1. 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

2. 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

3. 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

4. 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

5. 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

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

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

8. 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

9. 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

10. 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

11. 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?

12. 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”

13. SUBSTANTIVE AND ENFORCEMENT JURISDICTION TO TAX

14. 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

15. 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

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

17. 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

18. 7th School of Law THANK YOU University of the Year 2017
in the UK for Law
The Times and Sunday Times Good University Guide 2017
THANK YOU
University of the Year 2017
The Times and The Sunday Times
Good University Guide