Unitary Taxation Research Articles

Taxation models for international groups of companies

Taxation of international groups of companies can be based on two models: These are: 1) unitary taxation, whichinvolves determining the income of the group as a whole and then dividing it between individual companies, 2)separate entity taxation, which involves each entity being taken into account separately and its income beingdetermined as if it were an independent entity. In practice, it was decided to choose separate entity taxation, whichresulted in legislation on transfer pricing. However, using this model did not protect against tax optimization usedby international groups of companies, which prompted the OECD and the EU to take various actions to combat it.The latest initiative in the area of taxation of international groups of companies is the global minimum tax model.Its essence comes down to charging an additional amount of tax if the effective tax rate in a given tax jurisdictionis lower than 15%. In Poland, this model has not yet been implemented, it will most likely happen from 2025, hencethe lack of practical experience with its application

EU-Wide Unitary Taxation: A Path to a Fair Corporate Tax System

EU-Wide Unitary Taxation: A Path to a Fair Corporate Tax System

A Governance Analysis of BEFIT: How the Member States’ Wish to Obtain more Regulatory Authority is Driving a Revolution

This contribution analyses the ongoing BEFIT proposal (Business in Europe: Framework for Income Taxation) of the EC (European Commission) from a governance perspective. For this matter, it considers the proposed replacement of the arm’s length standard with a system of unitary taxation and formulary apportionment (FA) as a changing regulation strategy to tax multinational companies. It argues that the BEFIT proposal indicates a change from a reflexive regulation strategy to a command and control regulation strategy. The future approval of this proposal would imply that the Member States no longer want to count on the relative freedom of taxpayers to allocate profits, but attempt to take full responsibility for that allocation instead. This contribution concludes that this wish of the Member States to obtain more regulatory authority to tax multinational companies is the catalyst of the ongoing BEFIT revolution. BEFIT, harmonization, transfer pricing, arm’s length principle, formulary apportionment, unitary taxation, regulatory authority

Unitary Taxation After Pillar One

Unitary Taxation After Pillar One

The Development and Types of the Income Tax Construction

Two basic types of income taxes have evolved in tax systems: tax cedular, also known as analytical tax, and global tax, also known as synthetic or unitary tax. Taxation of personal income has become and is one of the most important redistribution tools income of the population, allowing for the implementation of the principles of universality, justice (equality) and taxation of the so-called clean income (these three principles are the requirements of modern taxation income from natural persons in EU countries) and stimulating the desired behavior in the sphere of consumption. Therefore, income taxes have a significantly different impact on the distribution of income and wealth than taxes indirect.

Non-harmonized Implementation of a GloBE Minimum Tax: How EU Member States Could Proceed

Since July 2021, more than 130 member countries of the G20/OECD Inclusive Framework (IF) have committed themselves to pursuing a ‘common approach’ on an international effective minimum tax regime. This political agreement implies that member countries who wish to implement such a tax regime have to streamline its design by modelling it after the so-called Global Anti-Base Erosion Proposal (‘GloBE’) that the IF has developed as ‘Pillar 2’ of its work program on tax challenges arising from the digitalization of the economy. This article explores how individual EU Member States could implement this agreement in conformity with EU fundamental freedoms also absent – or ahead of – harmonizing EU legislation to this effect. It is demonstrated that design alternatives to the often proposed extension of the carve-out for ‘substance-based’ activities exist and should be pursued. In particular, EU Member States could extend the minimum top-up tax approach to domestic entities of in-scope multinational enterprises (MNEs). Alternatively, they could also convert GloBE into a form of unitary minimum taxation. minimum taxation, GloBE, Pillar 2, fundamental freedoms, de facto discrimination

International taxation: Biden opens up the way to reform

Policy recommendations: • Progress is being made on combating corporation tax avoidance at international level. After a pause pending the results of the 2020 presidential election in the USA, discussions have resumed in an ‘inclusive framework’ within the OECD. The recent decisions by the Finance Ministers of the G7 and by the ‘Inclusive framework at the OECD’ confirm the political momentum to combat tax avoidance. • There are two conflicting models: continuing to rely to the utmost on a model that regards the various entities of a multinational group as separate entities, with their tax base set by transfer pricing rules and based on physical presence, or moving over to unitary taxation, with the tax base allocated within the group – and among countries – on the basis of tangible factors, such as jobs or sales. The preferred option is the second one, and the proposals under discussion are a first step in this direction. • The introduction of a minimum level of taxation is certainly a step forward. However, care must be taken to ensure that the level and scope are right in order to put an end to tax competition, which is detrimental in both economic and budgetary terms.

