communications have become immediate and cost-efficient. Who cannot enjoy the results of the “digital revolution”? Is the use of digital tools a right “per se” or solely where necessary to exercise other rights? Digitalization can simplify life of persons, economic activities and public administration, but it costs and could be an obstacle for people not ready to use it. One way to facilitate the diffusion of digital tools is to invest State resources in infrastructures, but harmful tax competition among States has a distortive effect in terms of fair distribution of revenue and of availability of funds to address the digital progress. The aim of the present work is to foster the analysis of the implications of digital transformation and its links with the distribution of tax rights and the availability of funds. It is crucial for jurisdictions not to lose the momentum and boosting their digital transformation to make themselves competitive, for that it is necessary to reach international agreements on collecting revenue from digital economy, making tax competition between States fairer.

Fiat v Commission: A Misconception at the Heart of the Tax Ruling Cases

In October 2015, a ripple was sent through the tax world when the European Commission found that Luxembourg and the Netherlands had provided unlawful State aid to Fiat and Starbucks. At the core of the Commission's decisions was the assertion that the Member States had misapplied the ‘arm's length principle’ ‐ a principle which broadly seeks to ensure that transactions between associated enterprises are priced as if carried out by independent parties Both were appealed. The first decisions of the General Court were handed down in October 2019 and were a mixed bag for the Commission – a win in the Fiat decision, but not Starbucks. The judgment in the subsequent Fiat appeal was handed down in November 2022. This was the first opportunity the Court of Justice had to consider the Commission's central argument that Member States were bound to apply a general ‘arm's length principle’. This case note analyses the judgment and considers its ramifications for other Member States, for multinationals, and for the capacity of EU law to tackle harmful tax competition.

Fiat Emerges Victorious in State Aid Battle with European Union: What’s Next?

This article delves into the decision by the Court of Justice of the European Union concerning the Fiat State aid case. The outcome of this case will set a precedent for similar ongoing disputes and influence the European Commission’s future strategy in this field. State aid remains a tool to combat harmful tax competition; yet, recent developments signal that further tax harmonization at the European level is approaching.

Proposals for a UN Tax Agreement

The introduction of a UN Tax Convention (UNTC) is gaining increasing support from governments, civil society, and the UN Secretary-General. The UNTC would fill an important regulatory gap in global economic governance, promote tax justice, and improve domestic resource mobilization. It is considered a central innovation to address harmful tax competition, reduce tax evasion and illicit financial flows, and ensure the fair distribution of taxing rights among countries. This article presents the status of negotiations and current proposals for the design and content of the UNTC.

Региональная налоговая конкуренция в Канаде, США и России: оценка опыта регулирования

Recent changes in the Russian tax legislation aimed at weakening the tax powers of the federal subjects in relation to profit tax open the question of a reasonable degree of limitation of the fiscal autonomy of Russian regions, as well as the regulation of regional tax competition. This article discusses the peculiarities of regulation of domestic tax competition in Canada and the United States on the basis of an analysis of the provisions of the tax legislation related to the fiscal powers of regional jurisdictions (provinces, states). The article focuses on approaches to limiting harmful tax practices that affect the economy or budget revenues of other regions. Empirical studies confirm the existence of negative effects of domestic tax competition, as well as the relevance of measures to restrict it. The considered countries make efforts to limit domestic tax competition both at the level of interregional agreements and at the level of central authorities. However, practice shows that it is difficult to ensure actual implementation of agreements at the regional level, so regulation by the central government is of key importance. Based on this result, recommendations are given for taking measures against harmful tax competition between the regions of Russia.

Fiscal state aid law as a tool against harmful tax competition in the EU: déjà vu?

Abstract The theme of this article is the relationship between harmful tax competition measures and prohibited fiscal State aid. The aim of this article is to present a targeted examination of the use of State aid rules against national tax measures, eg tax schemes and tax rulings, following the adoption of the EU Code of Conduct for Business Taxation in 1997. The fiscal State aid decisions and judgments to be covered are divided into two parts: the first fiscal aid wave of the (early) 2000s and the second (ongoing) fiscal aid wave, which most notably includes the Apple, Fiat, Starbucks, and Amazon cases. It is argued that an important factor connecting the two fiscal State aid waves is the link they share with the EU’s fight against harmful tax competition.

A Critical Evaluation of the International Impact of the Global Minimum Tax

This study provides a critical evaluation of the global minimum tax within the framework of the so-called “two-pillar” solution, addressing in particular its distributional effects, through a reconceptualization of the harmful tax competition policy challenge as a collective action problem. In doing so, it juxtaposes the potential outcome of the two-pillar initiative to the international tax implications prospectively arising from the proposed US corporate tax reform.

