International Tax Coordination Research Articles

Digital Services Tax: Comparative Analysis of Individual OECD Countries and Potential Risks of Introducing a Digital Tax in Russia

The need to ensure compliance with the fiscal interests of the state requires thetransformation of essential approaches to the regulatory regulation of tax relationsin the context of the regulation of the tax base taxed in Russia. At the same time,the problems that arise when taxing the activities of digital companies abroad arerelevant for Russia. The relevance of the study is due to the fact that digitalizationhas allowed companies to access a large number of customers around the worldwithout a physical presence in the countries where these customers are located.Thus, there is a discrepancy between the level of physical and economic presencein the market country. Currently, international tax coordination can no longer beidentified only with traditional double tax treaties. In the absence of consensus,many jurisdictions have begun to formulate unilateral rules for taxation of thedigital economy. Inconsistency of these rules is likely to increase the tax burden ofa number of multinational corporations, given that each state seeks to protect itsinterests. The author discusses national digital taxes introduced in OECD countries.It is proposed to divide these taxes into three groups: income taxes, consumptiontaxes (VAT for electronic services) and hybrid taxes. Based on a comparative legalanalysis of the legislation of the states in which digital taxes have been introduced,possible scenarios for tax regulation in Russia been developed. It is concluded thatthe introduction of a digital tax in Russia is not appropriate. In addition, in the contextof the introduction of various benefits for IT companies increasing the tax burden inthe field through the introduction of a new tax does not seem logical.

Principles Justifying the Reallocation of Taxing Rights to Market Jurisdictions: Do We Need Them?

This article argues that the taxing right of market jurisdictions under Pillar One is justified by commonly invoked and widely accepted principles in international taxation. This is not just a desirable outcome of the international coordination on the allocation of taxing rights but a moral demand that the inter-state allocation of taxing rights must comply with. A principle-based allocation of taxing rights is a precondition for the legitimacy and thus the equity of the international tax regime. Principles, such as ability to pay, the benefits principle and economic allegiance, provide a normative justification for asserting tax jurisdiction. Despite the criticism regarding their vagueness, indeterminateness, and overlaps between their meaning, the benefits principle and economic allegiance have a definite function in the international tax regime insofar as they designate the countries that have a legitimate claim to tax international income. Pillar One, international tax coordination, equity in international taxation, internation equity, legitimacy, principles, justification of taxation, justification of tax jurisdiction, benefits principle, economic allegiance.

International Collaboration in Times of Pandemics: An Urgent Need for Reforming our Global Financial System

Better, swifter and more responsive international coordination is needed within our global financial system for the containment of the pandemic and its effects. This requires better international tax coordination with a higher global minimum corporate tax, comprehensive coverage of sectors and firms, inclusion of all current tax havens and more generous redistribution of excess profits to developing nations based on user location. There also needs to be a more substantial and easier-to-access mechanism for debt relief and restructuring, one that generously suspends debt payments in periods of crises and provides financial support without strict and painful conditionalities.

The debt bias in company financing decisions - problems and possible solutions

Purpose : The purpose of the present article is to compare the relative strengths and weaknesses of thin capitalisation rules and allowances for corporate equity which are the main approaches used in modern tax systems to address the debt bias and have been an integral part of proposals for international coordination of corporate income taxation. Methodology: The theoretical methods applied in the article are review of the existing literature on the topic and comparative analysis of the strengths and weaknesses of the main approaches to the debt bias. Results: Although thin capitalisation rules and allowances for corporate equity contribute to the reduction of the problems associated with the debt bias, both types of methods have their limitations. The two approaches are analysed in the article from the perspective of international reform proposals within the BEPS project and the EU as the effective elimination of the distortions caused by the debt bias can be achieved only in coordinated manner. Originality : The paper adds to the growing body of literature on the topic by summarising the main strengths and weaknesses of the two main methods for resolving the debt bias and analysing them from the perspective of the reforms of international tax rules. Keywords: Corporate income taxation, Debt bias, Thin capitalisation rules, Allowances for corporate equity, International tax coordination https://doi.org/10.58869/EJABM008/SI05

Preface

The purpose of this paper which serves as an introduction to the special edition of the quarterly of “Finanse i Prawo finansowe. Journal of Finance and Financial Law” under the title of Current Challenges for National Tax Policies and International Tax Coordination – Selected Issues from the Polish, Spanish and International Perspectives, is to outline major issues and challenges in shaping national and international tax policies. The research hypothesis is that, to a large extent, the economic consequences of the COVID-19 pandemic, but also the changing economic reality associated with the progressive internationalization and digitalization of business activity, pose numerous and significant challenges in the field of shaping tax policies, both at the national and international level. The research was carried out using a dogmatic-legal and legal-comparative method, taking into account the provisions of law, the body of literature as well as some economic data. The result of the research is to establish a starting point for further analysis of selected topics that reflect the major current challenges for national tax policies and international tax coordination. They include the question of legitimacy of taxes, the issues of correct realisation of the fiscal function of taxes while at the same time implementing the basic tax principles, the matter of tax compliance and the question of tax policy-shaping within the framework of the democratic law-governed state. Those issues presented from the Polish and Spanish perspectives, hopefully may provide an interesting contribution and make a valuable input to further discussions on the issue of shaping tax policies, both at the national and international levels.

