Cash Flow Taxation Anti Money Laundering Measure? Prof. Dr. Geerten M.M. Michielse Center for Taxation and Public Governance, Utrecht (NL) International Monetary Fund, Washington DC

International Tax Issues Place of Residence Source Profit Determination Transfer Pricing

Place of Residence Effective Place of Management –Place of shareholder’s residence –Place where decisions take place –Day-to-day management –Place of administration –Place of main business activities Incorporation Principle

Source Criterions Administrative simplicity –Taxpayers –Tax Administration Substantial economic linkage to geographical area Neutral (i.e. acceptable in both States) Intention to tax Control should remain with legislator

Flaws of Source Principle Multiple linkages exists Income is just a calculus (Y=C+S-I) and doesn’t have source Only instrument through which income is derived does have a source Source reflects or neglects certain policy, legal, administrative and/or economic relations

Interim Conclusion Residence can be relocated –Change of circumstances resulting in shift of effective place of management –Cross-border legal merger (incorporation principle) Arbitrage Geographical source doesn’t exist –Multiple linkages –Services (managerial, teaching, etc.) –Intangible assets (trade marks, etc.) Arbitrage

International Profit Allocation Profit determination relies on accounting rules Transfer pricing method –Associated enterprises –Conditions made or imposed in their commercial or financial relations –Dealing ‘at arm’s length’ –Profit correction Comparable Uncontrolled Price = Delusion

Cash Flow Taxation Taxable Base = Incomings – Outgoings R(eal transactions)-variant [R +F(inancial transactions)]-variant S(hareholders)-variant

Advantages of CFT Only corporate tax on economic rent (i.e. after normal rate of return has been received on equity) No need for: –Complex accounting provisions –International profit allocation rules Origin or destination principle replaces residence and source rules

The Choice Between R- and S-variant R-variant: –Re-introduction debt/equity issues –Mixed character of financial transactions by financial institutions –Prone to tax avoidance (even in non-related situations) S-variant: –No internal issues if based on destination principle (i.e. export and import transactions eliminated)