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Read Case Problem 16.2 at the End of Chapter 16: Where's My Cart?

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Introduction

This chapter brings a legal perspective to the pressures in the international corporate tax system that take been discussed in other chapters largely from an economical point of view. In add-on to the economic drawbacks of the current architecture, the current system is also marked by major legal weaknesses leading to continued doubt and providing opportunities for ongoing tax arbitrage and aggressive tax planning. The proliferation of anti-avoidance rules to gainsay these opportunities has made the international corporate revenue enhancement system more than complex. Failure to address the core structural weaknesses in the arrangement has intensified the debate surrounding the fair allocation of taxing rights, particularly over lightly taxed residuum profits—amplifying the need for fundamental reform.

This affiliate is structured equally follows: The following section summarizes the current state of the international revenue enhancement law framework, and the gaps and mismatches in that framework that accept been exploited. The third section identifies the weaknesses and deficiencies in the current international taxation organization that remain in the aftermath of the G20/OECD Base Erosion and Turn a profit Shifting (BEPS) Projection. The quaternary section provides a legal assessment of future reform options and directions that the international revenue enhancement system may take. It takes a wide perspective, drawing on fundamental proposals,1 but is besides of relevance to the cess of the recent, more concrete, and narrower proposals under the two-colonnade approach outlined in the program of work being carried out by the G-20/OECD Inclusive Framework on BEPS (hereafter referred to as "Inclusive Framework"). The fifth department emphasizes the need for greater tax cooperation in order to implement any agreed reforms. The sixth section specifically discusses the distinct problems faced by, and capacity limitations of, low-income countries, which require tailored responses. The last section offers concluding remarks.

Electric current State of the International Tax Law Framework

Historically, international tax cooperation has focused primarily on the determination of double tax agreements with the main aim of reducing double taxation. This cooperation has established a series of international concepts and norms underlying a current network of over 3,000 bilateral double tax agreements with which domestic tax systems have historically sought to comply in order to minimize inappropriate interaction issues that could lead to adverse consequences and distortions, particularly double taxation of cross border trade and investment (column 1 of Tabular array 16.one).

Table 16.1.

BEPS Touch on on International Concepts and Norms for International Tax Law Pattern

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Source: Authors' compilation.

Some countries have pure territorial systems, that is, they impose taxation only on a source basis.

More recently, international tax cooperation has focused on limiting the power of multinational enterprises to exploit loopholes from existing gaps and mismatches between domestic taxation systems and double tax agreements (column ii of Table 16.1). This includes the 2015 BEPS package, which was intended to provide a comprehensive, coherent, and coordinated reform of the international taxation rules. The BEPS package—which was subsequently endorsed by the G20 leaders—consists of 15 deportment that produced a consensus on four minimum standards. The BEPS parcel was intended to provide governments with coordinated solutions for closing the gaps in existing international tax rules that immune corporate taxation bases to be eroded or artificially shifted to low-or no-tax jurisdictions, where typically little or no economic activeness (substance) takes identify. While the BEPS package represents the most comprehensive and internationally coordinated endeavor to date to strengthen the existing international concepts and norms, those underlying concepts and norms—being bolstered by a series of taxation integrity and anti-avoidance rules (column 3 of Tabular array xvi.i)—take remained fundamentally unchanged.

The immediate aftermath of the BEPS Project saw a strong trend toward countries adopting anti-avoidance rules to address remaining weaknesses and deficiencies in the electric current international tax system (column iv of Table 16.1). In response to the BEPS package, the European Union, for instance, adopted its ain measures in the form of the Anti-Tax Abstention Directive (ATAD) in July 2016 (Table sixteen.two). A number of the mandatory ATAD measures go further than the four minimum standards under BEPS. The ATAD measures were required to exist transposed into law past European union fellow member states by January i, 2019, with the exception of the interest limitation rule (January ane, 2024, if existing rules are equally constructive) and exit taxation (January one, 2020).

Tabular array 16.ii.

The European union's Anti-Tax Avoidance Directive (ATAD)

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Source: Authors' compilation.

