Tax Avoidance in a global economy

Mark Nieuweboer

(Institute for Taxation and Economics)

2.5%

Subjects

Fragmentation and globalisation Aggressive tax planning The case against tax avoidance

The law applies equally for all

Tax system Resistance against paying taxes Free riders If the law applies equally to all, how can one taxpayer

legally pay less than the other?

Fragmentation leads to arbitration

Fragmentation State Taxpayer Income Time

Arbitration

Case study: United States v Isham (1873)

Globalisation

World trade agreements Liberalisation of capital markets and the euro Information & communication Technology

Tax avoidance is profitable

Competition between states Competition between companies

Tax systems have not globalized

Base Erosion and Profit Shifting

Disconnect real activities from reported income Global value chain Drain profits through funding Profit repatriation schemes

Connection between profits and activities

Global Value Chain Transfer pricing Functions, risks & assets used Disproportional value for intangibles and risks?

Case study: quality coffee or high value brand?

Drain profit through debt funding

Interest charge is tax deductible Interest income is highly mobile Instruments:-

Base companies in ‘real’ tax havens Conduit companies Hybrid mismatches

Profit repatriation schemes

Prevent ‘leakage’ of profits Instruments:-

Defer distribution of income () Hybrid mismatches Conduit companies

Tax avoidance is bad, because it…

drains the public budget frustrates economic policy distorts competition is unfair and creates inequality is economically inefficient does not contribute to good citizenship is not transparant is not democratically legitimized

Tax avoidance is not bad, because it…

has minimal effect on budget allows for fiscal price differentiation makes tax competition between states less harmful facilitates foreign direct investments protects the tax revenues protects smaller economies requires less government resources

Economic effects of anti-avoidance policy

Increase in tax revenue Incidence of corporate income tax Capital outflow Elimination of means does not eliminate the needs Decrease welfare

What can we do?

Undo globalisation Change the corporate tax paradigm Eliminate the differences between all tax systems

through harmonization Coordinated anti-avoidance rules Uniliateral anti-avoidance rules Nothing…

“The subjects of every state ought

to contribute towards the support of

the government, as nearly as

possible, in proportion to their

respective abilities; that is, in

proportion to the revenue which

they respectively enjoy under the

protection of the state.”

Adam Smith, Wealth of Nations (1776)