A Destination-Based Corporate Tax School of Law A Destination-Based Corporate Tax RITA DE LA FERIA Professor of Tax Law, University of Leeds 2 June 2017 EATLP Congress 2017, Lodz

OUTLINE Current International Tax Rules Substantive Jurisdiction Why current rules are no longer suitable BEPs and other anti-avoidance rules Proposals for Reform Substantive Jurisdiction Legitimacy Inter-nation equity Enforcement Jurisdiction Identifying destination Compliance obligations Legal obligations Conclusions

UNSUITABILITY OF CURRENT RULES Current International Tax Rules Never perfect Much worse now Always questions over its inter-nation equity, and effects on developing countries But a “flawed miracle”, where jurisdiction to tax was clear Created for 1920s economy, started to falter with globalisation Mobility of factors of production meant jurisdiction to tax no longer clear

UNSUITABILITY OF CURRENT RULES Jurisdiction to Tax Substantive Jurisdiction Legitimacy to tax, i.e. a connection between what is being taxed and the country imposing the tax that is sufficiently strong to legitimise that tax Enforcement Jurisdiction Ability to tax, i.e. whether the country has effective legal and implementing means of collecting the proposed tax

UNSUITABILITY OF CURRENT RULES Traditional tax systems - Territorial and physical - Clarity on substantive and enforcement jurisdiction to tax Modern tax systems? - Globalised and digital - Unclear substantive and enforcement jurisdiction to tax

UNSUITABILITY OF CURRENT RULES COUNTRIES THAT CONTRIBUTE TO PRODUCTION OF A SINGLE JAR OF NUTELLA

BEPS AND OTHER ANTI-AVOIDANCE RULES NATIONAL GAARS TAARS / SAARS EUROPEAN / REGIONAL ADAT GAAR INTERNATIONAL BILATERAL GAARS / SAARS BEPS

BEPS AND OTHER ANTI-AVOIDANCE RULES Addresses symptoms, not causes of tax avoidance Always one step behind If incentives are not removed, symptoms will reappear

Why Maintain Current System? PROPOSALS FOR REFORM Why Maintain Current System? Revenue protection Countries which benefit from current rules Fears of revenue impact of any reform Immobilism Status quo bias Beneficiaries of current system

Criteria for Reform of CIT PROPOSALS FOR REFORM Criteria for Reform of CIT to identify a location of taxation which creates minimum distortion to the economic behaviour of multinational companies, to the ownership of assets and to competition between companies selling in the same market; and Minimum Distortion to Economic Behaviour to identify a location of taxation that has jurisdiction to tax, from both a substantive perspective, and an enforcement perspective (legitimacy to tax, and possible to enforce taxation) Jurisdiction to Tax

PROPOSALS FOR REFORM Taxing income at consumers’ location, while giving relief for costs where incurred, avoids most distortions Consumers tend to be immobile Identifying the mobility of different factors Is Destination the Location Which Creates Least Distortion To Economic Behaviour?

SUBSTANTIVE JURISDICTION TO TAX SOURCE VS DESTINATION CORPORATE INCOME TAX SOURCE / REDIDENCE TAX AVOIDANCE / COMPETITION DESTINATION ? VAT LIMITED AVOIDANCE AND COMPETITION BRAZIL – SOURCE “TAX WARS”

SUBSTANTIVE AND ENFORCEMENT JURISDICTION TO TAX

SUBSTANTIVE JURISDICTION TO TAX Legitimacy Considerations Not a VAT: is connection sufficiently strong to legitimise income taxing rights? Sales as origin of profit? Public view on legitimacy? From Starbucks to Google Destination not more legitimate than source or residence, but as legitimate as

SUBSTANTIVE JURISDICTION TO TAX Inter-Nation Equity Considerations Paradigm shift not necessarily unfavourable to developing countries Current international tax system is problematic also for developing countries Many developing countries already have destination rules, particularly on services Sub-Saharan countries import as much as they export Contra-factual is how much revenue collected under current system, but level of imports is still a good indication Countries with strong natural resources have natural resources taxes Dynamics of tax reforms Every tax reform results in gainers and losers - Impossible to say with certainty how revenues would be re-allocated – too many variables

ENFORCEMENT JURISDICTION TO TAX Enforcement Challenges Identifying Destination Compliance Obligations Risks of Fraud and Evasion

A DBCT can be successfully designed and implement CONCLUSIONS Current residence / source-based system is unsuitable for globalised and digitalised economy Destination-based taxation offers an alterative, which eliminates most economic distortions, whilst still upholding fundamental principles of tax jurisdiction A DBCT can be successfully designed and implement Implementing a DBCT will fundamentally alter the international tax system, but status quo is not an option DBCT

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