Shortcomings in the Electric current International Tax System

While various tax integrity or anti-avoidance rules are important to effectively counter revenue enhancement avoidance practices and protect the integrity of the tax system, the current trend to strengthen existing rules and develop more than novel rules—as discussed hereafter—has also made the current international tax organization relatively more complex and uncertain. Taxation certainty is increasingly recognized as important for economic agents (see IMF and OECD 2017; 2018; and 2019), just countering taxation avoidance (particularly through full general anti-abstention rules) necessarily creates uncertainty for taxpayers, implying a trade-off.

At the same time, tax competition issues remain fundamentally unaddressed, in particular through the continued existence of no or nominal tax jurisdictions, which, in combination with the existing arm's length principle, effectively enable substance (assets or risks) to be shifted to low-tax jurisdictions, leaving large residual profits subject to no or low levels of taxation (see Table sixteen.1). The increasingly digitalized economy—exacerbating the limitations of the current nexus requirement of a permanent institution—further intensifies the contend surrounding the fair allotment of taxing rights and the demand for fundamental reform. These factors too continue to inform the pattern of more novel unilateral international taxation police reform measures that countries are adopting in the absence of longer-term multilateral solutions.

Countries' newly designed or proposed unilateral tax law reform measures generally seek to effectively tax a greater portion of offshore residuum profits that otherwise remain lightly taxed post BEPS. In this regard, many countries have already gone further than BEPS and accept unilaterally implemented their own revenue enhancement law measures under the ambit of anti-avoidance.

Examples of such unilateral and uncoordinated measures include the United kingdom of great britain and northern ireland's diverted profits tax and Australia's Multinational Anti-Abstention Law, which are designed to counter the erosion of the tax base by multinational enterprises using artificial or contrived arrangements to avoid establishing a permanent institution in, and attributing related business profits to, those jurisdictions.

Furthermore, the 2017 US tax reform similarly includes measures that go beyond those set out in the BEPS package, such equally the GILTI (global intangible low-taxed income, which is a residence-based minimum tax on outbound investment from the United States) and the Vanquish (base erosion antiabuse tax, which is a residence-based minimum tax on inbound investment into the United States). While generally aimed at combatting broader BEPS issues that were otherwise left unaddressed (for instance, because of the application of the existing arm's length principle), those measures are likewise uncoordinated in their design and functioning, thereby giving ascension to double taxation concerns, specially in relation to the BEAT (which does not take into business relationship the effective rate of taxation paid by the recipient of the base-eroding payments in regard to which the BEAT is seeking to reverse the benefit). The United states tax reform likewise contains other novel features that lessen the taxation motivation to adopt international base of operations-eroding and profit-shifting structures, including a specific measure that seeks to regularize previously untaxed foreign earnings of US multinational enterprises through a deemed repatriation revenue enhancement.ii This measure was deliberately designed to address the celebrated U.s. taxation deferral on foreign earnings of US multinational enterprises that gave some of the impetus to the BEPS Project in the first place.

In the concurrently, others (for instance, the European Wedlock, France, Kingdom of spain, the Uk, United mexican states, Bharat, Chile, and Kenya) are exploring or adopting short-term (interim) measures such equally a digital services tax—as well with a view to maintaining pressure toward reaching international consensus on a more modern allocation of taxing rights. Many of these short-term (interim) measures diverge with respect to underlying principles and tax law pattern (for instance, the Eu measure takes a volume-based approach, whereas the U.k. measure takes a value-based approach with respect to user participation in certain highly digitalized business models).

While generally legally designed to be uniform with existing domestic laws and double tax agreement obligations, these unilateral tax measures may yet create distortions and spillovers because of their uncoordinated nature. Furthermore, anti-avoidance instruments—typically designed to counter tax avoidance practices—are not particularly well suited to operate as a backstop to address what are considered by those adopting countries to exist structural deficiencies in the existing international tax law framework. Similarly, bespoke turnover taxes like a digital services taxation more often than not impose a levy on gross income from specified transactions, which heighten all the efficiency concerns generally associated with these types of taxes. While countries may feel pressure level to take immediate action, uncoordinated interim measures may also create pregnant spillovers and distortions, including from retaliatory measures other countries might take in response to the real or perceived targeted nature of such measures.

