The current model of corporate taxation finds its origins in the 1920s and was a result of working groups inside the League of Nation. Nevertheless, the new processes taking place around the world, such as globalization, European integration, e-commerce, the rise of multinational firms require considerably changes into international and European tax regime. Nowadays, the multinational companies pay little or no effective taxes on their worldwide profits. Such companies like Starbucks, Amazon, Google, Facebook have been identified as having very low effective tax rates using the loophole of the oblate 1920s tax regime. The use of tax havens and preferential regimes in international corporate structure is currently under discussion at EU and OECD level.
It is noteworthy, that European Commission has been already, however, unsuccessfully pursuing a new reform within the EU for a number of years through its proposal for a Common Consolidated Corporate Tax Base (CCCTB).
Many commentators argued that the international tax regime is in dire need of reform on the political level following extensive press critic and public opinion. As a consequence, the G20 called on the OECD to produce a report on “Base Erosion and Profit Shifting” (BEPS), which it followed up with an Action Plan (AP) in July 2013.
The OECD BEPS project focuses on the need to change and reform the existing international tax system increasing transparency, morality, and naming and shaming. The Action Plan proposed by the OECD consists of fifteen actions which cover a wide range of issues and which are expected to lead to different types of outcomes. Specifically, the Plan should provide countries with domestic and international instruments that will better align rights to tax with “economic activity”.
Already, this main purpose and the base of the OECD project has invoked considerable critic in the literature of the subject. The international tax system does not currently allocate taxing rights to countries according to where “economic activity” takes place. Indeed, a narrow application of the “economic activity” test can wrongly identify instances of low or no taxation.
As a result, the whole Action Plan is an initiative, which seeks to close some loopholes in the system rather than to reform the fundamental structure of the system. Indeed, the OECD does not start to change the framework itself.
The “reform” of the international tax system proposed by the OECD is likely to be more incoherent, with taxing rights being aligned with economic substance in some cases but not in others. The new “reformed” international tax regime will consist of confused, vague and arbitrary rules. Leading from this, if the Action Plan proposed by the OECD is successfully implemented, the international tax regime will still not be fit for purpose.
Therefore, many commentators seek for potential alternatives. They call for a corporation tax 2.0 where the concept of fairness in international tax regime is developed. Nonetheless, fairness in corporate taxation based on the “equality principle, conforming to the notion of equal treatment before the law” may ultimately only be achieved through a worldwide approximation of country tax systems. In this case, the tax payable by a company would be a quotient of three factors- tax rate, worldwide rents of the company and domestic sales / worldwide sales. This corporation tax 2.0 could be achieved only at the international level.
However, the main anxiety is that the new corporation tax could distort business behaviour around the world. Therefore, as a second alternative could be an allocation of the tax base based on the location of sales to third parties. Such a destination-based tax could function similarly to Value Added Tax (VAT). Nevertheless, this tax would be levied on profit and not value added and therefore not affect the location of investment as it is levied where the consumer is located. Nowadays, it is hardly to imagine introduce such a tax at the international level because there would be many objections for countries to join a group of other countries that had already begun to operate such a system.
To sum up, we all agree that the 1920s international tax regime is no appropriate in the 21 century. The principle of the Action Plan proposed by the OECD’s are welcomed but they do not reform the system in the sufficient way. We need a stable system which will require the allocation of taxing rights to be based on fairness and other factors that limit avoidance of paying taxes by the multinational companies.
A. Auerbach, A. M.P. Devereux, Consumption and Cash-Flow Taxes in an International Setting.
M. P. Devereux and J. Vella, Are We Heading Towards a Corporate Tax System Fit for the 21st Century?
OECD, Action Plan on Base Erosion and Profit Shifting, OECD Publishing, 2013.
D. Dharmapala, What Do We Know About Base Erosion and Profit Shifting? A Review of the Empirical Literature.
K.A. Clausing, The Nature and Practice of Capital Tax Competition.
M.F. de Wilde, ‘Sharing the Pie’: Taxing multinationals in a global market.