Is There Finally an International Tax System?

In his David R. Tillinghast Lecture given at NYU in 1998, H. David Rosenbloom presented the tax world with a critical view as to the existence of an “international tax regime”. Has the world changed since then? On the one hand, there is a strong move towards international tax coordination, including multilateral agreements and the creation of new institutions handling international tax policies, like the G20 or the Inclusive Framework on BEPS. On the other hand, there is growing uncertainty and much explicit disagreement about the substantive fundamentals driving international tax policy and an increasingly bitter clash of revenue claims raised by governments. While countries were able to rally around the concept of “value creation” and the “single tax principle” in order to put tax havens in their place, they struggle to find common ground regarding the principles governing the overall allocation of taxing rights at the global level so far.

EU and International Income Tax Coordination After the Pandemics: It Is Time to Take It Personal

Traversa argues that it is the time to take personal the European Union and international income tax coordination after the COVID-19 pandemic. In troubled times, focus should be on essentials, and tax policy is no exception. What the world has endured in 2020 and a half has shaken the foundations of the social life. In many countries, prolonged lockdowns have not only strained the economy, they have taken a heavy toll on psychological welfare and human relationships in an unprecedented way. During this time, much of the international tax debate has focused on macropolitical issues such as new sources of financing for budgets running in deficit, taxation on multinational companies, and tax instruments to mitigate climate change. Those are worthy objectives, and progress that has been made should certainly be welcomed.

Sustainable Tax Policy Through the Lens of Intergenerational Justice

Professor Lind’s summary of the papers in this issue ably captures the range of topics addressed by the scholars who gathered for our conference at the University of Gävle last year. More importantly, she points out how well the various articles translate into the era of COVID-19. Even though no one could possibly have imagined the changes that we have experienced just since February of 2020, the issues of inequality, environmental degradation, international tax coordination, gender-and race-based unfairness, and so on have become even more important as the world explores how to move forward from this global tragedy.
 One of my long-term research projects has involved exploring the obligations between generations, in particular the “downward” obligations from older generations to younger generations that determine whether new members of society will thrive in the future.1 It is a source of inspiration but also some frustration that nearly every policy issue can be viewed from an intergenerational perspective—inspiration because it reminds us that all policy decisions have effects (direct and indirect) that carry into the future, but frustration because merely “having an impact in the future” does not necessarily make a policy question ripe for an intergenerational analysis and is thus too broad.

Remarks on the Future Prospects of the OECD/G20 Programme of Work – Profit Allocation (Pillar One) and Minimum Taxation (Pillar Two)

This article examines the OECD/G20 programme of work dealing with the tax challenges arising from the digitalization of the economy, highlights the partial abandonment of the arm’s length principle, discusses two ways of minimum taxation, evaluates the obstacles to international tax coordination and considers the possible consequences for national tax policy.

Does Interlocal Competition Drive Cooperation in Local Economic Development Policies? Evidence on Interlocal Business Parks in Germany

An increasing number of municipalities cooperates in the field of economic development. In this article, we focus on a specific instrument in this field, namely the development of joint business parks. We apply a hazard model to data from West German municipalities between 2000 and 2015. We find interlocal business parks to be more frequent among small municipalities and in urban clusters and other constellations where suitable land is scarce. Our main focus rests on the role of intraregional competition. An analogy building on the literature on international tax coordination supports the hypothesis that interlocal business parks are more likely in regions where intraregional competition is intense. We measure the intensity of competition using local tax rates and find the evidence to be affirmative: The likelihood of interlocal business park formation increases in the intensity of intraregional (tax) competition.