Legal Assessment of Hereafter Reform Options and Directions

Previous chapters have explored a number of alternative directions that the international tax system could take. This chapter assesses their feasibility from a legal perspective, focusing on the following policy options: (1) a strengthened nexus requirement to include a significant economic presence without the need for a physical presence or permanent establishment (as currently divers); (2) a residence-based minimum tax on outbound investment (like the GILTI), combined with a residence-based minimum tax on inbound investment (modified BEAT); (three) unitary taxation with formulary apportionment (combined formula); (4) residual profit split, with sales cistron; and (v) a destination-based cash-menses tax (DBCFT), with an exclusion for location-specific rents. The features of policy option (iv) reflect those beingness explored under Colonnade 1 of the Inclusive Framework, with the features of policy choice (ii) reflecting those being explored nether Pillar 2 of that Framework.

The degree of implementation feasibility of each choice or direction needs besides to reflect the current legal and other constraints (Box 16.ane), beyond those international concepts and norms embodied in double tax agreements as strengthened by BEPS. Yet, double tax agreements are still expected over the brusk to medium term to remain a ways for settling—on a coordinated basis—common problems that arise in international taxation, including with respect to settling disputes, with the present multilateral instrument or a similar new multilateral instrument providing an efficient implementation machinery.

Existing International Institutions and Frameworks Imposing Tax Reform Constraints

World Trade Organization: The multilateral trading arrangement is governed by World Trade Organization (WTO) agreements, which have been negotiated and signed by the bulk of the globe's trading nations. These documents provide the legal rules for international commerce. They are substantially contracts, binding governments to go on their trade policies within agreed limits, complemented by a dedicated dispute settlement mechanism. The WTO agreements recognize that countries' tax laws can undermine the proper functioning of international trade rules in two master ways: Beginning, taxes can serve as tariff barriers if they are imposed on imports only non on domestic sales of similar commodities. 2d, remission of taxes on exports can amount to prohibited export subsidies.1

European Union: The European union imposes constraints on member states' policies and protects certain freedoms to foster intra-European union trade. For example, the EU unmarried market place seeks to guarantee the freedom of movement of goods, uppercase, services, and labor—the "four freedoms"—within the European Matrimony. The legal framework seeks to remove or reduce barriers to intra-European union trade and foreclose the cosmos of new ones, so enterprises tin trade freely in the Eu and across—indeed, the gratis movement of upper-case letter as well applies to capital movements between EU and non-EU countries. The functioning of the unmarried market is monitored past a fundamental authorization—the European Commission—including through infringement proceedings brought against Eu countries that exercise not comply with governing Eu law and principles. Domestic tax policy is also constrained past other obligations and commitments in the Eu, notably the Code of Carry for business taxation and the state aid rules. The Lawmaking of Acquit for business taxation is a political commitment by fellow member states to refrain from engaging in "harmful taxation competition," which covers many preferential taxation regimes. European union Treaty– based state aid rules also prohibit member states from offering government support, including through the taxation organization, that gives a visitor an advantage over its competitors in the European Marriage. Cases tin can be simultaneously within the ambit of the Code of Conduct and state aid rules.

Other regional blocs/agreements: Many of these were inspired by the process of European integration and take adopted common and institutional legal frameworks to reach economic integration, which also shapes and constrains national policy reform, although often with relatively weaker monitoring and enforcement mechanisms compared to the European Union. This includes the Andean Pact, now the Andean Community, which aims to liberalize intraregional integration between members (Bolivia, Colombia, Ecuador, Republic of peru). Similarly, other regional economic communities have been established such equally those throughout Africa including the West African Economic and Budgetary Matrimony, the Economic and Monetary Community of Central Africa, and the Southern African Development Community, all with diverse legal obligations binding on members. The use of soft law rules is likewise a feature of a number of these regional economic communities, which tin can still be highly persuasive and enjoy considerable political legitimacy, while preserving required flexibility.

