International Corporate Taxation Research Articles

Developing influence: the power of ‘the rest’ in global tax governance

As Western-led institutions of global governance adapt to global power shifts, the question of which countries dominate, and how, increasingly animates scholarship. Yet while attention has shifted from ‘Great’ to ‘Rising’ Powers, the underlying focus on market power has changed little. In this article, we shift the focus to alternative forms of power that developing countries can wield in global governance, specifically in highly technical transnational negotiations. Reconceptualising the notion of ‘regulatory capacity’, we argue that states can overcome limited market power through socio-technical resources: expertise and professional networks. These resources form the basis through which policy claims become authoritative and they enable emerging state coalitions to influence policy-making. To demonstrate this, we analyse developing countries’ involvement in standard-setting for international corporate taxation. Specifically, we study the newly established G20/OECD Inclusive Framework, an experiment where more than 140 jurisdictions participate in negotiations that were previously the preserve of OECD states. Based on unique attendance data and interviews with dozens of participants, we perform a detailed analysis of specific policy decisions, interrogating the extent and sources of developing countries’ influence. We find that socio-technical resources allow individuals from lower-income countries to achieve narrow yet significant successes, punching above their weight in global governance.

BUSWEL Policy Brief: Corporate Tax Avoidance

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.

Elite professionals in transnational tax governance

AbstractSince the global financial crisis, international corporate taxation has risen to the top of the global political agenda, as political leaders have called for collective action to shore up corporate tax systems. However, high‐level political initiative alone does not create new international corporate tax rules. Rather, these transnational governance processes are centrally driven by elite tax professionals competing for prestige and influence. In this article, I investigate this competition in the case of one crucial post‐crisis reform – the OECD/G20 Base Erosion and Profit Shifting project. I argue that hierarchies of prestige and influence for elite professionals in transnational tax governance are based on strategic combinations of career resources in issue‐specific ‘linked ecologies'. In particular, I detail the expertise and network positioning of elite professionals, and discuss how these resources were mobilized in competitions for professional authority, which in turn shaped the transnational policy process. Evidence is drawn from qualitative interviews and career analysis.

Positive Spillovers in International Corporate Taxation and the European Union

The international spillover effects of specific domestic policies and practices have been subjected to increasing scrutiny from a range of international organizations, academia, and civil institutions with tax policy and practice both central in this discussion. Nevertheless, the extant international tax spillover analyses explore a limited set of spillover pathways or indicators that have been criticized in the literature for not being sufficiently inclusive. The focus of this article is on a newly launched index that includes a comprehensive set of plausible pathways in which spillovers occur. The Corporate TaxHaven Index (CTHI) explores twenty key tax spillover indicators under five categories and assesses sixty-four countries’ tax systems in order to identify policies that should be considered for corporate tax reform to mitigate cross-border tax spillovers. This article particularly aims to highlight international corporate tax spillover pathways in the European Union Member States’ domestic tax laws, regulations and documented administrative practices but limits its scope to domestic tax rules that dispense with positive spillovers. Finally, it analyses Member States’ current performance and concludes with recommendations for future tax reforms in the European Union. Tax spillovers, Corporate Tax Haven Index, transparency rules, public accountability, country by country reporting, mandatory disclosure rules, tax rulings, extractive contracts, anti-avoidance rules, controlled foreign company rules, deduction limitation.

International tax, regulatory arbitrage and the growth of transnational corporations

This paper traces the history of international corporate taxation, discusses how transnational corporations (TNCs), through their tax advisers, have helped to shape the system, and suggests that this is important in understanding the development of TNCs. It argues that a key competitive advantage of TNCs is their ability to exploit differences in corporate tax rules, as a form of regulatory arbitrage, which is facilitated by the inadequate coordination of those rules. It focuses on the divergence between the understanding in business, economics and international studies that TNCs are unitary firms and the principle which has increasingly hardened in international tax rules, especially on transfer pricing, that the various affiliates of TNCs in different countries should be treated as if they were independent entities dealing with each other at arm’s length. It argues that this facilitates tax avoidance, which is one of the strategies of the exploitation of regulatory differences, or regulatory arbitrage, which has contributed to the growth and oligopolistic dominance of large TNCs. While claiming that they merely obey the laws of each country where they do business, TNCs have taken advantage of their global reach to mould laws and normative practices, and develop structures taking maximum advantage of the loose coordination of global governance regimes.

