## _050914 — Spillovers in International Corporate Taxation (Executive Summary & Selected Excerpts)

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### Executive summary — scope and purpose
- Paper explores the nature, significance and policy implications of spillovers in international corporate taxation—the effects of one country’s rules and practices on others.
- Complements current initiatives focused on tax avoidance by multinationals, notably the G20-OECD project on Base Erosion and Profit shifting (BEPS).
- Draws on IMF experience with membership, technical assistance (TA), and prior analytical work.
- Goes beyond current initiatives to analyze a wide set of possible responses to spillovers, including alternative international tax architectures.
- Date on document: May 9, 2014.

### Core findings on spillovers and their importance
- Spillovers can matter for macroeconomic performance: “Capital account data are impossible to understand without referring to taxation,” and taxation powerfully affects MNE behavior.
- New results reported confirm that spillover effects on corporate tax bases and rates are significant and sizable.
- Spillovers reflect not just tax impacts on real decisions but, “and apparently no less strongly, tax avoidance.”
- Spillovers are especially marked and important for developing countries:
  - Developing countries typically derive a greater proportion of their revenue from corporate tax.
  - TA examples show sums at stake can be large relative to overall revenues.
  - Empirics suggest spillovers are especially strong for developing countries.
- Limiting adverse spillovers on developing countries requires capacity building, domestic law reform, and improvements in international arrangements.
- Wider reforms (for example, ‘formula apportionment’) address some spillovers under current arrangements, but would bring their own difficulties and “may not benefit developing countries.”
- Institutional framework for addressing international tax spillovers is weak; growing recognition strengthens the case for an inclusive and less piecemeal approach.

### Quantitative and empirical highlights (selected)
- Table 1 (FDI stocks relative to GDP—The Top Ten, 2012; average of outward and inward positions):
  - Luxembourg: FDI in percent of GDP = 4,710; Share of world FDI (%) = 10.2; Share of world GDP (%) = 0.07
  - Mauritius: FDI in percent of GDP = 2,504; Share of world FDI (%) = 1.1; Share of world GDP (%) = 0.01
  - Netherlands: FDI in percent of GDP = 530; Share of world FDI (%) = 15.4; Share of world GDP (%) = 0.91
  - Hong Kong SAR: FDI in percent of GDP = 409; Share of world FDI (%) = 4.1; Share of world GDP (%) = 0.31
  - Cyprus: FDI in percent of GDP = 252; Share of world FDI (%) = 0.2; Share of world GDP (%) = 0.03
  - Ireland: FDI in percent of GDP = 171; Share of world FDI (%) = 1.4; Share of world GDP (%) = 0.25
  - Hungary: FDI in percent of GDP = 170; Share of world FDI (%) = 0.8; Share of world GDP (%) = 0.15
  - Switzerland: FDI in percent of GDP = 148; Share of world FDI (%) = 3.6; Share of world GDP (%) = 0.75
  - Malta: FDI in percent of GDP = 101; Share of world FDI (%) = 0.0; Share of world GDP (%) = 0.01
  - Belgium: FDI in percent of GDP = 100; Share of world FDI (%) = 1.8; Share of world GDP (%) = 0.57
- Since the early 1980s, stock of inward FDI in developing countries relative to their GDP has roughly tripled, to about 30 percent.
- Corporate income tax (CIT) is more important as a share of total revenue in low and upper middle income countries than in advanced economies (IMF staff estimates; total tax revenue excluding social contributions; resource-rich countries excluded).

### Key concepts, framing, and channels of spillovers
- Core architectural concepts:
  - ‘Source’ (where investment is made and production takes place) and ‘residence’ (where the taxpayer is deemed located) underpin allocation of taxing rights.
  - Worldwide systems (residence taxes with foreign tax credits) versus territorial systems (exemption of foreign business income); in practice a spectrum between these extremes.
  - Controlled Foreign Corporation (CFC) rules, deferral, and passive/active distinctions mediate practical effects.
- Two broad types of fiscal externalities emphasized:
  - Base spillovers: one country's actions directly affect others’ CIT bases (via real responses and profit shifting).
  - Strategic spillovers: one country's actions induce changes in other countries’ tax policies (tax-setting incentives, ‘tax competition’).
- Principal channels:
  - Real and financial flows (FDI and corporate financing arrangements).
  - Corporate tax base changes (real location shifts and paper profit shifting).
  - Strategic tax-setting spillovers (responses by other countries).
  - World prices (pecuniary externalities via aggregate investment/saving effects).

