Friday, January 16, 2015

Devereux & Vella on Corporate Tax System for the 21st Century

Michael P. Devereux and John Vella recently posted in SSRN their new paper entitled Are We Heading Towards a Corporate Tax System Fit for the 21st Century? Here is the abstract:
The most significant problems with the existing system for taxing the profit of multinational companies stem from two related sources. First, the underlying “1920s compromise” for allocating the rights to tax profit between countries is both inappropriate and increasingly hard to implement in a modern economic setting. Second, because the system is based on taxing mobile activities, it invites countries to compete with each other to attract economic activity and to favour “domestic” companies. The OECD Base Erosion and Profit Shifting (BEPS) initiative essentially seeks to close loopholes rather than to re-examine these fundamental problems. As a consequence, it is unlikely to generate a stable long-run tax system. We critically examine the principle guiding the OECD’s reform proposals in its BEPS initiative and outline some more fundamental alternative reforms.

In my view the technical difficulties of taxing corporate income are dwarfed by the political ones. It is political will, not administrative ability, that makes GE/Google/Apple-style income tax payments in the low single digits a global reality.

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