International Corporate Taxation: What To Tax?

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There have been news stories in the last month or two about broad-based support across 130 countries for a minimum corporate global tax rate of 15%. The common assertion is that a minimum tax rate will be a powerful discouragement for companies that are trying to use accounting methods to shift their profits to low-tax countries. But the problem of international corporate taxation is considerably harder than agreeing on a minimum tax rate.

Ruud de Mooij, Alexander Klemm, and Victoria Perry have edited a collection of essays that lays out the issues in Corporate Income Taxes Under Pressure: Why Reform is Needed and How it Could be Designed (IMF, 2021).

Imagine a hypothetical of a multinational company. It’s a US-based firm with management and headquarters in the US. However, the company owns subsidiary firms in a dozen other countries that support its global production chain, and it sells its products backed by substantial advertising/marketing in several dozen other countries. When all is said and done, the firm makes a profit. But was the profit generated by the US-based management of the country? By the production units in other countries? By some combination of these two? What about the countries where the actual sales take place?

It’s easy to make this example a little more complex. What if the multinational company also owns a management consulting arm, based in non-US country #1, an insurance arm based in non-US country #2, and a research and development facility based in non-US country #3. Again, these different branches happen within a single firm, but all their services to the firm are provided digitally–without any physical product that ships across national borders. The firm will need to make decisions about what it is reasonable to pay each of these parts of the firm–and to decide what part of its overall profits (if any) are attributable to each arm of the company.

Finally, remember that each country along the production chain has two goals: it wants to encourage economic activity to happen within its own borders, and it wants some share of corporate tax revenues for itself. Some countries will put a stronger emphasis on attracting economic activity; others will put a stronger emphasis on collecting revenue. Some countries may reason that if they attract economic activity with low corporate taxes, they can instead collect tax revenue with value-added taxes or payroll taxes as production happens. Each country will write its own corporate tax rules, perhaps following the same general pattern, but also with its own favoritism and politics built-in. For example, countries may impose a certain corporate tax rate, then also have other provisions in the tax code, or other agreements about what kinds of public services will be provided to the firm, which make the effective corporate tax rates lower. Moreover, it is a general rule of international corporate taxation that a company should not be taxed more than once on the same earnings.

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