### Common international tax planning devices (summary)
- Abusive transfer pricing, transfer of IP rights to low-tax jurisdictions, intra-group debt and conduit companies, thin capitalization, risk transfer, exploiting legal mismatches (e.g., ‘check the box’), treaty shopping, locating asset sales in low jurisdictions, deferral and inversion.
- Schemes commonly combine devices, hinge on fine legal distinctions, and span multiple countries.

### Specific concerns and vulnerabilities for developing countries
- Reasons for larger vulnerability:
  - Higher reliance on corporate tax for government revenue in many developing countries.
  - Individual tax-planning cases can involve tens or hundreds of millions of dollars—large relative to some developing countries’ revenues.
  - Tax incentives undermining revenue in developing countries may be a spillover response to policies abroad.
- Empirical and TA-based evidence:
  - Examples in extractive sectors: a gold mining sector with USD 100 billion invested but almost entirely debt financed; potential loss from elimination of withholding taxes on a single project equivalent to around 15 percent of total revenue.
  - Telecom companies in Africa being almost entirely debt financed and highly profitable are other TA examples.
- Policy implication: limiting adverse spillovers requires capacity building, stronger domestic laws (e.g., on indirect transfers, interest deductibility), and better international arrangements.

### Empirical results — base spillovers, strategic spillovers, and heterogeneity (Appendix III summary)
- Data and estimation:
  - Sample: unbalanced panel of 173 countries, period 1980-2013; resource-rich countries excluded.
  - Dependent variable: implicit corporate tax base B_it = (CIT revenue / GDP) / statutory CIT rate.
  - Foreign-rate weights used: GDP-weighted, simple unweighted average, and haven-weighted (tax havens per Gravelle (2013)).
  - Method: System-GMM (Blundell and Bond, 1998) with lagged dependent variable and controls (log GDP per capita, agriculture share, trade openness, inflation, oil rents; country and time fixed effects).
- Key base-spillover estimates (Appendix Table 1, short-run coefficients and long-run effects reported):
  - Own-rate short-run marginal effects (τ_it):
    - GDP-weighted (column (1)): -0.1747*** (0.0552).
    - Simple average (column (2)): -0.1494*** (0.0514).
    - Haven-weighted (column (3)): -0.0839** (0.0439).
  - Long-run own-rate effects θ(β) (reported):
    - Column (1): -0.5976* (0.3472).
    - Column (2): -0.6881*** (0.2641).
    - Column (3): -0.3154** (0.1396).
  - Short-run spillovers (γ) from others’ statutory rates:
    - GDP-weighted (column (1)): 0.3211** (0.1693).
      - Interpretation cited: a one percentage-point reduction in the GDP-weighted world average CIT rate (excluding own rate) reduces a typical country’s CIT base in the short run by 0.3 percent of GDP.
    - Simple average (column (2)): 0.1220* (0.0725).
    - Haven-weighted (column (3)): 0.2973*** (0.0971).
  - Long-run spillovers θ(γ) reported:
    - Column (1) GDP-weighted: 1.0981* (0.9341).
    - Column (2) Simple average: 0.5622* (0.3441).
    - Column (3) Haven-weighted: 1.116** (0.5146).
- Heterogeneity by country group (Appendix Table 2, haven-weighted estimates summarized):
  - OECD sample:
    - CIT rate i: -0.0747* (0.0421); long-run spillover θ(Υ): 0.2657* (0.1689).
  - Non-OECD sample:
    - CIT rate i: -0.1918*** (0.0647); long-run spillover θ(Υ): 0.4998* (0.3140).
  - Low and Middle Income sample:
    - CIT rate i: -0.2348*** (0.0844); CIT rate j, weighted tax havens: 0.5520** (0.2857); θ(Υ): 0.9258** (0.4966).
  - Time interaction: have-weighted spillovers increased in 1996-2013 (coefficient 0.2163** (0.1047)).
- Strategic spillovers (Appendix Table 3):
  - Countries respond to others’ statutory CIT rates:
    - GDP-weighted foreign rate: 1.2908*** (0.5406).
    - Simple average: 0.4649** (0.2197).
    - Haven-weighted: 0.6725** (0.4036).
  - Text interpretation example: a one percentage point decrease in others’ statutory CIT rates generates, on average, a cut of 0.7 percentage points in OECD responses (Devereux et al. (2008) cited); Appendix III finds responses around unity using GDP weights.
- Diagnostic and sample notes:
  - Observations for CIT rates (strategic spillovers): 3,037; for CIT base (base spillovers): 2,161.
  - Appendix Table 5 descriptive statistics include:
    - Statutory CIT Rate: Observations 3037; Mean 32.15; Maximum 61.80; Minimum 0.00; Std. Dev. 10.85.
    - CIT Rate, Simple Average: Observations 3037; Mean 28.40; Maximum 36.34; Minimum 20.04; Std. Dev. 4.74.
    - CIT Rate, GDP Weighted: Observations 3037; Mean 35.79; Maximum 42.62; Minimum 27.21; Std. Dev. 3.73.
    - CIT Rate, Tax Havens: Observations 3037; Mean 17.09; Maximum 24.46; Minimum 11.08; Std. Dev. 3.55.
    - CIT Revenue, percent of GDP: Observations 2161; Mean 2.64; Maximum 13.37; Minimum 0.00; Std. Dev. 5.45.
    - CIT Base, percent of GDP: Observations 2161; Mean 8.59; Maximum 29.99; Minimum 0.00; Std. Dev. 5.45.

