Final Report Summary - INTLTAXFAIRNESS (THE USE OF INTERNATIONAL TAX ARRANGEMENTS TO PROMOTE GLOBAL WEALTH REDISTRIBUTION)
The main objective of the research was to produce high quality interdisciplinary research with respect to international taxation and to demonstrate how international tax rules can help produce effective redistributive tools. Perhaps because of the complexity of international tax arrangements, most of the critical theory about current international economic arrangements does not address international taxation. Instead, most of the focus is on international trade intellectual property and environmental regimes. This approach misses the potential of addressing distributive concerns through international tax arrangements. Therefore, the research argues that using the international tax regime more effectively (especially with respect to the taxation of multinational enterprises' income) is possible. It further wishes to demonstrate that in many cases using international tax rules to promote more equitable redistribution of resources among nations would have an efficient and effective distributive impact (compared t the impact of other regulatory alternatives).
The project is comprised of five different analytic research papers. Two of those are conceptual—focusing more on normative issues. The other three papers are of more technical nature—focusing on the taxation of multinational enterprises.
The articles that focus on normative issues can be of interest to a broad academic audience which include. legal scholars (interested in tax law, redistribution and international law), international relation scholars and economists. They wish to establish the two following points:
• The first point relates to the fact that philosophers and economists who address issues of global wealth redistribution often do not address the question of how such redistribution should take place. I argue that if a certain level of global wealth distribution is morally justified and, more importantly, beneficial, the question of how it should be promoted is far from trivial. I therefore develop a framework for analyzing the potential distributive impact of international tax arrangements. I explain how international tax arrangements, as an indirect method of redistribution, can promote global distributive objectives and assess whether they can offer a more effective global wealth redistribution mechanism when compared to other (indirect) alternatives such as fair trade, international labor, and environmental regulation. I show that under certain realistic circumstances international tax redistributive efforts can offer a more effective redistributive option compared to other alternatives.
• The second point is that policymakers and academics dealing with international redistribution often miss an important dimension of distributive considerations: their insurance function. In a very crude way, "distributive fairness" means that countries should pay for the provision of international public goods according to their relative economic abilities. Hence, any international agreement that correlates countries' obligations with their abilities offers some form of insurance to countries such that, if they suffer a relative economic decline, then their obligations would be reduced. In a volatile global economy in which countries cannot predict their relative economic abilities, they are concerned about giving other countries a competitive advantage by over-obliging themselves. Therefore, absent a redistributive insurance framework, countries will only be willing to accept very modest long-term obligations.
The three other papers in this project are more technical in nature—and related primarily to the manner in which MNEs should be taxed. The audience for these papers are primarily tax academics (from the fields of public finance, law and accounting) that are interested in international taxation law and policymakers in the EU and other developed countries. In particular, it could be of value to those policymakers currently considering the different trajectories of reforming the international tax regime as part of the OECD’s (in cooperation with the G20’s) BEPS project, which is currently undergoing.
The three articles all deal with the desired policies that tax authorities should adopt in order to better locate the business activities of multinational enterprises—those that involve related party financial and intangibles related activities. All of the articles are unique in the sense that they aim to offer solutions that (could benefit but) do not require intensive international coordination in order to be successful.
• The first point relates to the taxation of related party interest payments. It offers a relatively cheap, consistent, and accurate way to allocate MNE financial income, which is the building block in each of the various international tax policies that different countries employ. I do so by taking a new approach noting that in contrary to what most tax researchers argue, control equity investments in private corporations (rather than affiliated-debt) investments are the core of the sourcing problem. To overcome this problem, I propose to re-characterize intra-group equity investments as long-term-subordinated debt (with imputed interest rates). This re-characterization will allow tax authorities to reduce income-shifting manipulation and to simplify many existing international tax arrangements.
• The other two papers refer primarily to the manner in which tax authorities should determine the location of income streams divided from intangible assets within a multinational group.
1. The first paper (written jointly with Reuven Avi Yonah) seeks to re-examine the formulary alternative to transfer pricing by inquiring whether partial integration of formulary concepts into current practices would offer a reasonable alternative to transfer pricing rules. We believe that the key to achieving an equitable and efficient allocation of MNE income is to solve the problem of the residual, i.e. how to allocate income generated from mobile intangible assets and activities whose risks are born collectively by the entire MNE group. These assets and activities generate most of the current transfer pricing compliance and administrative costs, as well as tax avoidance opportunities. The basic notion promoted in this article is that a limited formulary tax regime that allocates only the residual portion of MNE income may therefore offer significant advantages. We argue that such a regime would not require significant deviations from current practices, or substantial modifications of the international tax regime.
