Lecture 8 Flashcards
What are the fundamental tax reform and recent proposals for anti-tax avoidance?
Fixing existing system
⋄OECD BEPS Action Plan (OECD, 2015)
⋄EU Anti-Tax Avoidance Directive (EU-ATAD)
•OECD BEPS 2.0: switch to partial formula apportionment (FA)
⋄Pillar One: Sales-based FA for residual profits (aim: CCCTB?)
⋄Pillar Two: Global Minimum Tax
•Destination-based Cash-flow Taxation (Auerbach/Devereux, 2018)
What is the Destination-based Cash-flow Taxation idea for perfect tax system and problems with it?
To impose a destination-based Cash-flow Tax, which is:
⋄effectively tax on domestic consumption
⋄tax on cash-flow (or ACE) exempting normal rate of return
⋄border-adjustment tax
→sold as perfect tax system
Still there are problems:
⋄desirable to tax the normal rate of return (cf.Schindler/Vrijburg,2022, for an overview on arguments)
⋄incentives to deviate unilaterally when intermediate sector
(Bond/Gresik, 2020; Gresik/Bond, 2021; Manon, 2021)
How does the formula apportionment (FA) system work and what is the effect on MNC?
Definition / working of a formula apportionment (FA) system
⋄corporate groups (e.g., an MNC) consolidating all income profits affiliates into one (global) taxable income
⋄allocation of global income on jurisdictions according to groups’ economic activity in each jurisdiction
⋄use of common formula to approximate activity: allocation keys
•Effect: elimination of all intra-firm transactions
⇒No incentives for paper profit shifting, but strong investment incentives
What is the intuition behind FA system?
Intuition
⋄consolidation eliminating benefits from profit shifting
→no abusive transfer price
⋄all costs of S tax-deductible and no use for transfer pricing
→intermediate input at undistorted Samuelson rule
⋄after-tax marginal productivity of capital depending on average tax rate as taxed by both countries
⋄increasing (decreasing) investment in low-tax (high-tax)country reducing average tax rate and total tax burden
→tax-induced investment shifting, see second term in eq. (8.11)
⇒FA replacing paper profit shifting by investment shifting
What are the welfare effect and spillovers associated with FA system?
•FA with ambiguous spillover effect on tax revenue in the other country
1) positive effect on country j from investment shifting after tax increase in country i
2) negative effect on country j from reduction in total capital investment after tax increase in country i
•Lower tax revenue under FA than under SA whenever tax policy under FA moving further away from Pareto optimum
either: low supernormal profits; intermediary transfer pricing costs
or: high supernormal profits; intermediary/high transfer pricing costs
•Under full symmetry, welfare effects analogous to tax revenue effects
•Symmetry, but no transfer pricing: FA always fostering tax competition
→see Keen and Konrad (2013, Section 4.5) for summary
⋄under SA, gain from marginal profit
⋄under FA, gain from average
⇒more to gain from tax competition under FA
⋄supernormal profits crucial
•When supernormal profits sufficiently high and transfer pricing not too
distortive, result carrying over to profit shifting
•With transfer pricing, relation of tax spillovers indicating whether tax
competition larger under FA or SA (Nielsen et al., 2010)
What are the sales-based formula only missing?
(I) race to the top in tax rates (Eichner/Runkel, 2008)
∗negative fiscal externality
∗MNC locating production (sales) in high-tax country to book (fixed) costs at higher tax rate
(II) invest. shifting under imperfect competition (van denBerg, 2021)
∗under segregated markets and market power, MNC shifting production to low-tax country
→reducing quantity in high-tax country
∗reduction along demand function reducing sales revenues and tax share in high-tax country
∗high-tax country with lower sales, larger efficiency losses from imperfect competition, and relatively less tax revenue
(III) disincentive for public infrastructure investment
∗production countries paying all costs of public production inputs (e.g., infrastructure), but sharing returns on input
→underprovision of public input goods
∗alternative financing model ‘user fees’ reintroducing tax competition through backdoor
What is the aim and claims and problems related to it of OECD Pillar I: Sales-based FA?
•Aim: higher tax burden for large MNCs in market jurisdictions
•Effectively partial, sales-based FA by splitting MNC profits into
⋄‘routine profits’: standard SA approach
⋄income under Pillar I: ‘Amount A’, ‘Amount B’
•Claims related to Pillar I
⋄sales as allocation key less distortive: sales/consumers immobile
⋄fair allocation of tax base according to where market is
⋄capturing ‘home-less profits’ of digital platforms
•General problems with sales-based FA (see also slides 329ff.)
⋄still replacing paper profit shifting by investment shifting
→‘race-to-the-top’ externality (Eichner/Runkel, 2008)
⋄imperfect competition: reducing sales further in high-taxcountry
→standard tax competition and higher inefficiency
⋄negative infrastructure incentives for exporting countries
→financing externality creating underinvestment/-provision
What is the aim and claims and problems related to it of OECD Pillar II: Global Minimum Tax?
•Aim: minimum tax via ‘Global Anti-Base Erosion Rules’ (GloBE)
⋄income inclusion rule (IIR): minimum tax
⋄undertaxed payment rule (UTPR): safeguard to prevent leakage
•IIR effectively a CFC rule on all(passive and active) income
⋄HQ country in charge
⋄taxing MNC whenever consolidated ETR below minimum (15%)
•First evaluation
⋄nice idea, tax rate good compromise
⋄stopping profit shifting and tax competition (if idea working)
•In our framework: minimum tax effectively an increase of taxrate in internal bank and profit center / CFC analyses might apply
•Some issues
⋄expected revenue gain
∗OECD: 150bn USD (but <0.2% of world-GDP)
∗effects might be overstated; strong variation across countries
⋄OECD (2021) likely underestimating negative invest. incentives
∗neutrality: capital stock fixed, world interest rate adjusting
∗savings, however, elastic: stock not fixed
∗not all assets involved
⇒no perfect adjustment of interest rate
⋄earlier proposals failed: Neumark (50%), Ruding (30%)
⋄already lobbying for exceptions (e.g., U.K. finance industry)
→exemptions creating loopholes