### Evidence consistent with profit shifting (Appendix IV summary)
- Using Gross Operating Surplus (GOS) as reference base for 59 countries (final sample 51 countries, 840 observations, 1980-2012 after exclusions):
  - Mean CIT-efficiency (actual CIT revenue / (standard CIT rate × GOS)): 43 percent; Std. Dev. 29.
  - Regression of CIT-efficiency on CIT rate (Appendix Table 6):
    - Linear specification (column 1): Constant 85.1 (t-value (8.3)); CIT rate coefficient −1.2 (t-value (−9.4)); Adj R2 0.73; Observations 840.
    - Non-linear specification (column 2): Constant 153.1 (t-value (3.3)); CIT rate coefficient −5.5 (t-value (−6.8)); CIT rate squared 0.06 (t-value (5.9)); Adj R2 0.77; Observations 840.
    - OECD linear (column 3): CIT rate coefficient −0.7 (t-value (−7.4)); Observations 558.
    - Non-OECD linear (column 4): CIT rate coefficient −2.4 (t-value (−7.4)); Observations 282.
  - Interpretation: strong negative relationship between CIT-efficiency and statutory CIT rates, more pronounced in non-OECD countries—consistent with profit shifting patterns, with caveats.
- Simulation approach constructs counterfactual revenue without profit shifting using GOS and a global average CIT-efficiency (GOS-weighted average 43 percent for 2001–2012), but authors emphasize limitations and that the exercise attributes all cross-country variation in CIT-efficiency to profit shifting (strong assumption).