2. The second paper (written jointly with Yaron Lahav) is a natural follow up of the previous one. It argues that the income allocated from certain types of intangibles should be allocated via a cost-of-labor formula. It further demonstrates that such a shift would not result in tax induced labor shifting. It contributes to the current literature about income shifting by offering a relatively simple to implement solution, which reduces the social costs of income shifting without requiring any radical reform. Additionally, it uses theoretical and empirical analyses to illustrate a novel point—that the location of the cost-of-labor deduction operates as a friction which limits income-shifting-tax-planning. Most of the literature about income shifting considers only unitary alternatives to the current transfer pricing regime and fails to consider the option of applying formulary allocation only with respect to a portion of a multinational enterprise's income. However, as the article points out, the implications of using this more constrained, yet realistic, alternative are radically different than those of the unitary regime, and policymakers should take advantage of those differences.
The project is comprised of five different analytic research papers. Two of those are conceptual—focusing more on normative issues. The other three papers are of more technical nature—focusing on the taxation of multinational enterprises.
The articles that focus on normative issues can be of interest to a broad academic audience which include. legal scholars (interested in tax law, redistribution and international law), international relation scholars and economists. They wish to establish the two following points:
• The first point relates to the fact that philosophers and economists who address issues of global wealth redistribution often do not address the question of how such redistribution should take place. I argue that if a certain level of global wealth distribution is morally justified and, more importantly, beneficial, the question of how it should be promoted is far from trivial. I therefore develop a framework for analyzing the potential distributive impact of international tax arrangements. I explain how international tax arrangements, as an indirect method of redistribution, can promote global distributive objectives and assess whether they can offer a more effective global wealth redistribution mechanism when compared to other (indirect) alternatives such as fair trade, international labor, and environmental regulation. I show that under certain realistic circumstances international tax redistributive efforts can offer a more effective redistributive option compared to other alternatives.
• The second point is that policymakers and academics dealing with international redistribution often miss an important dimension of distributive considerations: their insurance function. In a very crude way, "distributive fairness" means that countries should pay for the provision of international public goods according to their relative economic abilities. Hence, any international agreement that correlates countries' obligations with their abilities offers some form of insurance to countries such that, if they suffer a relative economic decline, then their obligations would be reduced. In a volatile global economy in which countries cannot predict their relative economic abilities, they are concerned about giving other countries a competitive advantage by over-obliging themselves. Therefore, absent a redistributive insurance framework, countries will only be willing to accept very modest long-term obligations.
The three other papers in this project are more technical in nature—and related primarily to the manner in which MNEs should be taxed. The audience for these papers are primarily tax academics (from the fields of public finance, law and accounting) that are interested in international taxation law and policymakers in the EU and other developed countries. In particular, it could be of value to those policymakers currently considering the different trajectories of reforming the international tax regime as part of the OECD’s (in cooperation with the G20’s) BEPS project, which is currently undergoing.
The three articles all deal with the desired policies that tax authorities should adopt in order to better locate the business activities of multinational enterprises—those that involve related party financial and intangibles related activities. All of the articles are unique in the sense that they aim to offer solutions that (could benefit but) do not require intensive international coordination in order to be successful.
• The first point relates to the taxation of related party interest payments. It offers a relatively cheap, consistent, and accurate way to allocate MNE financial income, which is the building block in each of the various international tax policies that different countries employ. I do so by taking a new approach noting that in contrary to what most tax researchers argue, control equity investments in private corporations (rather than affiliated-debt) investments are the core of the sourcing problem. To overcome this problem, I propose to re-characterize intra-group equity investments as long-term-subordinated debt (with imputed interest rates). This re-characterization will allow tax authorities to reduce income-shifting manipulation and to simplify many existing international tax arrangements.
• The other two papers refer primarily to the manner in which tax authorities should determine the location of income streams divided from intangible assets within a multinational group.
1. The first paper (written jointly with Reuven Avi Yonah) seeks to re-examine the formulary alternative to transfer pricing by inquiring whether partial integration of formulary concepts into current practices would offer a reasonable alternative to transfer pricing rules. We believe that the key to achieving an equitable and efficient allocation of MNE income is to solve the problem of the residual, i.e. how to allocate income generated from mobile intangible assets and activities whose risks are born collectively by the entire MNE group. These assets and activities generate most of the current transfer pricing compliance and administrative costs, as well as tax avoidance opportunities. The basic notion promoted in this article is that a limited formulary tax regime that allocates only the residual portion of MNE income may therefore offer significant advantages. We argue that such a regime would not require significant deviations from current practices, or substantial modifications of the international tax regime.
2. The second paper (written jointly with Yaron Lahav) is a natural follow up of the previous one. It argues that the income allocated from certain types of intangibles should be allocated via a cost-of-labor formula. It further demonstrates that such a shift would not result in tax induced labor shifting. It contributes to the current literature about income shifting by offering a relatively simple to implement solution, which reduces the social costs of income shifting without requiring any radical reform. Additionally, it uses theoretical and empirical analyses to illustrate a novel point—that the location of the cost-of-labor deduction operates as a friction which limits income-shifting-tax-planning. Most of the literature about income shifting considers only unitary alternatives to the current transfer pricing regime and fails to consider the option of applying formulary allocation only with respect to a portion of a multinational enterprise's income. However, as the article points out, the implications of using this more constrained, yet realistic, alternative are radically different than those of the unitary regime, and policymakers should take advantage of those differences.