Summary : Taxation of Multinational
Firms
Week 1 : introduction to Taxation
Why Governments levy taxes?
The provision of public goods (i.e. goods and services that are not provided by the private
market. E.g. property rights, legal system, utilities, police force, roads, street lights, etc.)
The distribution of resources
Economic stabilization
Elements of taxes
Base : subject of the tax. The ‘thing’ which is being taxed
Consumptions taxes
Single stated : simple, but easy to avoid
Multi-stated (e.g. VAT) : complex, higher administrative cost, but hard to avoid
Wealth taxes
Income and profit taxes
Poll (or head) taxes
Rate
Average rate vs marginal rate (i.e. is the rate the taxpayer will pay on an
additional unit of the base)
In Flat rate system, average rate = marginal rate
In Progressive rate system, average rate < marginal rate (i.e. the higher the
base, the higher the rate)
Regressive rate? (e.g. consumption taxes)
Taxpayer
Legal taxpayer : is the one who is named in the legislation as being responsible
for paying the tax
Economic taxpayer : is the one who actually ends up parting with the cash at
the end of the day; s/he bears the incidence or burden of the tax
Direct tax : is one where the legal taxpayer cannot pass on the incidence of the tax (e.g.
departure tax)
Indirect tax : is when the incidence is shifted to another person (e.g. consumption tax)
,Evaluating Taxes and Tax systems
Equity (fairness, perceived fairness rather than actual fairness)
Horizontal equity : where two persons have the same ability to pay, then they
should bear the same tax burden
Vertical equity : where one taxpayer has a greater ability to pay, then they
should bear a higher tax burden >> used to justify progressive rate system
Benefit principle : taxes should be levied in line with some relationship to the
usage of government services. (however, difficult to measure, and some benefits
cannot be attributed to specific taxpayers)
Economic Efficiency (Neutrality : tax should not interfere with decision making)
In practice, it is difficult to achieve
Sometimes, governments will want to interfere with people’s choices (e.g.
cigarette tax)
Convenience / simplicity / flexibility
Optimal taxation : designing taxes and tax system that minimize their excess burden
Excess burden : the economic distortions that arise in response to taxes over and above the
actual monetary transfer from the private sector to government
Flat vs Progressive ta
Benefits Costs
Flat Incentive to work Regressive impact (i.e.
Simple inequality)
Lower administrative cost Reduced government revenue
Transparency Less redistributive
Reduce tax evasion Potential for underfunded
public services
Progressive Distribution benefits Disincentive to extra work
Reduced income inequality Complex
Higher government Higher administrative cost
revenue Potential for tax evasion
Economic stability Perceived unfairness
Social equity
Tax expenditures : tax revenue deliberately foregone by the government in order to achieve
a particular purpose (aka. negative revenue, tax breaks, tax concessions, tax relief, tax
subsidies, tax aids)
Tax holidays : an exemption from income tax for a number of years commencing from the
date on which an enterprise begins operations
,Compliance costs : costs incurred by the taxpayer in meeting the requirements of the
legislation
- Since it is borne by taxpayers, they tend to be relatively more hidden.
- Difficult to quantify
- Not consistent : vary considerably across different parts of the taxpaying population
(often more onerous for smaller taxpayers than large taxpayers)
Administrative costs : costs to the government of administering the tax system
Tax compliance
The deterrence model assumes that taxpayers pay their taxes because they are afraid of
being detected, so that they are motivated by the threat of penalties and the likelihood of
detection.