Position Paper and a Common List of Demands for Representatives of the Civil Society From Africa to Propose a Reform of International Corporate Taxation in the Fight Against Illicit Financial Flows

This position paper recommends the stand that representatives from civil society from Africa should take on the fight against Illicit Financial Flows (IFF). It is envisaged that tackling IFF from Africa requires reform of international corporate taxation. This tax system has many loopholes, and Transnational Corporations (TNCs) have exploited them. Profit shifting, and transfer pricing remain the primary drivers of corporate tax practices that facilitate IFF. Yet, these practices have not been adequately dealt with at both the international and regional fora. Estimates from the African Development Bank reveal that IFF have resulted in corporate tax losses in excess of a trillion dollars from Africa since 1980. The Tax Justice Network (TJN) and the IMF’s Fiscal Affairs Department estimate these losses at $500bn and $200bn respectively per annum. In 2015, the United Nations Economic Commission for Africa (UNECA) published its High Level Panel Report on Illicit Financial Flows (HLP Report) in which it reported that Africa is losing more than $50 billion annually in IFFs. The Report asserted that this estimate may well fall short of reality because accurate data does not exist for all African countries, and these estimates often exclude some forms of IFFs that by nature are secret and cannot be properly estimated, such as proceeds of bribery and trafficking of drugs, people and firearms as well as corruption. In July 2018, at the High Level Policy Dialogue on Development Planning in Africa the Head of Development Planning and Statistics at the Economic Commission for Africa reported that $100 billion a year is illegally earned, transferred, or used due to mis-invoicing. These Tax losses resulting from IFF have become too serious to neglect anymore.

Taxing Multinational Enterprises as Unitary Firms

This paper explores the issues raised for international tax rules of explicitly treating multinational enterprises (MNEs) as single or unitary firms. It first briefly explains why reform of international corporate taxation is important particularly for developing countries, then outlines the flaws in the current system. It discusses the impetus created for reforms, and the political and institutional dynamics of the tax treaty system. An evaluation is provided of the results of the G20/OECD project on base erosion and profit shifting (BEPS), focusing essentially on the extent to which they moved towards a unitary approach, and the problems created by their continued adherence to the independent entity principle. It then outlines several proposals which, in different ways, would apply a unitary approach to MNEs. The remainder of the paper focuses more particularly on one variant: unitary taxation with formulary apportionment – this was the focus of the ICTD’s research programme, which resulted in the outputs discussed here. It outlines the main findings on optimal design of an international formulary apportionment system, evaluates the evidence about its possible effects on national tax revenue, and considers the possibilities and prospects for adoption of such a system regionally.

Focus: The World Needs To Revamp International Tax Cooperation

FOCUS | TAX AND TRADE UNION RIGHTS 19 25/1 | International Union Rights | The international system of taxing companies, which was designed in the early twentieth century by the developed world, has become obsolete in our current globalised world. These days, almost half of world trade takes place between parent companies and subsidiaries of multinational companies and the service sector represents the lion share of global GDP. But the system of international corporate taxes still follows rules that were set a century ago. Since 2015, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) has promoting major changes of these rules. Established by a broad coalition of civil society and consisting of members from all continents and diverse backgrounds, the Commission aims to foster the corporate tax reform debate at the international level, and to promote institutions appropriate for this cause. Contrary to the high levels of international integration we have reached, the international corporate tax system is based on the separate entity principle, according to which every firm that is part of a multinational group, whether it be parent company or subsidiary, is treated as an independent legal entity when it comes to paying taxes. This generates important problems in accounting and taxation, given that the price at which a business transaction between two companies from the same group is valued, known as the transfer price, may be very different from the value of a business transaction between non-related companies, a fully competitive price known as the arm’s length price. In theory, the transfer prices should be similar to the arm’s length prices. However, it is difficult, or even impossible, to guarantee this fact. Moreover, the importance of this problem has increased due to the growing proportion of intangible assets companies have, including their intellectual property – patents, royalties, brand names, registered trademarks –, their management system and their business networks. When transactions within the same group involve these intangible assets, the principle of the arm’s length price does not work, since these transactions are not comparable to others on the market. This structure creates huge opportunities for tax abuses. To this we need to add the loans between parent companies and subsidiaries and the way they distribute the fixed costs of the administration of the multinational group. The more complex the network of companies tied to the same group is, the easier it is, therefore, to avoid paying taxes. On top of that, it is difficult for tax authorities, even the most efficient ones, to call such transactions and transfers into question. What this implies is that the present focus on separate legal entities and its system of transfer pricing is inconsistent with an economy that is globalised and knowledge-based. The abusive tax practices of many multinationals have arisen indignation in the public eye and led various governments and parliaments to investigate many of the most emblematic corporations in the world. The inquiries are bringing to light the aggressive tax engineering employed by the large multinationals, as well as the tax competition countries enter into to attract investment. Even more, in many cases the tax benefits multinationals take advantage of ‘tax holidays’, customs-free zones, investment agreements, or the acceptance of complex corporate ownership structures. All of these practices stem from lobbying by corporations, and from competition between governments to attract investments. The symbols of tax competition are the classic tax haven, offering low or zero tax rates, and the extensive networks of special economic zones with generous exemptions from direct taxation as well as various other tax advantages. The benefits are accompanied by secrecy to protect owners and prevent financial and regulatory authorities from other countries from checking these companies’ balance sheets. The irony of all this is that these offshore centres only exist because they are tolerated by the major developed countries or even created by them. The leaking of the ‘Panama Papers’, the ‘Bahama Leaks’ and, most recently, the ‘Paradise Papers’ have revealed the global scope of these networks, which are enabled and supported by a chain of banks, accounting firms and legal advisers. When tax secrecy is combined with special exemptions, this may attract and facilitates money laundering and a...

