International Tax Rules Research Articles

Aggressive International Tax Planning by Multinational Corporations: The Canadian Context and Possible Responses

Aggressive international tax planning by multinational corporations has lately fallen under intense political scrutiny. U.S. politicians have called out some American multinationals, including Apple, Amazon, Starbucks and Google, for relocating profits abroad to avoid American taxes. More recently, politicians accused Burger King of being unpatriotic for its own purported “tax inversion” maneuver, in which it would acquire Canada’s Tim Hortons and shift the head office from Florida to Ontario, benefitting from the lower northern tax rates. The Chicago-based Walgreens pharmacy chain recently backed off a “tax inversion” plan to relocate to Switzerland (the former headquarters of Alliance Boots, a company acquired by Walgreens), apparently having assessed the political risk as too high. This sort of aggressive international tax planning by multinational corporations was what G20 members had committed to fighting against when they endorsed the OECD’s “action plan” against base erosion and profit shifting (BEPS). Canada has been vigilant about improving its tax framework to prevent non-resident corporations from eroding the Canadian tax base, having enacted thin-capitalization rules and, more recently, foreign-affiliate-dumping rules, as well as proposing anti-treaty-shopping measures. But despite Canada’s commitment to the OECD’s BEPS Action Plan, the Canadian government has been reluctant to follow through on implementing rules that might affect its own resident corporations and their international competitiveness. This is most notably visible in the generous participation exemption for dividends from foreign affiliates, the absence of rules restricting the deductibility of interest expenses incurred to earn exempt dividends from foreign affiliates. Canada may be reluctant to fully follow through on all aspects of the OECD’s BEPS Action Plan. As the examples of Apple, Amazon, Google and Starbucks demonstrate, the American government has so far been unable to bring itself to take any meaningful action against aggressive international planning by U.S.resident corporations. Were Canada to enact and enforce rules that clamped down on aggressive international tax planning by its own resident corporations, it would only put Canadian firms at a competitive disadvantage relative to American (or other international) rivals. Until the United States is willing and able to take the lead on aggressive international tax planning by multi-national corporations, the reality is that smaller countries, including Canada, should be cautious about making changes to its international tax rules that are dependent on other countries making similar changes.

Transparency in Financial Reporting: Is Country-by-Country Reporting Suitable To Combat International Profit Shifting?

In this article, the authors contend that country-by-country reporting cannot be regarded as a convincing measure to combat international profit shifting. Instead, tax legislators should limit profit shifting by enforcing national and international tax rules and by closing gaps in tax law.

The Role of Tax Treaties in Facilitating Development and Protecting the Tax Base

The amount of taxes paid by multinational enterprises (MNEs) in host and home countries continues to make headline news. Corporate tax regimes, particularly those in many OECD countries, have never been more complex and the competition to attract and retain foreign direct investment (FDI) has perhaps never been so great. All of these political, legal, economic and competitive realities face countries at a time when they need additional budget revenues. At the June 2012 G-20 Summit in Los Cabos, leaders identified base erosion and profit shifting as key fiscal issue to be addressed. Many are expecting this to translate into a new approach to applying existing international tax standards, an increased pressure to eliminate tax breaks, enact tougher anti-abuse provisions, and less tolerance of aggressive tax planning. There has been an increased critical focus on transfer pricing, corporate restructuring and double tax treaties. Some have suggested that double tax treaties are eroding the domestic tax bases of developing countries, while others conclude that double tax treaties promote development and FDI and thereby expand the tax base. Dividing up a revenue pie has never been easy and the implementation of international tax rules to transparently and predictably allocate revenue to avoid double taxation and double non taxation has never been more adversarial between taxpayers and tax authorities and between tax jurisdictions. It was for these reasons that the Global Tax Policy Center of the Institute for Austrian and International Tax Law (Vienna University of Economics and Business) and the International Tax and Investment Center (ITIC) decided to undertake this study. The objective of our study was to look at the development impact of double taxation treaties and, more broadly, how tax policy can help generate economic growth and prosperity. Legally domestic tax laws are normally subordinate to international double taxation treaties, but in reality a double tax treaty only serves a country as well as its domestic tax regime. We've concluded that the problems affecting developing countries lie not with double tax treaties but rather in weak domestic tax legislation. Our study reviews empirical data from 20 developing countries, including LDCs, middle-to-high income developing countries, resource-rich countries, and BRIICS[1] countries. We hope that the empirical analysis and the conclusions that can be drawn from it can help guide policymakers to refocus their policy objectives to boost capital formation, expanding exports, and protect their domestic tax bases. We believe that a country with strong domestic tax legislation can advance their pursuit of the Millennium Development Goals by affectively utilizing double tax treaties and the related international tax rules to more transparently share and grow their tax base. (authors' abstract)

Transparency in Financial Reporting: Is Country-by-Country Reporting Suitable to Combat International Profit Shifting?