The Global Minimum Tax: Some Known Unknowns

In order to address the fundamental challenges for the international tax regime brought about by the digitalization of the economy and new forms of potentially harmful tax competition, the G20 summit of October 2021 called for a commitment to the implementation of the Global Minimum Tax Proposal developed by the OECD within the framework of the Two-Pillar solution, aiming at 2023 as an implementation deadline. The breadth and technical complexity of the OECD Model Rules and the OECD Guidelines, as well as the Directive Proposal released by the EU Commission in December 2021, offer several inputs for further reflection, also considering the evolving international policy and political framework. The main purpose of this contribution is to highlight the most pivotal “known unknowns” of the proposed set of measures so as to stimulate further debate on the topic.

Tax Avoidance and Harmful Tax Competition: A Proposal for an Alternative Solution

For decades, the European Commission has made attempts to resolve the problem of tax avoidance and harmful tax competition in the European Union. It has proposed various solutions, including the Common Consolidated Corporate Tax Base (CCCTB), the EU Anti-Tax Avoidance Directive (2016/1164) (ATAD), and the recently discussed Pillars One and Two approaches, along with a new Framework for Income Taxation for Business in Europe (BEFIT). This article focuses on why the problem has not been satisfactorily solved to date. It also proposes an alternative approach to address the problem.

Article: Global Minimum Corporate Tax: A Death Knell For African Country Tax Policies?

The idea that a global minimum corporate income tax rate should be introduced has been publicized with intense fanfare. Not as widely publicized is the fact that this, along with the other provisions of Pillar Two, has negative implications for the corporate income tax policies currently implemented in African countries. Moreover, Pillar Two may also affect the implementation of the United Nations’ Sustainable Development Goals (SDGs) in Africa. In systematically delineating these implications, this article argues that a more nuanced approach to global harmful tax competition should be followed in the practice of inter-nation equity. This approach is as follows: all countries should cooperate to halt virtual tax competition. Moreover, all developed countries should cease both virtual and real tax competition while developing countries continue to engage in real tax competition – provided that their tax incentives meet certain criteria. Should a developing country not adhere to such criteria, it would forfeit its exemption. This article further argues that African countries are already demonstrating that the fears that such an approach elicits are unfounded. The time is opportune for African countries to advocate for meaningful reform in international tax that would result in fairer outcomes for all developing countries. Pillar Two, global minimum corporate tax rate, Africa, inter-nation equity, fairness, tax incentives, virtual tax competition, real tax competition, developing countries, Sustainable Development Goals

Transfer Pricing as an Institution Supporting the Anti-Optimization Clause in Counteracting Tax Avoidance

The purpose of this study is to show the relationship between transfer pricing regulations and the anti-tax avoidance clause. The paper discusses the axiology of legal regulations aimed at counteracting tax avoidance practices and the use of non-market prices in relations between related entities. An attempt was made to present the concept of the phenomenon of harmful tax competition, also the essence of tax avoidance, and to contrast this concept with the phenomenon of tax evasion. The phenomenon of tax optimization was also indicated. The relationship between the provisions of the general anti-optimization clause and transfer prices that determine the appropriate state of prices between related entities within the meaning of tax law was also subjected to a detailed analysis.

Article: The EU’s Uncoordinated Approach to Tax Avoidance and Tax Abuse in Relation to ‘Uncooperative’ Tax Jurisdictions

The European Union (EU)’s external tax policies in relation to ‘uncooperative’ tax jurisdictions are predominantly shaped by the case law of the Court of Justice of the European Union (CJEU), the Member States’ domestic tax laws and, most recently, the EU list of non-cooperative jurisdictions for tax purposes (EU blacklist). Research in academia scholarship has assessed the EU blacklist from various angles. The objective of this article is to contribute to this discussion by contextualizing the EU blacklist with the relevant CJEU case law on anti-avoidance and antiabuse provisions applied in third country situations. Beyond an assessment from a doctrinal perspective, particular emphasis is placed on related tax policy issues. This combined evaluation yields three primary conclusions: the EU blacklist’s soft law character allows the Member States to continue to take advantage of type-casted and irrebuttable anti-avoidance and anti-abuse provisions in light of the CJEU case law; the EU blacklist’s inability to meet its initial objectives can be explained by political dynamics at the EU level; and the EU blacklist might relieve some of the currently manifesting symptoms without addressing the fundamental flaws in the international tax system. CJEU case law, developing countries, EU blacklist, EU external tax policies, free movement of capital, harmful tax competition, mutual assistance, tax abuse, tax avoidance