### Policy responses, alternative architectures, and trade-offs
- Wide set of policy responses assessed, including:
  - Minimum Domestic Taxation (MT): charging tax on measures less subject to manipulation (turnover, book earnings, assets); found in over 30 countries; can protect domestic bases but may create distortions (reinforce debt bias if on net assets; distort between firms if on gross assets).
  - Strengthening worldwide taxation: would limit spillovers but increases pressure on residence concepts; movement toward territoriality observed (17 OECD countries moved significantly toward territoriality since 1990s).
  - Formula Apportionment (FA): unitary taxation with allocation by formula (sales, assets, payroll, employees); removes transfer-pricing valuation needs but revenue allocation highly sensitive to factor choice; FA could produce reallocation up to 50 percent of current CIT revenue for some countries in early CCCTB work; conduit countries likely lose; developing countries gain only if employment weight is high.
  - Formulary Profit Split (FPS): hybrid—apply ALP where straightforward, apportion residual profit by formula; preliminary analysis suggests weaker spillovers under FPS than separate accounting or FA.
  - Destination-based corporate taxation: tax on destination (exclude exports, deny deduction for imports), akin to VAT plus labor subsidy; appeals because cross-country spillovers expected to be minimal, but raises unresolved issues (services, WTO compatibility) and could shift base toward countries where sales are concentrated.
- Key messages (verbatim):
  - Current initiatives, operating within present architecture, will not eliminate spillovers.
  - There is little consensus on practicable guiding principles for international taxation.
  - Minimum taxes can be useful in protecting revenue from inward investments.
  - Strengthening worldwide taxation may limit tax competition but raises residence issues.
  - Formula apportionment would limit conventional transfer pricing problems but create new difficulties and would not necessarily shift base to developing countries.
  - Hybrid schemes combining ALP and formulaic allocation merit closer study; destination-based proposals also merit study.
  - Obstacles to effective and inclusive action are political and conceptual, and are substantial.

### Key implementation and capacity issues for developing countries
- Tax treaties (BTTs) present trade-offs:
  - BTTs often reduce withholding taxes and provide PE definitions, EOI mechanisms, dispute resolution; there are now around 3,000 BTTs.
  - Whether a capital-importing country benefits from a BTT depends on whether increased FDI offsets revenue loss from reduced WHTs; EOI may increase revenue but could discourage inward investment.
  - Empirical evidence on treaty effects is mixed; firm-level studies find treaties raise probability of firm entry but not necessarily investment level conditional on presence.
  - Treaty shopping can turn a bilateral treaty into, effectively, a treaty with the rest of the world; example estimates cited (treaties with the Netherlands foregone revenue for developing countries at least EUR 770 million in 2011; rough calculations suggest U.S. treaties cost non-OECD counterparts perhaps $1.6 billion in 2010 for dividends and interest).
  - Limitation of Benefit (LOB) provisions can restrict treaty benefits but are complex and verification is difficult for low-capacity countries.
  - Policy caution: countries should exercise considerable caution before entering BTTs; consider using TIEAs or domestic law for key protections.
- Indirect transfers of interests:
  - Owners can avoid source-country capital gains tax by structuring asset ownership and selling in low-tax jurisdictions; macro-relevant in several low income countries.
  - Legal reform needed to tax gains on indirect transfers; many treaties and domestic laws unclear.
  - Implementation mechanisms: notification requirements for indirect disposals, information sharing, deeming residents liable for non-resident taxes, non-tax penalties (e.g., license withdrawal).
- Interest deductibility and earnings stripping:
  - Debt shifting via intra-group loans is a significant concern.
  - Rules applied include debt/equity ratios, net interest payment rules, intracompany-specific rules, and earnings stripping rules limiting interest deductions to a proportion of income.
  - Such measures are relatively easy to apply and attractive for developing countries to protect bases.
- Arm’s Length Principle (ALP) challenges:
  - ALP requires function/asset/risk analysis and is resource-intensive to verify.
  - Transfer pricing valuation of intangibles and risk transfer pose severe problems where no comparables exist.
  - Developing countries face data scarcity (geographical adjustments), no accepted approach to sharing location savings, asymmetric allocation of routine/residual profits, and weak guidance on risk transfer.
  - Policy agenda for developing countries includes: introducing/strengthening transfer pricing rules (including domestic TP), concrete guidance for ALP in contexts relevant to developing countries, carefully designed safe harbors, withholding taxes on services, restrictions on deductions (parent HQ services), and limitations on interest deductions targeted at low-tax operations.
  - Coherent agenda rests on four pillars:
    - Introducing appropriate anti-avoidance rules.
    - Developing more detailed guidance on ALP application.
    - Improving public data availability for comparability studies.
    - Capacity building.
- Balance: tackling international tax challenges should not distract from core domestic tax strengthening (e.g., building effective personal income tax systems).