Aggressive tax planning efforts of highly profitable multinational companies (Base Erosion and Profit Shifting (BEPS)) have recently become the subject of intense public debate. As a response, several international initiatives and parties have called for more transparency in financial reporting, especially by means of a country-specific reporting of certain tax information (Country-by-Country Reporting (CbCR)). In our paper, we demonstrate that neither consolidated nor individual financial accounts seem to be an appropriate platform to provide such country-specific information and, therefore, that CbCR cannot be based on extended financial accounting standards. Moreover, we argue that even separate CbCR templates do not prevent multinationals from profit shifting, since their common tax minimization strategies are mainly based on the legal exploitation of gaps and loopholes in national and international tax law. In that regard, we show that expected costs for CbCR would exceed expected benefits and therefore contend that CbCR cannot be regarded as a convincing measure to combat international profit shifting. Instead, we argue that tax legislators should limit profit shifting by enforcing national and international tax rules and by closing gaps in tax law. In particular, we call for more tightened and standardized transfer pricing regulations to be adopted at an international level.

Response to Comments on Fixing U.S. International Taxation

In responding to the thoughtful comments offered by Stephen Shay, Yariv Brauner, and Fadi Shaheen, my first priority is to thank both of them and the editors of the Jerusalem Review of Legal Studies. The book symposium is a great format, offering the focused attention that authors more often want than get, and here its potential has been richly fulfilled. Each commentator either disagrees with, or at least significantly augments, certain aspects of the discussion in Fixing U.S. International Taxation. For example, Shay questions my policy suggestions, based on the importance of existing tax treaties and the difficulty of revising them. Brauner suggests that I am too critical of formulary apportionment, and that ‘‘correctness’’ in sourcing income is even less promising and useful as an evaluative perspective than I suggest. Shaheen augments my analysis of how home country deferral for foreign source income interacts with foreign tax creditability, by more fully addressing the scenario in which higher after-foreign-tax returns are persistently available for income that is reported as arising in low-tax than in high-tax countries. Fundamentally, however, all three commentators appear not just to share my dissatisfaction with the ‘‘quality and scope of U.S. international tax policy discussion,’’ but to ascribe some value and interest to my proposed analytical framework Even the most critical comments in the three reviews can be viewed either as friendly amendments or as suggesting that countervailing considerations limit the practical feasibility of adjusting the U.S. international tax rules in response to analytically correct points that I make. Given the limited scope of disagreement, along with the importance, in my view, of revamping the dominant intellectual framework for international tax policy analysis, this response will mainly focus on summarizing the book’s motivation and chief aims.

Submission No. 6 to Senate Committee on Finance -- Summary of Staff Discussion Draft -- Unaddressed Issues and Request for Comments -- Responses

The Senate Committee on Finance international tax reform staff discussion draft issued November 19, 2013 sets out certain proposals for international tax reform. In a document titled “Summary of Staff Discussion Draft” issued on November 19, 2013 of the proposals, certain “Unaddressed Issues” were listed and comments were requested. This letter responds to certain of those Unaddressed Issues. Comments are provided for the following Unaddressed Issues:1. The pros and cons of the two options for taxing foreign market activities of foreign subsidiaries of U.S. businesses.2. The relative merits of Chairman Camp’s Option C as compared with the proposals in this Senate Finance Committee staff discussion draft.3. The treatment of foreign branches.4. Consideration of a unitary approach to international taxation.9. International tax rules affecting individuals.This is Submission 6 of 7 Comment Letters Provided to the Committee.

Unitary Taxation and International Tax Rules

unitary taxation; tax; international tax; formulary apportionment; separate accounting; arm’s length standard; developing countries; multinational companies.