Source: Authors' compilation. 1 In item with respect to the trade in goods there are too legally binding instruments imposed on members of the World Customs Organization that sign them that are not covered hither.

A residence-based minimum tax could exist designed and implemented through unilateral domestic taxation law measures, and in a manner that is consistent with existing norms and double tax agreements (for example, because of the savings clause in double taxation agreements, which does not prevent a jurisdiction from adopting a residence-based measure to taxation its own residents, provided the mensurate is nondiscriminatory).

Greater legal implementation complexities ascend whenever at that place is a demand to establish new norms, such as ones that demand to be embodied in double tax agreements (for example, altered allotment of existing taxing rights under a new nexus concept, or the reallocation of taxing rights based on a new formula or gene, and so on). This would crave the new norms to be adopted in all existing and new double tax agreements, which could exist facilitated by a new multilateral instrument. Optionality with respect to core features relating to the reallocation and attribution would need to exist minimized—underpinned by a robust dispute resolution mechanism—in club to avoid double tax and reduce the take a chance of other adverse spillovers occurring, which could lead to increased cross-border tax disputes that would jeopardize the drove of any reallocated revenues.

Where the scheme retains meaning aspects of current norms and practice (for example, the arm's length principle for routine returns), then the legal implementation volition exist relatively less difficult (for example, a remainder profit split up volition be relatively easier to implement legally when compared to total unitary revenue enhancement with formulary circulation). The key legal challenges will center around ensuring the consistent adding of residual profits (total profits less routine returns) in club to, in plow, enable the decision of the reallocated residual profits based on a globally agreed formula or allocation factors—again, to be implemented through new double revenue enhancement agreement norms. Greater implementation complexity will arise where residual profits are determined with regard to multilayered segmentation, such as by business lines, product lines, and geographic regions, and so on. In all cases where some global consolidation of profits is required—whether in respect of residual returns or of all profits under full unitary taxation—there would besides exist a need for pregnant harmonization of the calculation of the apportionable profits across jurisdictions, noting that harmonized tax base rules over balance profits volition be more than likely to be agreed to every bit compared to full unitary taxation at a global level. All deviations from current norms and practices (for example, taxing in the absence of a physical presence) would likewise need to be implemented through domestic police force, with their reallocation supported by double tax agreements. The design, drafting, and implementation of these new rules and norms volition once more be critical to avert double revenue enhancement and manage the chance of other adverse spillovers occurring across jurisdictions. The imperative to maximize the ease of legal implementation and administration—of particular relevance to low-income countriesthree—would tend toward the adoption of more formulaic approaches over apportionable (for example, residual) profits and losses, rather than seeking to replicate the complexity inherent in the current system which apportions profits and losses on an individual entity and transaction footing, commonly involving complex segmentation.

While implementation of the DBCFT can describe on experience with the VAT, information technology represents a more primal shift giving rise to significant legal questions relating to consistency with Earth Trade Organization (WTO) rules and double tax agreements (although these double taxation understanding issues too arise nether any culling that departs from the current norm by seeking to create a taxing right in the absence of a physical presence). These questions warrant further discussion, but when combined with the WTO sensitivities make this selection the most difficult legally to implement. A DBCFT that is designed in a way that (1) denies deductions for imports or imposes a withholding revenue enhancement on imported goods or services to reach the border adjustments; and (ii) implements the wage subsidy via a deduction within the tax organisation itself (rather than by way of separate direct relief or credit), gives rising to significant WTO and tax treaty consistency issues.

The consistency issue arises under WTO rules considering border adjustability resulting in imports and exports existence taxed differentially is non currently permitted for direct taxes, including corporate income taxes. The DBCFT raises key national treatment concerns on the import side because the purchase toll of imports would not be deductible, whereas the purchase costs of domestic inputs would exist deductible. Further, wage deductions would be bachelor to domestic businesses, whereas the tax would likely exist imposed on importers without a similar wage deduction. The wage deduction could besides amount to a prohibited export subsidy. It is possible that a DBCFT could be designed in alternative ways to better defend against a WTO challenge (for example, by treating import and exports consistently or by reducing labor costs through mechanisms other than embedded tax deductions). A more direct way would be to change WTO rules, which would be possible in the (admittedly unlikely) case of an agreed global adoption of such tax.