How The Netherlands Became a Tax Haven for Multinationals

The Netherlands tax environment for multinational foreign directive investment (FDI) has been characterized as ‘a tax haven’ or, perhaps more accurately, as a ‘conduit financial centre’. Anyway, with a share of 25% in the worldwide market for tax-driven FDI diversion, the Dutch tax planning industry has become a prominent target of recent OECD and EU anti-avoidance measures. Adaptations in many of the relevant Dutch tax rules are by now under way. The paper aims at the interactions between (a) the making of the relevant tax environment and (b) the rise of a specialized industry for FDI tax planning over the last century. The basic mechanism will be shown to be simple. A century ago, Dutch rules for taxation of cross-border FDI started to develop from a consistent view: FDI should not be hindered by tax borders. This served the interests of a small open economy hosting many internationally successful enterprises. A specialized tax planning industry only emerged in the second half of the 20th century as a by-product of international tax policies aimed at substantial business interests. But as this industry grew, its role in shaping and re-shaping the relevant rules increased. Only very recently, this role has begun to decline due to both international policy pressure and national public opinion. Issues to be discussed from this perspective include the development of Dutch tax treaty policy, the Dutch position in international tax coordination processes, and the development of relevant rules in Dutch tax law, starting with the first Dutch income tax law (1893/4) and with a focus on post-1945 developments.

The Better Route to Global Tax Coordination: Gradualism or Multilateralism?

In the context of international tax coordination incomplete information is one of the well-known frictions that can lead to bargaining failure and might explain a lack of observed coordination. We consider international negotiations about tax coordination under complete and incomplete information. We identify the conditions for multilateral negotiations to be more likely to be successful than gradual/sequential negotiation approaches and compare different routes of sequential bargaining. Under plausible conditions, full-scale global coordination is least likely to emerge if the negotiations take place sequentially, and if the negotiations with the most unpredictable country take place last.

BEPS Action 16: The Taxpayers’ Right to an Effective Legal Remedy Under European Law in Cross-Border Situations

This article starts from the reasonable assumption that the implementation of the base erosion and profit shifting (BEPS) project increases legal uncertainty in tax matters. The shift from the isolated and bilateral exercise of taxing jurisdiction to international tax coordination in the framework of the BEPS project is not accompanied by a corresponding global convergence in the exercise of legal remedies, which remain confined to their national boundaries. In line with their previous research, the authors address hereby the right of taxpayers to an effective legal remedy under European tax law, taking into account the dialogue among Courts in respect of legal values contained in national Constitutions of European Union (EU) Member States, the EU Charter of Fundamental Rights and the European Convention on Human Rights. The focus is on the right to an effective legal remedy in cross-border tax procedures, with special emphasis on mutual agreement procedures and mutual assistance. The authors suggest a two-tier mechanism with the involvement of taxpayers and tax authorities, which allows for an effective exercise of the right of defence and does not require major changes in the wording of treaty clauses modelled after Articles 25 and 26 OECD MC. Hopefully, something that other international institutions, including the United Nations, may consider for the future. The authors suggest filling this gap with their proposal for a BEPS Action 16.

The scope for progressive tax reform in the OECD countries

The trend of increasing inequality in the distribution of income and wealth in most developed countries has led to calls for corrective tax increases for the rich and wealthy. Such calls are often confronted with the claim that higher taxes on top personal incomes, corporate income and wealth are detrimental to growth and employment and/or will foster tax avoidance. This paper argues that even the dominating theoretical framework leaves substantial leeway for redistributive taxation. Furthermore, from a Keynesian macroeconomic perspective redistribution may even be systematically conducive to growth and employment. At the same time a change towards such a policy of redistribution may for some economies, particularly the German one, well be the prerequisite for compliance with the European Fiscal Compact if an increase of the macroeconomic imbalances that have come to be seen as a root cause of the global financial and economic crisis 2008/2009 and also the Euro crisis by many observers is to be avoided. Therefore, besides attempts at international tax coordination and harmonisation, national tax policies should actively use their room of manoeuvre for progressive taxation to correct the disparities in the income distribution and at the same time to increase the fiscal space.

Keeping up with the Joneses, the Smiths and the Tanakas: On international tax coordination and social comparisons

Recent evidence suggests that social comparisons between people in different countries have become more important over time due to globalization. This paper deals with optimal nonlinear income taxation in an international setting, where consumers derive utility from their relative consumption compared both with other domestic residents and people in another country. The optimal tax policy in our framework reflects both correction for positional externalities and redistributive aspects of such correction due to the incentive constraint facing each government. If the national governments behave as Nash competitors to each other, the resulting tax policy only internalizes the externalities that are due to within-country comparisons, whereas the tax policy chosen by the leader country in a Stackelberg game also to some extent reflects between-country comparisons. We also derive globally Pareto-efficient tax policies in a cooperative framework, and conclude that there are potentially large welfare gains of international tax policy coordination.