Unitary Taxation and International Tax Rules

unitary taxation; tax; international tax; formulary apportionment; separate accounting; arm’s length standard; developing countries; multinational companies.

The Discrepancy between 'Ideal' and 'Real World' International Tax Rules - What Drives Politicians When Making the Rules?

The current international tax system diverges greatly from a theoretically tax system. One reason for this discrepancy may be that politicians strive for other objectives rather than making tax rules that comply with the theoretical concepts of optimal taxation. In this article, I overview the approaches used in the economic and legal literature to explain the motivations of the people making international tax policy and contrast them with observations from the real world. This article illustrates that the making of international tax policy is affected by many different factors: domestic pressure groups and the structure of the international tax system, along with selfinterested politicians and bureaucrats. Considering the complexity of the conditions under which international tax policy is made, it is not astonishing that international tax law deviates from the principles characterizing ideal taxation. (author's abstract)

Investment and Financing Strategy of a Multinational Enterprise Under Alternative Tax Designs

This paper investigates the consequences of a series of alternative international tax designs on the strategy of a multinational enterprise regarding the cross border distribution of its investment and the choice of its financing behavior. We start with a world where no international tax rules are at work. Then we successively introduce (i) the rules provided by the OECD Model Tax Convention, (ii) the EU Parent-Subsidiary Directive of July 23, 1990; and (iii) a combination of Allowance for Corporate Equity (ACE) and Comprehensive Business Income Tax (CBIT). Finally, we leave systems based on Separate Accounting (SA) aside and turn to Consolidation and Formulary Apportionment (C&FA) adopted either by all the jurisdictions at work in the model, or by a sole subset of them within the framework of an Enhanced Cooperation Agreement (ECA).

Legislation in the system of international tax rules

Legislation in the system of international tax rules

OECD Draft Guidelines on VAT/GST on Cross-Border Services

In this article, the author seeks to assess, on the basis of the Draft Guidelines and previous related consultations, the efforts undertaken at OECD level in addressing cross-border taxation of services and intangibles. The author briefly recalls the principles usually relied on to tax supplies in cross-border scenarios, and identifies the specific obstacles that taxation of services and intangibles may encounter and which are addressed by the Draft Guidelines. The author also gives some comments on the Draft Guidelines and on the role played by the OECD in the adoption of international tax rules and principles.

Tax Dynamics of (U.S.) Corporate Expatriations

This article addresses the main issues that corporate inversion transactions (or expatriations) raise both from the perspective of the corporations as well as from that of the policy makers (focusing on the U.S. government).In the first part, the inversion transactions will be defined and the most common juridical forms through which the transaction takes place and the consequent tax treatment will be synthetically described.In the second part, an historical analysis of the phenomenon in the U.S. will be provided.In the third part, the tax motives why American corporations have decided to invert (or may decide to invert in the future) will be investigated. In specific, the basic features of the U.S. international tax rules that encourage corporations to expatriate will be investigated. Considering the existence of an international tax regime, and the significant degree of convergence in international tax matters, the conclusions can be clearly adopted for other policy makers. In the last part, an overview of other possible policy tools that may be implemented in the future (in the U.S. or in other jurisdiction) to efficiently prevent inversion transactions will be shown, as a conclusion of the article.More specifically, a change in the definition of corporate residency for tax purposes, the use of corporate governance tools as tax anti-avoidance measures and a reconsideration of the residence based taxation principle will be proposed as possible solutions to prevent domestic corporations to expatriate.

Tax Dynamics of (U.S.) Corporate Expatriations

This article addresses the main issues that corporate inversion transactions (or expatriations) raise both from the perspective of the corporations as well as from that of the policy makers (focusing on the U.S. government).In the first part, the inversion transactions will be defined and the most common juridical forms through which the transaction takes place and the consequent tax treatment will be synthetically described.In the second part, an historical analysis of the phenomenon in the U.S. will be provided.In the third part, the tax motives why American corporations have decided to invert (or may decide to invert in the future) will be investigated. In specific, the basic features of the U.S. international tax rules that encourage corporations to expatriate will be investigated. Considering the existence of an international tax regime, and the significant degree of convergence in international tax matters, the conclusions can be clearly adopted for other policy makers. In the last part, an overview of other possible policy tools that may be implemented in the future (in the U.S. or in other jurisdiction) to efficiently prevent inversion transactions will be shown, as a conclusion of the article.More specifically, a change in the definition of corporate residency for tax purposes, the use of corporate governance tools as tax anti-avoidance measures and a reconsideration of the residence based taxation principle will be proposed as possible solutions to prevent domestic corporations to expatriate.