Similarly, consistency issues arise in relation to the DBCFT with respect to double taxation agreements. The threshold question with respect to the DBCFT and double tax agreements revolves around whether the DBCFT is an income tax or "substantially similar" tax and therefore within the scope of double revenue enhancement agreements. This ultimately depends on how a country chooses to design and draft the implementing legislation. While consistency between characterization of the nature of the tax for WTO and double taxation agreement purposes might be desirable, this is not guaranteed. If characterized as a taxation within the scope of double tax agreements (which would be considered the more favored characterization based on the design features outlined above), the key legal result would seem to exist that existing double tax agreements would need to be renegotiated or terminated because of the following reasons:

  • Taxing importers (for example, remoter sellers) without a permanent establishment would violate existing double tax agreements.

  • There would be a potential violation of the nondiscrimination provisions (for example, where providing benefits to local exporters equally compared to others).

  • The bear upon on existing withholding taxes would also be uncertain. In theory, withholding taxes should non be imposed by the DBCFT country in relation to imports by taxable entities, as tax is "collected" via disallowances of deductions, with payments for exports giving ascent to exempt income. All the same, at the opposite finish, there will be footling incentive for non-DBCFT countries (or DBCFT treaty partners) to reduce their withholding taxes (given that export income is likely to be untaxed in the DBCFT state). This also highlights the foreign tax credit– related consequence. As the DBCFT more closely reflects a territorial organization, there may be little need for the DBCFT country to give foreign taxation credits (see also the following discussion, from the perspective of the not– DBCFT country, which may still seek to deny a foreign tax credit for the DBCFT paid away). On the other manus, if the DBCFT country were to collect the DBCFT in relation to imports past nontaxable entities by mode of withholding, that could be problematic in a double tax agreement context.

  • A number of other tax treaty modifications would too be required to achieve total implementation of the DBCFT —for example, in order to subject cross-border royalties and derivative payments to import treatment (which seems essential to preserve the intention and proposed benefits of the tax, particularly compared with current turn a profit shifting and transfer pricing practices).

Nevertheless, if characterized as something other than an income tax, so the DBCFT would be outside the scope of existing double tax agreements (which would simplify the implementation somewhat), but this could hateful that:

  • Parties have no access to tax treaty based bilateral dispute mechanisms regarding the functioning of the DBCFT.

  • A not-DBCFT country would non be obliged to requite any credit for revenue enhancement levied past the DBCFT state under an existing double tax agreement (although double taxation relief is now commonly conferred through domestic law rather than relying on double tax agreements). In any instance, given the unique nature of the DBCFT, particularly the bespoke expensing mechanism on imports, treaty partners may fence that any DBCFT is non creditable (this is a mutual issue for withholding taxes levied on gross payments of services income, for instance).

Tabular array 16.3 summarizes the assessment of legal implementation feasibility in uncomplicated overall ratings ranging from low to medium-high in respect of the various reform options.

Table 16.three.

Assessment of Legal Implementation Feasibility of Reform Options

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Source: Authors' compilation.

Need for Greater Tax Cooperation to Implement Global Reform

Irrespective of the called longer-term reform, greater tax cooperation is likely to be required. To avoid undesirable spillovers from double (not) taxation, revenue enhancement competition, proliferation of unilateral measures and trade distortions, the international tax system should continue to be based on mutually accepted concepts and norms, but appropriately adapted to the modernistic economic system. A multilateral approach to international tax reform producing consensus-based solutions should also be preferred because of its capacity to take into account the interests of all parties involved. For example, the recent Eu listing of noncooperative tax jurisdictions exposed the shortcomings of non adopting a more than inclusive multilateral arroyo. The European union list process seeks to impose EU and OECD standards on not-EU and not-OECD countries (with the exception of also applying to OECD countries exterior the European Spousal relationship), which were not involved in setting those standards. For example, the EU Code of Conduct, which was initially adult to apply to European union member states, does not interpret easily to low-income countries, which oft face capacity constraints. Low-income countries can—and many practise—join the Inclusive Framework on BEPS, within which they are expected to adhere to BEPS standards that accept already been ready. While the BEPS (or EU Code of Conduct) principles should generally be supported, these are not necessarily reform priorities for low-income countries, which often require more than structural and critical reforms to their domestic tax systems before turning to the implementation of those standards.