Several tax administrations have adopted a ‘compliance pyramid’, which tries to match
taxpayer behavior to administrative responses
Kirchler (2007) has developed a model called the ‘slippery slope’ that builds on the notion
of the compliance pyramid by including a further dimension – that of trust in the tax
authority
maximum voluntary compliance can be achieved if taxpayers understand their obligations
and have positive attitudes towards the government and the need for paying taxes. If trust
in the authorities is weak, however, and/or the power of the tax authority is low, then
taxpayers will look for ways to avoid or evade their taxpaying obligations
Tax avoidance : refers to working within the law, or exploiting the law in order to minimize
tax liability, in a way not intended by the government
Tax evasion : where a taxpayer does not pay a tax liability that has already arisen
Anti-avoidance rule, gives tax authorities discretion to cancel tax benefits where
transactions are entered into purely for tax purposes
Tax policy : the approach of a government to the design and implementation of its tax
system, including the tax mix or choice of different forms of taxation as well as their individual
design features
- for example, a growth-oriented reform would seek to shift the burden from income
taxes to consumption or property taxes
, International tax system does not exist. Each country has its own domestic system. When
thinking about tax in global context, a number of new conceptual issues arise
expanding the understanding of ‘equity’ to embrace ‘international equity’
how to attach taxing rights to particular geographical locations (international economic
efficiency / neutrality)
National Neutrality (NN) : is insular. It focuses on ensuring that the domestic
fisc does not lose when residents invest overseas. It is concerned with equalizing
after-tax rate of return on foreign investments with the pre-tax return on domestic
investments by treating foreign taxes paid in the same way as other business
expenses. The overriding concern is national welfare, rather than global welfare.
Capital Export Neutrality (CEN) : is concerned with neutrality in the location of
investment
Domestic tax rate is most important
Capital Import Neutrality (CIN) : is concerned with neutrality in the source of
investment
Foreign tax rate is most important
As a result of globalization and increased complexity in tax policies, rules and administration,
we are starting to see greater co-operation among nations (e.g. OECD, IMF, UN, WB, G20,
etc.)
International tax law : consists of customary international law and international
agreements. It covers the right of a state to tax, tax treaties and dispute settlement where it
is unclear what the respective taxing rights of two states are. It may extend to protocols for
exchange of information on taxpayers.
Which individual and firms does a country have the right to tax?
Tax jurisdictions : the extent of a country’s right to tax
2 key principles determining the extent of a country's tax jurisdiction
residence principle
source principle
double taxation oftentimes occurs when these two principles overlap
Base erosion : when the tax base is reduced (whether the reduction was planned or not
International corporate income taxes
How to tax a corporation?
Classic model : corporation entirely taxable separated from owners
Full integration model : corporation is only a conduit for owners, only the owners should be
taxed
In practice, partial integration
Evolution of corporate tax
138 countries (have now) agreed to set a minimum global tax of 15% for MNFs
The general trend for corporate tax rates has been declining from 1980s
Firms
Week 1 : introduction to Taxation
Why Governments levy taxes?
The provision of public goods (i.e. goods and services that are not provided by the private
market. E.g. property rights, legal system, utilities, police force, roads, street lights, etc.)
The distribution of resources
Economic stabilization
Elements of taxes
Base : subject of the tax. The ‘thing’ which is being taxed
Consumptions taxes
Single stated : simple, but easy to avoid
Multi-stated (e.g. VAT) : complex, higher administrative cost, but hard to avoid
Wealth taxes
Income and profit taxes
Poll (or head) taxes
Rate
Average rate vs marginal rate (i.e. is the rate the taxpayer will pay on an
additional unit of the base)
In Flat rate system, average rate = marginal rate
In Progressive rate system, average rate < marginal rate (i.e. the higher the
base, the higher the rate)
Regressive rate? (e.g. consumption taxes)
Taxpayer
Legal taxpayer : is the one who is named in the legislation as being responsible
for paying the tax
Economic taxpayer : is the one who actually ends up parting with the cash at
the end of the day; s/he bears the incidence or burden of the tax
Direct tax : is one where the legal taxpayer cannot pass on the incidence of the tax (e.g.
departure tax)
Indirect tax : is when the incidence is shifted to another person (e.g. consumption tax)
,Evaluating Taxes and Tax systems
Equity (fairness, perceived fairness rather than actual fairness)
Horizontal equity : where two persons have the same ability to pay, then they
should bear the same tax burden
Vertical equity : where one taxpayer has a greater ability to pay, then they
should bear a higher tax burden >> used to justify progressive rate system
Benefit principle : taxes should be levied in line with some relationship to the
usage of government services. (however, difficult to measure, and some benefits
cannot be attributed to specific taxpayers)
Economic Efficiency (Neutrality : tax should not interfere with decision making)
In practice, it is difficult to achieve
Sometimes, governments will want to interfere with people’s choices (e.g.
cigarette tax)
Convenience / simplicity / flexibility
Optimal taxation : designing taxes and tax system that minimize their excess burden
Excess burden : the economic distortions that arise in response to taxes over and above the
actual monetary transfer from the private sector to government
Flat vs Progressive ta
Benefits Costs
Flat Incentive to work Regressive impact (i.e.