Country-by-Country Reporting: A Step Towards Unitary Taxation?

Multinational companies are now obliged to deliver an annual report to the tax authorities with information disaggregated by country (country-by-country reporting) in order to show where the assets and workers are allocated, how profits are distributed and to whom taxes are paid. Unfortunately, these reports are not made public in the European Union, thus preventing public scrutiny about the strategies used by multinational companies to displace profits to tax havens. This article applies the Unitary Taxation regime proposed by the European Commission to US multinational companies. The results confirm a strong bias among the profits distribution towards countries with lower corporate tax rates. Likewise, they confirm the capacity of the Unitary Taxation to promote a fairer distribution of tax revenues. These results can be a good contribution to the current Portuguese presidency of the European Union, which managed to gather important support to move forward with the European public country-by-country reporting directive.

Fair Corporate Taxation: Why and How International Tax Rules Need to Be Changed

Tax avoidance harms public budgets as is estimated that at least 20 per cent of corporate income tax revenues are lost due to such corporate behaviour. Furthermore, the business models used by multinational enterprises to reduce tax payments (such as letterbox-type practices) have a detrimental impact on productive investment, on workers’ involvement in management’s decisions and on collective bargaining for a fair share of the wealth. Indeed, current international tax rules do not take into account the complex business and tax strategies in which multinationals are engaged at global level. First, a move towards a unitary taxation principle is required, which means that the profits of a multinational should be determined globally and shared out between countries in proportion to the real level of economic activity. Second, a global minimum tax rate should limit tax competition between countries and raise corporate tax revenues. And finally, greater transparency about tax practices, including a breakdown of revenues and profits by country (country-by-country reporting), is needed to enable workers’ representatives to understand the tax practices of their companies.

A Securities Tax and the Problems of Taxing Global Capital

An earlier paper, How to Tax Capital, 70 Tax L. Rev. 1 (2016), proposed a new approach to taxing capital owned by U.S. households and nonprofits. The cornerstone is a flat periodic tax on the market value of U.S. publicly traded securities. An annual tax rate of around .8 percent (80 basis points) would roughly approximate the average tax burden on capital income in the U.S. under the existing patchwork system for taxing capital income. A security issuer would remit the tax based on the market value of its securities. A security issuer would receive a credit for U.S. publicly traded securities it holds so that wealth that is represented by a string of publicly traded securities would be taxed once. Wealth held in forms other than publicly traded securities (e.g, private equity and closely held companies) would be taxed by a complementary tax at the same rate on their estimated value. The earlier paper explained why the securities tax is superior to the individual income tax and the corporate income tax as a tax on capital. It eliminates most distortions created by the existing system, it is easy to administer, and it is impossible to evade other than by holding wealth in illiquid forms (which is costly). This paper examines how the securities tax would function in a global context assuming that other nations do not change their approach to taxing cross-border investment. The current system involves a bifurcated tax on capital income with the nation in which capital is used imposing a company-level tax on income and the state in which owners of capital reside imposing an owner-level tax of dividends, interest, and capital gains. The securities tax is a unitary tax on capital imposed at the company level. Integrating a unitary tax with the current bifurcated system requires several modifications in the securities tax: the corporate income tax would need to be retained to tax foreign direct investment in the U.S.; the U.S. would probably want to give a U.S. company a partial credit against the securities tax for foreign taxes paid by a company on foreign source income; and the U.S. probably would want to rebate a significant part of the securities tax to identified foreign owners of U.S. securities (the rebate would not be paid to unidentified owners). These modifications would mean that the securities tax would not remedy the problems that currently plague the taxation of global capital. One modest benefit is that not rebating the tax to unidentified foreign owners of U.S. assets would allow the U.S. government to share in the profit from the U.S. serving as a haven for hidden wealth, which would make the U.S. somewhat less attractive as a haven. But the modified securities tax would be no worse than the status quo with respect to taxing cross border investment.

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.

