Thursday, March 14, 2019
IMF Policy Paper, Corporate Taxation in the Global Economy:
The international corporate tax system is under unprecedented stress. The G-20/OECD project on Base Erosion and Profit Shifting (BEPS) has made significant progress in international tax cooperation, addressing some major weak points in the century-old architecture. But vulnerabilities remain. Limitations of the arm’s-length principle—under which transactions between related parties are to be priced as if they were between independent entities—and reliance on notions of physical presence of the taxpayer to establish a legal basis to impose income tax have allowed apparently profitable firms to pay little tax. Tax competition remains largely unaddressed. And concerns with the allocation of taxing rights across countries continue. Recent unilateral measures, moreover, jeopardize such cooperation as has been achieved.
This paper reviews alternative directions for progress. The call for taxation “where value is created” has proved an inadequate basis for real progress. There now seems quite widespread agreement that fundamental change to current norms is needed—but no agreement, as yet, on its best form.
Key concerns are to better address both profit shifting and tax competition—and ensure full recognition of the interests of emerging and developing countries. Low income countries (LICs) are especially exposed to profit shifting and tax competition (and have limited alternatives for raising revenue) and their limited capacity is now stretched further by increased complexity. For them, securing the tax base on inward investment is key.
Alternative international tax architectures differ not only in their economic properties, but in how far they depart from current norms and the degree of cooperation they require. No scheme is without difficulty, but there are clear opportunities for improvement