Simple inequality)
Lower administrative cost Reduced government revenue
Transparency Less redistributive
Reduce tax evasion Potential for underfunded
public services
Progressive Distribution benefits Disincentive to extra work
Reduced income inequality Complex
Higher government Higher administrative cost
revenue Potential for tax evasion
Economic stability Perceived unfairness
Social equity
Tax expenditures : tax revenue deliberately foregone by the government in order to achieve
a particular purpose (aka. negative revenue, tax breaks, tax concessions, tax relief, tax
subsidies, tax aids)
Tax holidays : an exemption from income tax for a number of years commencing from the
date on which an enterprise begins operations
,Compliance costs : costs incurred by the taxpayer in meeting the requirements of the
legislation
- Since it is borne by taxpayers, they tend to be relatively more hidden.
- Difficult to quantify
- Not consistent : vary considerably across different parts of the taxpaying population
(often more onerous for smaller taxpayers than large taxpayers)
Administrative costs : costs to the government of administering the tax system
Tax compliance
The deterrence model assumes that taxpayers pay their taxes because they are afraid of
being detected, so that they are motivated by the threat of penalties and the likelihood of
detection.
Several tax administrations have adopted a ‘compliance pyramid’, which tries to match
taxpayer behavior to administrative responses
Kirchler (2007) has developed a model called the ‘slippery slope’ that builds on the notion
of the compliance pyramid by including a further dimension – that of trust in the tax
authority
maximum voluntary compliance can be achieved if taxpayers understand their obligations
and have positive attitudes towards the government and the need for paying taxes. If trust
in the authorities is weak, however, and/or the power of the tax authority is low, then
taxpayers will look for ways to avoid or evade their taxpaying obligations
Tax avoidance : refers to working within the law, or exploiting the law in order to minimize
tax liability, in a way not intended by the government
Tax evasion : where a taxpayer does not pay a tax liability that has already arisen
Anti-avoidance rule, gives tax authorities discretion to cancel tax benefits where
transactions are entered into purely for tax purposes
Tax policy : the approach of a government to the design and implementation of its tax
system, including the tax mix or choice of different forms of taxation as well as their individual
design features
- for example, a growth-oriented reform would seek to shift the burden from income
taxes to consumption or property taxes
, International tax system does not exist. Each country has its own domestic system. When
thinking about tax in global context, a number of new conceptual issues arise
expanding the understanding of ‘equity’ to embrace ‘international equity’
how to attach taxing rights to particular geographical locations (international economic
efficiency / neutrality)
National Neutrality (NN) : is insular. It focuses on ensuring that the domestic
fisc does not lose when residents invest overseas. It is concerned with equalizing
after-tax rate of return on foreign investments with the pre-tax return on domestic
investments by treating foreign taxes paid in the same way as other business
expenses. The overriding concern is national welfare, rather than global welfare.
Capital Export Neutrality (CEN) : is concerned with neutrality in the location of
investment
Domestic tax rate is most important
Capital Import Neutrality (CIN) : is concerned with neutrality in the source of
investment
Foreign tax rate is most important
As a result of globalization and increased complexity in tax policies, rules and administration,
we are starting to see greater co-operation among nations (e.g. OECD, IMF, UN, WB, G20,
etc.)
International tax law : consists of customary international law and international
agreements. It covers the right of a state to tax, tax treaties and dispute settlement where it
is unclear what the respective taxing rights of two states are. It may extend to protocols for
exchange of information on taxpayers.
Which individual and firms does a country have the right to tax?
Tax jurisdictions : the extent of a country’s right to tax
2 key principles determining the extent of a country's tax jurisdiction
residence principle
source principle
double taxation oftentimes occurs when these two principles overlap
Base erosion : when the tax base is reduced (whether the reduction was planned or not
International corporate income taxes
How to tax a corporation?
Classic model : corporation entirely taxable separated from owners
Full integration model : corporation is only a conduit for owners, only the owners should be
taxed
In practice, partial integration
Evolution of corporate tax
138 countries (have now) agreed to set a minimum global tax of 15% for MNFs
The general trend for corporate tax rates has been declining from 1980s