On the Future of Business Income Taxation in Europe

How should Europe respond to society’s calls for a sound and properly functioning corporate tax system for the internal market? With the aim of contributing to the deliberations on this subject, the proposal of the author is for the EU Member States to jump ahead in the debate and remodel the CCTB/CCCTB draft directives into a new system of international taxation, i.e. a unitary taxation model for taxing the worldwide economic profits of multinationals, using a destination-based apportionment formula (CCCTB 2.0) to apportion the tax base to countries both within and outside the European Union. Under such a system, it would be up to the EU Member States themselves to determine the rate applying to the tax base apportioned to them. This would take tax out of the equation in the case of marginal financing and investment decisions, while also curtailing its influence on investment location decisions and, at the same time, making “gaming the system” more difficult. EU Member States would, in turn, regain their autonomy to set their corporate tax rates at the levels they regard as appropriate, while the proposed model would also end the “race to the bottom” within the European Union. If the European Union were to be the first mover, self-interest would prompt other countries and regions to follow its lead. The resulting production location neutrality would encourage international businesses to embrace the model and lobby for transition as rapidly as possible. Driven by self-interest and competitive responses, such a move could initiate a transition to the worldwide adoption of destination-based taxation of excess earnings – in other words, harmonization through competition. As the innovator, the European Union would enjoy the greatest economic benefit during the transitional period, when countries’ profit tax systems would be evolving towards an equilibrium in which destination-based tax would become the new global standard. The final destination would be a new destination-based company tax paradigm operating both neutrally and non-discriminatorily on the supply side. That would produce a result that would not only be fair, but would also – and primarily – provide a systemic and economically efficient solution for the international problem of BEPS.

How accurately does the CCCTB apportionment formula allocate profits? An evaluation of the European Commission proposal

The European Commission has been setting the course for an EU-wide reform of the traditional corporate tax system of separate accounting (SA) to a unitary taxation with formula apportionment (FA). The underlying claim of this formula is that it allocates profits more precisely than SA to the country where the value is created, as SA can be distorted by intra-group profit shifting. We analyze and evaluate the proposed CCCTB apportionment formula in terms of how well FA approximates the “undistorted” profit. After identifying potential determinants of misapportionment in the CCCTB formula, we test the formula empirically by randomly grouping pairs of European groups to fictitious metagroups. We allocate profits to the metagroup members according to the formula and compare the apportioned FA profit with the observed SA profit (our proxy for “undistorted” profit). We find huge profit misallocations under FA. Restricting the sample to metagroup years with positive profit of each metagroup member, the mean negative (positive) profit deviation is − 4.2% (6.2%) of total assets. Compared to the mean return on assets of the sample, this results in an average error of − 49.5% or + 74.1%, respectively. The deviation caused by FA is systematic. The main drivers for profit misallocations are the profitability of a firm as well as the within-group heterogeneity in firm size and in profitability. The inclusion of loss years shows that loss firms would suffer from considerable additional tax payments under FA. An adjustment of the apportionment weights would slightly increase the performance of the formula. All in all, the CCCTB apportionment formula performs remarkably badly.

On the Future of Business Income Taxation in Europe

How should “Europe” respond to society’s calls for a sound and properly functioning corporate tax system for the internal market? With the aim of contributing to the deliberations on this subject, the proposal of the author is to remodel the CCTB/CCCTB draft directives into a unitary taxation model for taxing the worldwide economic profits of multinationals and using a destination-based apportionment formula (the “CCCTB 2.0”) to apportion the tax base to countries, both within and outside the EU. Under the proposal it would be up to EU member states themselves to determine the rate applying to the tax base apportioned to them. This would take tax out of the equation in the case of marginal financing and investment decisions, while also curtailing its influence on investment location decisions and, at the same time, making “gaming the system” more difficult. EU member states would, in turn, regain their autonomy and scope to set their corporate tax rates at the levels they regard as appropriate, while the proposed model would also end the “race to the bottom” within the EU. If the EU were to be the first mover, self-interest would prompt other countries and regions to follow its lead. The resultant production location neutrality would encourage international businesses to embrace the model and lobby for transition as rapidly as possible. Driven by self-interest and competitive responses, such a move could initiate a transition to worldwide adoption of destination-based tax of excess earnings: in other words, harmonization through competition. As the innovator, the EU would enjoy the greatest economic benefit during the transitional period, when countries’ profit tax systems would be evolving towards an equilibrium in which destination-based tax would become the new global standard. The final destination would be a new destination-based company tax paradigm operating both neutrally and non-discriminatorily on the supply side. And that would produce a result that would not only be fair, but also – and primarily – provide a systemic and economically efficient solution for the international problem of BEPS.

