The international tax practices of countries spill over national boundaries and negatively effect other nations, particularly developing nations, concludes a International Monetary Fund (IMF) staff report.
The 85-page report, “Spillovers in International Corporate Taxation,” dated May 9 but released publicly on June 25, analyzes tax spillovers and suggests responses to them. The report concludes that spillovers of international tax practices have a “significant and sizable” effect on corporate tax bases and rates and that this effect is “especially marked and important for developing countries.”
Capacity building is not enough to limit adverse spillovers on developing countries; rather, weaknesses in domestic and international tax laws must also be addressed, the report states.
Developing nations should consider adopting tougher laws to protect against avoidance of capital gains on transfers of assets though indirect transfers of ownership interests in low tax jurisdictions. Stronger laws should also be adopted to guard against debt shifting through intra-group loans, clearer and more simplified transfer pricing guidance should be adopted, and simple anti-avoidance rules should be considered.
The IMF report also advises developing countries to be wary of signing tax treaties because treaty shopping causes many developing nations to lose significant tax revenue.
Although forumlary apportionment would address problems with existing transfer pricing rules, such rules create new difficulties relating to factors used to apportion profits across jurisdictions and would not necessarily shift tax base towards developing nations, the report said.
Territorial tax regimes can amplify profit shifting and intensify tax competition, the report states. Spillovers would likely be less under worldwide taxation without deferral or with territoriality with tough controlled foreign corporation rules, the reports concludes. Also, minimum taxes may, in some cases, be useful, the report said.
The report also includes appendices addressing indirect share transfers, taxation of the digital economy, formulary apportionment, and other issues. IMF staff report (744KB), press release. See, also, response to the report from Oxfam.
-NEW: Analysis by Dr. Constantin Gurdgiev, at true economics