Focus: The World Needs To Revamp International Tax Cooperation

FOCUS | TAX AND TRADE UNION RIGHTS 19 25/1 | International Union Rights | The international system of taxing companies, which was designed in the early twentieth century by the developed world, has become obsolete in our current globalised world. These days, almost half of world trade takes place between parent companies and subsidiaries of multinational companies and the service sector represents the lion share of global GDP. But the system of international corporate taxes still follows rules that were set a century ago. Since 2015, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) has promoting major changes of these rules. Established by a broad coalition of civil society and consisting of members from all continents and diverse backgrounds, the Commission aims to foster the corporate tax reform debate at the international level, and to promote institutions appropriate for this cause. Contrary to the high levels of international integration we have reached, the international corporate tax system is based on the separate entity principle, according to which every firm that is part of a multinational group, whether it be parent company or subsidiary, is treated as an independent legal entity when it comes to paying taxes. This generates important problems in accounting and taxation, given that the price at which a business transaction between two companies from the same group is valued, known as the transfer price, may be very different from the value of a business transaction between non-related companies, a fully competitive price known as the arm’s length price. In theory, the transfer prices should be similar to the arm’s length prices. However, it is difficult, or even impossible, to guarantee this fact. Moreover, the importance of this problem has increased due to the growing proportion of intangible assets companies have, including their intellectual property – patents, royalties, brand names, registered trademarks –, their management system and their business networks. When transactions within the same group involve these intangible assets, the principle of the arm’s length price does not work, since these transactions are not comparable to others on the market. This structure creates huge opportunities for tax abuses. To this we need to add the loans between parent companies and subsidiaries and the way they distribute the fixed costs of the administration of the multinational group. The more complex the network of companies tied to the same group is, the easier it is, therefore, to avoid paying taxes. On top of that, it is difficult for tax authorities, even the most efficient ones, to call such transactions and transfers into question. What this implies is that the present focus on separate legal entities and its system of transfer pricing is inconsistent with an economy that is globalised and knowledge-based. The abusive tax practices of many multinationals have arisen indignation in the public eye and led various governments and parliaments to investigate many of the most emblematic corporations in the world. The inquiries are bringing to light the aggressive tax engineering employed by the large multinationals, as well as the tax competition countries enter into to attract investment. Even more, in many cases the tax benefits multinationals take advantage of ‘tax holidays’, customs-free zones, investment agreements, or the acceptance of complex corporate ownership structures. All of these practices stem from lobbying by corporations, and from competition between governments to attract investments. The symbols of tax competition are the classic tax haven, offering low or zero tax rates, and the extensive networks of special economic zones with generous exemptions from direct taxation as well as various other tax advantages. The benefits are accompanied by secrecy to protect owners and prevent financial and regulatory authorities from other countries from checking these companies’ balance sheets. The irony of all this is that these offshore centres only exist because they are tolerated by the major developed countries or even created by them. The leaking of the ‘Panama Papers’, the ‘Bahama Leaks’ and, most recently, the ‘Paradise Papers’ have revealed the global scope of these networks, which are enabled and supported by a chain of banks, accounting firms and legal advisers. When tax secrecy is combined with special exemptions, this may attract and facilitates money laundering and a...

Taxation of Multinational Enterprises in a Global Market: Moving to Corporate Tax 2.0?

How countries tax the profits of multinational enterprises has become hopelessly outdated. The recent OECD/G20 Base Erosion and Profit Shifting Project has left the existing international corporate taxation framework essentially intact. Perhaps it is time to consider a truly fundamental reform of corporate tax systems, i.e. Corporate Tax 2.0.