Debt and Equity: What's the Difference? A Comparative View

The divide between debt and equity belongs to the focal points of national and international tax law. Under domestic individual income tax law, it is crucial for the distinction between a creditor-debtor relationship and a full partnership of taxpayers jointly carrying on a business. Under domestic corporate income tax law, it is decisive for the application of a two-layer taxation of corporate profits and dividends. Under international income tax law, the allocation of taxing rights and the application of withholding taxation follows largely the distinction between debt and equity. Against this background, this article analyses on a comparative basis the major features of debt and equity under corporate law, accounting law and tax law in six jurisdictions (Austria, France, Germany, Switzerland, United Kingdom, United States). It becomes clear that the debt-equity divide is shaped differently for purposes of individual income taxation, corporate income taxation and international income taxation. While individual or corporate income taxation largely looks at the similarities between a full partner or a full shareholder on the one hand and the holder of a hybrid debt instruments on the other hand, international tax rules tend to include all sorts of profit-dependent payments under the rules for corporate profits and dividends. It remains to be seen whether the dependency of payments on contingent profits (or other proprietary elements of a business entity like turnover) forms a convincing rationale for the existing distinctions between debt and equity in the international tax arena or whether tax policy should opt for full or near equal treatment of these financial instruments.

Place Where the Supply/Activity is Effectively Carried Out as an Allocation Rule: VAT vs Direct Taxation

The aim of this paper is to establish whether VAT place of supply rules are more effective allocation rules than international tax rules currently governing income taxation. This is done through the analysis of the “place where the activity is effectively carried out” (PWAECO) and the “place where the supply is effectively carried out” (PWSECO) as allocation rules. The paper discusses allocation rules applicable to (corporate) income under international taxation provisions, analyzing its limitations and weaknesses, as well as some of the proposed solutions. The attention then shifts to VAT. The place of supply rules under European VAT will be assessed, in particular the role of the PWSECO rule therein; similarly to the approach taken income international tax rules, an analysis of the limitations and weaknesses of the place of supply system within European VAT will then be undertaken. The paper concludes with considerations on whether VAT rules for allocation of taxing rights are more effective than direct taxation’s allocation rules, or whether VAT offers a false promise, further highlighting that in tax – as in life – the grass always seems greener on the other side.

Tax Competition, Tax Arbitrage, and the International Tax Regime

This paper argues that a coherent international tax regime exists, embodied in both the tax treaty network and in domestic laws, and that it forms a significant part of international law (both treaty-based and customary). The practical implication is that countries are not free to adopt any international tax rules they please, but rather operate in the context of the regime, which changes in the same ways international law changes over time. Thus, unilateral action is possible, but is also restricted, and countries are generally reluctant to take unilateral actions that violate the basic norms that underlie the regime. Those norms are the single tax principle (i.e., that income should be taxed once - not more and not less) and the benefits principle (i.e., that active business income should be taxed primarily at source, and passive investment income primarily at residence).

Tax Credits, Source Rules, Trade and Electronic Commerce: Behavioral Margins and the Design of International Tax Systems

The paper provides a framework for designing international tax rules by outlining the various behavioral margins they apply to. It then goes on to analyze three specific policy issues in terms of preserving the neutrality of choices along the relevant margins: (1) Which foreign taxes should be credited against home country tax liabilities? (2) Should the income from intangible assets like patents be taxed by the host country or the country in which it was developed? (3) Should the local sales by a foreign company determine the income tax imposed by the consuming country? Should the rules be changed because of electronic commerce? The analysis shows that the current foreign tax credit rules lack any coherent basis, either in terms of efficiency or fairness. For example, a tax on gross assets should be creditable, as well as a tax on gross income that does not allow deductions for interest. The income from intangible assets like patents should be sourced in the country in which the intangible asset was developed and be subject to its tax rate. That preserves the undistorted choice among alternative locations for exploiting an intangible. The analysis of the relationship between income taxes and trade taxes shows that in extreme cases a tax on imports may be justified to offset the distorting effect of income taxes. But electronic commerce is unlikely to create such a case. It is like any other technical change that lowers transactions costs.