New Approaches to International Tax Cooperation: the Fight against Harmful Tax Competition and the OECD’s Consolidation as a Technical Forum

New Approaches to International Tax Cooperation: the Fight against Harmful Tax Competition and the OECD’s Consolidation as a Technical Forum

On the Fragility of the International Taxation Legal System

This Article focuses on the OECD’s work on harmful tax competition todemonstrate how the OECD and subsidiary bodies’ governance structure,and the standard-settingprocess, built a fragile international taxationlegal system that is not just impairing legitimate tax competitionbut also failing to promote cooperation among tax jurisdictions. Theoption for the harmful tax competition work among other tax issuescovered by the OECD is justified by the difficulties faced by the WTODispute Settlement Body (DSB) while adjudicating the Argentina-FinancialServices dispute. In this dispute, Panama challenged theimposition of defensive tax measures against harmful tax competitionbased on a list of non-cooperativetax jurisdictions issued by the Argentine tax authority. The clash between the international tradelegal system and the international tax system unveiled the fragilities ofthe last related not just to the global governance structure but also theinternational tax standards for harmful tax competition. In spite ofthe recent efforts by the OECD by the lauching of the BEPS Project, thechallenge of making the international taxation system work for allMembers and non-Membersremains.

Strengthening financial integrity and combating economic crimes in the post-pandemic Caribbean: what lies ahead!

PurposeThis paper aims to map key strategic concerns that Commonwealth Caribbean States will face in combating economic crimes and strengthening financial integrity in the post-pandemic era.Design/methodology/approachHorizon scanning was used to conduct a qualitative policy analysis of key regulatory developments in international anti-money laundering and combating the financing of terrorism (AML/CFTP) and tax governance, from the perspective of Commonwealth Caribbean countries.FindingsThis paper finds that the COVID-19 pandemic might widen several fault lines, along the Global North/South axis, in international AML/CFTP and tax regulatory governance. These include the “sustainable development” gap in AML/CFTP norm-making; making the Financial Action Task Force fit-for-purpose; renewed campaigns against “harmful tax competition”; and international commitment to scaling up technical assistance to combat economic crimes in developing countries. It questions the sustainability of the prevailing “levelling the playing field” regulatory approach to AML/CFTP and tax matters and whether serious consideration ought not to be given to mainstreaming “differential treatment” in international AML/CFTP and tax standards, for resource-strapped Caribbean countries.Originality/valueTo the best of the author’s knowledge, this paper is the first attempt to assess the strategic policy risks and challenges that will arise from balancing economic recovery and fighting economic crimes by small and vulnerable Commonwealth Caribbean States in the post-pandemic era.

The impacts of profit-based royalties on early-stage mineral exploration

The impact of public policy on the mineral industries is difficult to measure due to little short-term responsiveness to policy changes by companies already investing in known fixed deposits. Nevertheless, early-stage (or grassroots) exploration has been suggested to provide early signals about the impact of a policy. Among mineral policies, taxation has received plenty of attention in theoretical analysis and simulation studies, but little empirical evaluation.Profit-based royalties should affect early-stage exploration by decreasing the expected value of a discovered deposit. The empirical approach here uses a difference-in-difference strategy, analyzing the Chilean mining royalty changes of 2004 and 2010. The first tax change is argued to be exogenous as it happened due to the political cycle and in line with a major increase in commodity prices, and the later modification occurred as a result of a major earthquake. Results indicate a surprisingly small average impact on grassroots exploration. However, the effect is heterogeneous as larger companies increased their budget as opposed to junior companies. The absence of geographical spillovers not only supports these estimated effects but also suggests that neighboring countries do not need to engage in harmful tax competition.

The Market Distortion Provisions of Articles 116-117 TFEU: An Alternative Route to Qualified Majority Voting in Tax Matters?

The European Commission is currently exploring how to make full use of the market distortion provisions of Article 116-117 TFEU to end prolonged veto deadlocks in tax matters and to fully deliver on the EU’s fair tax agenda. This article sets out why the market distortion rules do not seem appropriate for any far-reaching EU tax integration initiatives. However, they could complement the diplomatic EU Code of Conduct Group’s work, and the Commission’s use of the State aid rules, in addressing national market distorting tax measures and tax ruling practices of Member States. Market distortion, state aid, harmful tax competition.