Corporate tax in an international environment – Problems and possible remedies

Abstract The paper addresses the problems of corporate taxation in a globalized world. It first considers recent trends in international practices and then reviews the literature on the effects of corporate taxes in closed and open economies. The paper emphasizes the severity of the problems caused by current international tax rules. It compares various national and international policy alternatives and considers two recent Nordic tax reform proposals as examples of national-level solutions. The problems of current international corporate taxation are fundamental. Introducing increasingly tight antiavoidance measures could serve as a medium-term approach but does not provide any promising long-term solution. There should be more research concerning initiatives that would reform the fundamental principles of the international tax system.

Indeterminacy, Complexity, Technocracy and the Reform of International Corporate Taxation

Recent public concerns and publicity about the extent of tax avoidance by some of the largest and most respected transnational corporations have prompted numerous parliamentary inquiries and intergovernmental initiatives. Among the questions raised during hearings in the UK House of Lords on 11 June 2013 were whether such avoidance could be more effectively prevented either by a reduction in the complexity of the rules, or by a more aggressive interpretation of those rules by tax authorities. These questions raised issues concerning the complexity and interpretation of law, which received interestingly different responses from the academics to whom they were posed, and they merit closer examination, which is the aim of this article. The article begins by discussing some types of complexity, then considers how these are rooted in the indeterminacy of legal language and finally discusses the sociology and politics of the interpretive communities concerned. The main part applies this analysis to the historical development of international tax rules, seen in the context of these current pressures and initiatives for reform of international corporate taxation.

Spillovers in International Corporate Taxation

This paper explores the nature, significance and policy implications of spillovers in international corporate taxation—the effects of one country’s rules and practices on others. It complements current initiatives focused on tax avoidance by multinationals, notably the G20-OECD project on Base Erosion and Profit shifting (BEPS). The paper draws on the IMF’s experience on international tax issues with its wide membership, including through technical assistance (TA), and on its previous analytical work, to analyze spillovers and how they might be addressed. In doing so, it goes beyond current initiatives to look at a wide set of possible responses.

International corporate taxation and U.S. multinationals' behaviour: an integrated approach

Abstract This paper explores the effects of corporate taxation on U.S. capital invested abroad and on tax planning practices. The econometric analysis first indicates that investment is strongly influenced by average tax rates, with a magnified impact particularly for low‐tax rates, implying that the attractiveness of low‐tax countries is not weakened by anti‐deferral rules and cross‐crediting limitations. Further explorations suggest that firms report higher profit, higher Subpart F income, and are less likely to repatriate dividends when they are located in low‐tax jurisdictions. Finally, when the role of effective transfer pricing regulations is estimated, it appears that low degrees of law enforcement are associated with higher income shifting.

Globalization and the Politics of International Corporate Taxation: A View From India

Information and communications technology (ICT) has enabled corporations to use offshore facilities for outsourcing commercial activities. This has expanded service trade significantly but poses ch...

ICT and International Corporate Taxation: Tax Attributes and Scope of Taxation

In this paper, an outline of the consequences of the increased use of ICT on international corporate taxation, namely on the tax attributes and the scope of taxation, is given. It is argued that the concept of capital export neutrality shall prevail, as it is deemed to be the most appropriate to the changed economic structure. With regard to the tax attributes in the source state, an enlargement of the notion of a permanent establishment in order to shift tax revenues to the source state is not recommendable. Concerning the tax attributes in the residence state, it is shown in how far problems might arise and which alternatives might constitute a solution. As regards the scope of taxation, we recommend that international corporate taxation shall be based on taxation according to the residence principle.

ICT and International Corporate Taxation: Tax Attributes and Scope of Taxation

In this paper, an outline of the consequences of the increased use of ICT on international corporate taxation, namely on the tax attributes and the scope of taxation, is given. It is argued that the concept of capital export neutrality shall prevail, as it is deemed to be the most appropriate to the changed economic structure. With regard to the tax attributes in the source state, an enlargement of the notion of a permanent establishment in order to shift tax revenues to the source state is not recommendable. Concerning the tax attributes in the residence state, it is shown in how far problems might arise and which alternatives might constitute a solution. As regards the scope of taxation, we recommend that international corporate taxation shall be based on taxation according to the residence principle.

The influence of foreign factor prices and international taxation on fixed investment in the UK

This paper examines the influence of foreign factor prices and international corporate taxation on fixed investment in the UK manufacturing sector. The evidence suggests that factor prices affect fixed investment in the UK through their influence on international competitiveness rather than the factor mix decision. There also appears to be a significant effect of tax competitiveness on the rate of investment. Empirical evidence suggests that policy to increase investment be aimed at reducing the average rate rather than the marginal rate of corporation tax.