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Tax Avoidance in a global economy

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

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Tax Avoidance in a global economy

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  1. Tax Avoidance in a global economy Mark Nieuweboer (Institute for Taxation and Economics)

  2. 2.5%

  3. Subjects • Fragmentation and globalisation • Aggressive tax planning • The case against tax avoidance

  4. 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?

  5. Fragmentation leads to arbitration • Fragmentation • State • Taxpayer • Income • Time • Arbitration

  6. Case study: United States v Isham (1873)

  7. Globalisation • World trade agreements • Liberalisation of capital markets and the euro • Information & communication • Technology

  8. Tax avoidance is profitable • Competition between states • Competition between companies • Tax systems have not globalized

  9. Base Erosion and Profit Shifting • Disconnect real activities from reported income • Global value chain • Drain profits through funding • Profit repatriation schemes

  10. Connection between profits and activities • Global Value Chain • Transfer pricing • Functions, risks & assets used • Disproportional value for intangibles and risks?

  11. Case study: quality coffee or high value brand?

  12. 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

  13. Profit repatriation schemes • Prevent ‘leakage’ of profits • Instruments:- • Defer distribution of income () • Hybrid mismatches • Conduit companies

  14. 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

  15. 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

  16. 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

  17. 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…

  18. Adam Smith, Wealth of Nations (1776) “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.”

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