The U.S. Tax Treatment of Foreign Source Income Earned in Developing Countries

The purpose of this paper is to explore whether the U.S. should amend its international tax rules in ways that might encourage U.S. companies to invest in developing countries (DCs). Some scholars, notably Professor Karen Brown, have argued that the current U.S. international tax regime works against the interests of DCs and should be replaced by one that, she asserts, would benefit DCs in general and African nations in particular. She has proposed that the U.S. replace its foreign tax credit mechanism with an exemption system for DCs (at least for Africa). One of the reasons for the proposal is that the current U.S. system prevents DCs from offering tax incentives, such as tax holidays, to attract foreign direct investment (FDI) by U.S. multinational corporations (MNCs). Certainly it is the case that very little U.S. FDI finds its way to DCs. At the end of 2001, total U.S.-owned assets located abroad totaled $6.2 trillion (valued at cost), but little of these assets were in DCs. But, proposals such as that put forward by Professor Brown raise several questions. Is FDI an unqualified good for DCs? What are the determinants in the location of FDI? Are tax incentives offered by DCs effective in attracting FDI, even in situations where home country tax rules do not thwart them? Can tax incentives alone attract FDI or are there necessary preconditions a DC must satisfy before there is FDI at all? Are home country unilateral tax incentives effective in increasing FDI by its MNCs? Is it better for developed countries to assist DCs by offering tax subsidies to its MNCs or by providing direct financial assistance to DCs? This paper explores these questions. The paper first provides a broad overview of international tax systems that countries can adopt, i.e, the worldwide taxation of income with a foreign tax credit and exemption systems. The paper then demonstrates that the current U.S. foreign tax credit system defeats the objectives of DCs in offering tax holidays to U.S. MNCs only if the tax rate of the foreign country is lower than the U.S. and if the U.S. MNC is in an excess credit position. I propose a structural change in the U.S. foreign tax credit rules that would mitigate the impact of the U.S. international tax system on host country tax incentives to attract FDI. The proposal is not designed to be an incentive for greater FDI in developing countries by U.S. MNCs. Instead, it is intended to correct what I believe are defects in the current U.S. FTC rules. The factors and forces that adversely affect developing countries then are identified in order to lay the groundwork for an assessment of whether particular tax changes by the U.S. would impact these forces and factors positively. Recent work by the United Nations and the OECD regarding the level and means by which developed countries can aid DCs is also analyzed with particular attention paid to the role of foreign direct investment in these reports. The rather minimal economic evidence on the impact of tax policies on the level and location of FDI is then reviewed. Several different changes in the U.S. international tax system are assessed in terms of their efficiency and simplicity effects and in terms of their effectiveness in meeting the problems facing DCs: adopting an exemption system for DCs, reducing the corporate tax rate on DC income, adopting tax sparing for DC income, modifying Subpart F for DC income, and modifying transfer pricing rules to allow more profit to be allocated to DCs. The paper concludes that none of these proposals is likely to increase FDI by U.S. MNCs in DCs.

Source Rules, Trade and Income Taxes, and Electronic Commerce: Designing Rules for the Taxation of Cross-Border Income

Several issues in the design of international tax rules are examined. One is whether the income from intangible assets such as royalties should be taxed by the host country in which the intangibles are used or the home country in which they were developed. Another is whether local sales should be a basis for taxing foreign companies even if they have no local physical presence. A third related issue is whether a destination basis income tax is a valid policy option. The introduction develops a general framework to evaluate tax regimes, based on efficiency along various behavioral margins such as the choice of where to exploit an intangible asset. The analysis concludes that the income from intangible assets should be taxed by the home country, not the country where it is used. Also, any attempt to tax foreign companies based on their local sales is simply the equivalent of a tariff. The paper shows that there are some extreme circumstances which would justify a tariff to offset the distortions created by an income tax, but electronic commerce does not seem to qualify for this departure from the benefits of free trade. Finally, a destination basis income tax creates an incentive to invest abroad rather than at home. It is an improper attempt to graft a consumption tax concept onto an income tax