A Break in the Dam? India’s New Profit Attribution Proposal and the Arm’s Length Standard

On April 18, 2019, the Indian Central Board of Direct Taxes released a public consultation document on amending India’s rules for profit attribution to permanent establishments. This remarkable document is the first time a national government has proposed what in essence amounts to an abandonment of the arm’s length standard (ALS), the governing standard in transfer pricing for over 80 years, in favor of a formulary system. Given that the OECD has also raised the option of using formulas to allocate profits to market jurisdictions, India’s unilateral move may signal the proverbial break in the ALS dam, with the potential of leading to an abandonment of the ALS in favor of a unitary tax system.

Consistent Treatment of Inflation in Discounted Cash Flow Valuation

Since the mid-1960s inflation has been a consistent aspect of the U.S. economy. Even at the relatively low rates of approximately 2% that prevail today, inflation can have an important impact on property tax appraisal and must be treated consistently. In this paper, we derive the proper formulas for taking account of inflation in the context of the constant growth models often used when applying the income approach to valuation. We demonstrate how older approaches, still in widespread use in unitary tax appraisals today, fail to properly adjust for inflation.

An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates

We develop a theory of cross-border income shifting in response to subnational personal taxation in a federation and examine its implications for the excess burden of personal taxes. We show how a properly chosen federal tax rate can offset the fiscal externality between states and facilitate decentralization, even in a heterogeneous federation where unitary taxation is suboptimal. Optimal taxes depend on the elasticities of national tax avoidance and of cross-state tax base shifting. We estimate these elasticities around a tax decentralization reform in Canada, finding both to be empirically relevant. We discuss the implications for optimal federalism. (JEL D31, H21, H23, H24, H26, H71, H77)

Joint berth allocation and quay crane assignment under different carbon taxation policies

The environmental pollution issue of port has been highly concerned about by government and green port has been a focus to sustain the development of maritime transportation. At present, the port operator mainly takes measures of designing reasonable berth allocation for vessels and improving loading/unloading efficiency of quay cranes to reduce the carbon emission of port. The International Maritime Organization (IMO) has proposed to impose carbon emission tax on ports in the long-term, which would definitely enhance the willingness of ports to reduce the carbon emission. Therefore, this paper makes effort to explore the study of integrated berth allocation and quay crane assignment problem with considering two policies of different carbon emission taxation rates on port: one is unitary taxation rate and the other is piecewise taxation rate. Two corresponding mathematical optimization models are proposed for the two policies respectively and a number of equivalent or relaxed models are developed to ease the models. Finally, a set of test instances are randomly generated to access the applicability of the proposed models and an actual case is implemented to evaluate the effect of imposing carbon emission taxation on carbon emission reduction. It is found that the carbon emission taxation policy has significant effect on berth-QC plans and the carbon emission can be significantly reduced.

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.

Can formula apportionment really prevent multinational enterprises from profit shifting? The role of asset valuation, intragroup debt, and leases

The European Commission has been supporting a transition from a system of separate accounting to formula apportionment. After its 2011 draft directive was rejected by the Council, the Commission presented two new draft directives in October 2016, one stipulating rules for a common tax base and another the terms for consolidation and apportionment. The aspired system of unitary taxation is considered more resistant to profit shifting and assumed to reduce compliance costs. However, there are also doubts about the extent, to which such a system will eradicate tax-planning activities of MNEs. Other concerns have arisen about the practical issue of enforcing uniform rules for asset valuation throughout the member states. We use a dynamic model of tax accounting based on neoclassical investment theory and effective tax rates to determine to what extent formula apportionment mitigates the efficiency of typical profit-shifting strategies. We focus on the roles of transfer pricing and intragroup debt financing (through loans and leases) under both separate accounting and formula apportionment. We also take into account a possible leeway for inconsistent valuation. Our results show that instead of eliminating tax planning strategies, the proposed system might simply induce a shift from manipulating reported profits to influencing the apportionment key. Inside the European Union, the CCCTB may be able to render thin capitalisation rules and transfer pricing documentation redundant. However, formula apportionment invites for new forms of tax planning. It is therefore essential to give credit to these new kinds of tax incentives when implementing a system of unitary taxation.