Spielräume für eine gerechtere Steuerpolitik in den OECD-Ländern

WSI-Mitteilungen , Seite 263 - 271

Tax Rate Harmonization, Renegotiation, and Asymmetric Tax Competition for Profits with Repeated Interaction

AbstractThis paper analyzes a model of corporate tax competition with repeated interaction and with strategic use of profit shifting within multinationals. We show that international tax coordination is more likely to prevail if the degree of asymmetry in terms of productivity differences between countries is smaller, or if concealment costs of profit shifting are larger when the tax authorities adopt grim‐trigger strategies. Allowing for renegotiation in the tax harmonization process requires more patient tax authorities to implement tax harmonization as a weakly renegotiation‐proof equilibrium. In this case, we find somewhat paradoxical situations where higher costs of profit shifting make tax harmonization less sustainable.

Cross-Border Intra-Group Hybrid Finance and International Taxation

In intra-group finance hybrid instruments allow for tailor-made form of finance. Hence hybrid finance is often used for international tax planning in multinational groups. Due to a lack of international tax harmonization or tax coordination qualification conflict can arise. A specific hybrid instrument is classified as debt in one country, and as equity in the other country. This may lead to double taxation. In the reverse case, double non-taxation can arise. Against this legal background one might expect that cross-border hybrid intra-group finance is advantageous in comparison to classical debt finance in case of double-non-taxation while it can be expected to be disadvantageous in the case of double taxation of the yield. Previous studies do not include qualification conflicts. Thus the question arises how qualification conflicts are affecting an intra-group finance decision. We examine effects of such qualification conflicts, resulting from the use of cross-border, intra-group hybrid finance, on the tax-advantageousness as compared to classical debt finance. The analysis is based on a binomial simulation model including economic and legal uncertainty. We show that the results of our analysis under uncertainty vary significantly when compared to the more obvious results under economic and legal certainty. (author´s abstract)

A Critical Examination of the International Regulation of Offshore Financial Centres

Globalisation has leaded to increasing movements across national frontiers of goods and services, financial capital, production factors and technology. Globalisation has mixed effects on the development of tax systems and national economies. However, it has also contributed to a tax competition taking potentially the form of harmful tax practices. Further, the opportunities for money laundering, terrorism financing and evasion of taxes on capital income have increased, fuelling an explosive growth of “offshore” finance, which takes advantage from the weaknesses of the international tax coordination’s system and of the financial markets. Thus, the economic and tax competition has created a growing number of “tax havens” and “Offshore Financial Centers” (OFCs). Feeling an erosion of their economies and national tax bases, the G7/8 nations began a vigorous campaign, driven by international bodies and international associations of regulators. According to these international regulators, the IMF, the OECD, the FATF and the European Union (EU), the OFCs adopt harmful regimes to attract mobile activities or hide financial crimes, to encourage tax avoidance and flight of capital, to make possible money laundering, and other illegal activities, and to weaken the power of both national and international supervisory bodies to regulate the financial system. These international bodies has used the threat of sanctions to oblige OFCs to cooperate in the areas such as anti money-laundering, counter financing terrorism, and tax competition. This campaign is, until now, moderately successful. The limited success is mainly grounded on the fact that there has been very limited coordination between the international bodies in order to improve cooperation in tax enforcement and the supervision of financial markets and institutions. Further, these initiatives have been largely criticized by the OFCs as they consider them as rich countries’ initiatives. The campaigns have had the opposite effect of what they had originally intended. Through complying with the OECD, the EU, and the IMF requirements, offshore sovereignty has been enhanced, sustaining its continued appeal for international finance. In fact, without strong enforcement capacities from the very beginning, the multilateral approach was vulnerable to bilateralism from the commencement. Several solutions are proposed like the creation of a unique international body dealing with all issues raised by OFCs, or the adoption of a “unitary taxation” system or a “Financial Transparency Index”. The solution could also be the base on a multilateral agreement for the exchange of tax-relevant information. The information shared would help to target tax evasion, illegal trafficking and money-laundering. Finally, the international community needs to adopt a more global approach to the issue of OFCs including all countries and not only developed countries, and transversal, including taxation, corruption and instability.

Tax Rate Harmonization, Renegotiation and Asymmetric Tax Competition for Profits with Repeated Interaction

This paper analyzes a model of corporate tax competition with repeated interaction and with strategic use of profit shifting within multinationals. We show that international tax coordination is more likely to prevail if the degree of asymmetry in terms of productivity differences between countries is smaller, or if concealment costs of profit shifting are larger when the tax authorities adopt grim-trigger strategies. Allowing for renegotiation in the tax harmonization process generally requires more patient tax authorities to support tax harmonization as a subgame perfect equilibrium. We find somewhat paradoxical situations where higher costs of profit shifting may make international tax arrangements less sustainable under weakly-renegotiation-proof strategies.