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)
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