Notwithstanding, the Inclusive Framework on BEPS still serves every bit a practical and useful model for bringing about a consensus-based solution nether a multilateral approach. This was reconfirmed at the virtual G20 meeting of finance ministers and central banking company governors in October 2020, where further progress on addressing the taxation challenges arising from digitalization was encouraged, and the blueprints for Pillars 1 and 2 were welcomed as a solid basis for negotiations and possible political consensus.4 The Inclusive Framework by and large embodies very efficient features enabling the production of soft law standards, supported by review and monitoring mechanisms to ensure more effective implementation outcomes. A framework of this kind besides avoids the legal and institutional complexities associated with seeking to develop a forum or torso based on "hard" law or legally binding obligations (for instance based on one-state-one-vote or quota-based systems). The "soft" police arroyo as well more naturally lends itself to a consensus-based machinery and arguably better reflects the current geopolitical reality, balancing the need for multilateral solutions with the desire to maintain tax sovereignty. Any consensus-based framework should also be underpinned by a functioning dispute settlement mechanism, with supporting mechanisms to put pressure on countries to abandon harmful tax policies that are inconsistent with the agreed soft law principles.

Impact for Low-Income Countries

The distinct problems faced by, and capacity limitations of, low-income countries require tailored responses. The main forms of profit shifting affecting them are typically less sophisticated than those affecting more advanced economies, while tax incentives often requite ascent to an especially prevalent grade of tax competition. While external back up can help to develop capacity, attention is needed to the design of legal rules and norms themselves. Capacity limitations put a premium on the utilise of simpler methods to protect developing countries' tax bases. Non to the lowest degree, their interests—since they host no major multinational enterprises—tin exist quite unlike from those of avant-garde economies. For example, every bit capital importing countries, inbound measures are typically even more than important for low-income countries.

Pending more fundamental reform of the international tax system, low-income countries' primary focus should be on farther strengthening their domestic legal framework (beyond BEPS) to counter base of operations erosion and increase domestic revenue mobilization. Any such additional measures should be rules based to reach greater tax certainty and designed to mitigate against distortions and the take a chance of double taxation. In this regard, the electric current trend is toward domestic revenue enhancement police measures (to complement existing traditional measures) in the class of minimum taxes, peculiarly in respect of entering investment, to counter the continued erosion of the corporate income revenue enhancement base, specially of low-income countries. As noted to a higher place, an entering minimum revenue enhancement measure is more relevant and crucial for depression-income countries. In contrast, an outbound minimum tax measure out volition typically exist of limited relevance since low-income countries typically host no major multinational enterprises. Low-income countries accept a sovereign right to implement a well-designed inbound minimum tax mensurate and should be cautious well-nigh agreeing—whether bilaterally or multilaterally—to constrain their ability to enforce that correct, including past agreeing to allow another land's outbound measure out to utilize in priority to their own inbound measure. Such inbound measures are likewise capable of being designed to ensure consistency with double tax agreements. Further, care needs to exist taken when designing these minimum taxes and then that they reach their policy objective without jeopardizing trade and foreign investment. Therefore, the current trend toward minimum taxes on entering investment into low-income countries should arrange to the following general legal blueprint principles:

  • 1. They should exist residence based and so as to maintain consistency with existing double tax agreements, which do not typically affect a contracting state's right to taxation their ain residents, such that:

    • a. the measure out operates to tax a resident entity or local permanent establishment;

    • b. past denying tax benefits (for instance, deductions or treaty benefits), and/or as a split up minimum tax assessment to essentially reverse those tax benefits,five and

    • c. in each example, with the denial of tax benefits or dissever minimum revenue enhancement cess being calculated with regard to base-eroding amounts/payments, including high risk turn a profit shifting payments giving rise to deductions in the low-income country, which could cover payments for both goods6 and services.7

  • 2. The deprival of taxation benefits or the assessment of a minimum tax relating to base of operations-eroding amounts should depend on those amounts non being subject to minimum effective taxation in the hands of the recipient (not minimum level of substance in recipient jurisdiction),8 with the onus to be placed on taxpayers claiming the revenue enhancement do good to bear witness that adequate tax has been paid. This pattern feature will amend mitigate against the risk of double taxation and more specifically target disproportionate related-party arrangements (that is, deduction for payment in the low-income country, without corresponding taxation of the payment in the hands of the related recipient); and

  • 3. They should be nondiscriminatory (meaning provisions should apply equally to similar domestic transactions).

Further, low-income countries should consider domestic law measures that seek to specifically target the tax of location-specific rents in their jurisdiction.ix The BEPS objective of "taxing where value is created" has in office had the issue of embedding existing norms in the allotment of taxing rights. The example for allocating the right to taxation income from location-specific rents to the location state appears widely accepted—though putting this economic concept into legal language is challenging. It should be formulated to include—for instance—location-specific rents clearly linked to natural resources and rights (such equally those embodied in licenses) to explore for, develop, and exploit those natural resource. It could possibly be extended further to as well comprehend income from rents linked to other national avails, such as from licenses to exploit public goods (for instance, electricity, gas, or other utilities; telecommunications and broadcast spectrum and networks and so on). Irrespective of the direction taken in terms of future reform options (Table 16.3), source/location countries should retain substantial taxing rights in relation to natural resource. Across this, however, is a longstanding tussle for taxing rights between "source" and "residence" countries—an issue of particular importance for low-income countries, which, though not the only ones acting as a source of income, rarely host the parent of pregnant multinational enterprises. Location-specific rents are an attractive tax base because they can in principle exist taxed without distorting investor behavior. Although more common in the extractive sector, low-income countries could think about designing taxation rules that specifically target location-specific rents more broadly. If one were to design a very simplified revenue enhancement on location-specific rents (without detailed calculation rules), the bones skeleton might resemble the simplified provisions prepare out in Box sixteen.two. These bones provisions are very general in nature and do not take into account the individual circumstances of whatever particular tax arrangement but provide a first insight into what sort of rights could give rise to income from location-specific rents when expressed in legal language. The ultimate course of any such provisions to be adopted by a given country would need to take into account the state's specific legal tradition and arrangement—including any ramble and international law limitations, including double revenue enhancement agreements10—every bit well as its political and authoritative structure and fiscal policies.

Location-Specific Rent (LSR) Tax

  • (1) LSR Taxation (LSRT) is charged and payable by an entity for any yr of income in which the entity has a positive accumulated net cash position from the conduct of an enterprise nether an LSR right.

  • (two) The amount of LSRT payable nether subsection (1) by an entity for a year of income is the aggregate of LSRT payable for the twelvemonth with respect to each separate enterprise conducted by the entity under an LSR right.

  • (iii) LSRT payable past an entity with respect to an enterprise conducted by the entity under an LSR right is calculated as [25 percent] of the accumulated net cash position of the entity for the yr.

  • (iv) LSRT is imposed in addition to whatever other tax or charge, including income tax.

  • (5) Payments made and received in respect of an LSR right accept a source in [Source State].

  • (6) In this section, "LSR right" means

    • (a) an exploration, prospecting, development, or similar correct relating to land or buildings, including a right to explore for mineral, oil or gas deposits, or other natural resources, and a right to mine, develop, or exploit those deposits or resources, from country in, or from the territorial waters of, [Source Country];

    • (b) information relating to a correct referred to in paragraph (b); or

    • (c) a right or other potency granted by or on behalf of the authorities (whether or not embodied in a license) to be an exclusive or semiexclusive supplier or provider of:

      • (i) appurtenances (such equally radioactive material);

      • (ii) utilities (such as electricity or gas); or

      • (3) other services (such as telecommunication and broadcast spectrum and networks).

Countrywide or within a geographic area of [Source Country].

Source: Authors' formulation.

Decision

The proliferation of anti-abstention rules following the BEPS Project has fabricated domestic tax systems more complex and uncertain without addressing the cardinal shortcomings in the electric current international tax system. Taxation competition issues remain fundamentally unaddressed, in particular through the continued beingness of no or nominal tax jurisdictions which, in combination with the existing arm's length principle, finer enable substance (assets or risks) to be shifted to low-tax jurisdictions, leaving large residual profits field of study to no or low levels of taxation. The increasingly digitalized economic system—exacerbating the limitations of the current nexus requirement of a permanent establishment—further intensifies the debate surrounding the off-white allocation of taxing rights and the need for fundamental reform.

These factors continue to inform the blueprint of more novel unilateral international tax law reform measures that countries are adopting in the absence of longer-term multilateral solutions. Countries' newly designed or proposed unilateral tax police reform measures mostly seek as a mutual objective to tax a greater portion of offshore residual profits that otherwise remain lightly taxed postal service BEPS, either on a destination basis (in the market jurisdiction) or equally a residual minimum tax (in the country of residence of the parent company of multinational enterprises). However, few substantial multinational enterprises are headquartered in depression-income countries, but many multinational enterprises operate in the relatively smaller markets that exist there—making inbound rules more critical for them.

Pending more than primal reform of the international tax system (which gives rise to relatively more legal complexity and difficulty in reaching agreement with respect to adoption and implementation), low-income countries' primary focus should be on further strengthening their domestic legal framework (beyond BEPS) to counter base erosion and increment domestic revenue mobilization. Any such additional measures should be rules based to achieve greater revenue enhancement certainty and designed to mitigate against distortions and the risk of double taxation. In this regard, the electric current trend is toward domestic tax police force measures (to complement existing traditional measures) in the form of minimum taxes, peculiarly in respect of inbound investment, to counter the continued erosion of the corporate income taxation base, especially of low-income countries. Care needs to exist taken when designing these minimum taxes so that they achieve their policy objective without jeopardizing trade and strange investment. Therefore, the current trend toward minimum taxes on inbound investment should conform to the general legal design principles outlined in the preceding section. Further, low-income countries should consider domestic law measures that seek to specifically and more comprehensively target the revenue enhancement of location-specific rents in their jurisdiction.

Greater legal implementation complexities arise whenever at that place is a demand to establish new norms, such as ones that demand to be embodied in double tax agreements (for example, altered allocation of existing taxing rights nether a new nexus concept, or the reallocation of taxing rights based on a new formula or factor, and so on). This means that a more fundamental reform of the international taxation system is likely to accept a longer atomic number 82 fourth dimension, despite the contempo extension of the goal of achieving a more than comprehensive consensus-based solution inside the Inclusive Framework on BEPS by mid-2021 (previously set for 2020). However, reform options that retain significant aspects of current norms and practice (for example, arm'due south length principle for routine returns) will be relatively less difficult to implement legally (for example, residual profit dissever will be relatively easier to implement legally when compared to full unitary taxation with formulary apportionment). While implementation of the DBCFT can depict on feel with the VAT, there are meaning legal questions such every bit those relating to consistency with WTO rules and double tax agreements, which would need to exist resolved earlier this solution can be implemented. It is possible that a DBCFT could exist designed in alternative ways to brand the instance for WTO and double tax agreement consistency (for example, a new tax that treats imports and exports consistently, with separate measures to lower labor costs). However, an implementing country could await to be challenged where material adverse spillovers arise. Alternatively, multilateral adoption of a DBCFT would imply some consensus on the need to overcome these legal obstacles and challenges.

References

  • Avi-Yonah , S. Reuven , and Brett Wells . 2018 . " The BEAT and Treaty Overrides: A Brief Response to Rosenbloom and Shaheen ." Constabulary & Economics Working Papers 157, University of Michigan Law School Repository , University of Michigan , Ann Arbor, MI .

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