### Coordination, political economy, and stakeholder views
- Coordination challenges:
  - Substantial coordination has proved very difficult due to divergent country interests (low vs high tax countries; capital exporters vs resource-rich countries).
  - Institutional framework gaps: no global institution comparable to WTO for taxation; bilateral treaties only cover subset of issues.
  - OECD BEPS project is inclusive and powerful; UN expertise and participation of other organizations matter.
- Risks of partial/piecemeal coordination:
  - Regional or partial coordination may leave participants vulnerable to low-tax jurisdictions elsewhere.
  - Coordinating only a subset of instruments can shift pressures to non-coordinated instruments (e.g., making treaty abuse harder may increase transfer pricing or intra-group borrowing).
  - Important to treat BEPS Action Plan elements as a package.
- Consultations summary (Appendix I):
  - Civil society: concerned about international inequities in corporate tax take, non-inclusive standard-setting, treaty risks to developing countries, and called for greater transparency (country-by-country reporting) and automatic information exchange.
  - Business sector: warned of conflicts over tax take, double taxation, compliance costs (country-by-country reporting), and judged unitary taxation with FA to have little international merit.
  - Developing country representatives: stressed difficulties in tackling specific planning cases, harm from tax competition and incentives, need to revise taxing-right allocation, and need for capacity.
  - Other submissions: advocated strengthened CFCs, restrictions on interest deductibility, invigorated WHTs, adjustments to ALP, study and possible movement toward formulary approaches over years.

### Digitalization and the ‘digitized economy’ (Appendix II summary)
- Preference for term ‘digitization of the economy’ as tax issues affect broader business activity.
- Challenges:
  - Location of intangibles and “scale without mass” undermine traditional PE and source rules.
  - Sales alone do not create CIT nexus under standard architecture; proposals include virtual PE or lowering PE thresholds.
  - Consensus that any rule changes must apply to all firms irrespective of degree of digitization.
  - Indirect tax (VAT) issues have been more tractable administratively (e.g., EU rule from January 1, 2015 on place of supply of electronic services).

### Implementation caveats, data limitations and interpretation cautions
- Authors emphasize measurement and data limitations:
  - AETR data lacking for many developing countries; strong correlation between statutory rates and AETRs offers some comfort but measurement error remains.
  - Identification of haven effects depends on correlation between statutory rates and special regimes (data limitations).
  - Simulations and GOS-based exercises attribute cross-country variation to profit shifting—strong assumption—and may understate losses to jurisdictions outside sample.
  - Assessing welfare implications is complex: measured revenue losses are a lower bound for welfare losses; strategic responses can reduce direct revenue effects but not necessarily eliminate collective inefficiency.

*Source: SPILLOVERS IN INTERNATIONAL CORPORATE TAXATION, International Monetary Fund (content unit _050914).*

### EXECUTIVE SUMMARY

### _050914 - EXECUTIVE SUMMARY

### Introduction
- Paper explores the nature, significance and policy implications of spillovers in international corporate taxation—the effects of one country’s rules and practices on others.
- Complements current initiatives focused on tax avoidance by multinationals, notably the G20-OECD project on Base Erosion and Profit shifting (BEPS).
- Draws on the IMF’s experience on international tax issues with its wide membership, including through technical assistance (TA), and on its previous analytical work.
- Goes beyond current initiatives to analyze a wide set of possible responses to spillovers.
- Date on document: May 9, 2014.

### Core findings on spillovers and their importance
- Spillovers can matter for macroeconomic performance: “Capital account data are impossible to understand without referring to taxation,” and taxation powerfully affects MNE behavior.
- New results reported confirm that spillover effects on corporate tax bases and rates are significant and sizable.
- These spillovers reflect not just tax impacts on real decisions but, “and apparently no less strongly, tax avoidance.”
- Spillovers are especially marked and important for developing countries:
  - Developing countries typically derive a greater proportion of their revenue from corporate tax.
  - TA experience provides many examples where the sums at stake in international tax issues are large relative to their overall revenues.
  - Empirics reported suggest that spillovers are especially strong for developing countries.
- Limiting adverse spillovers on developing countries requires not just capacity building, but also addressing weaknesses in domestic law and international arrangements.
- Wider reforms (for example, ‘formula apportionment’) address some spillovers under current arrangements, but would bring their own difficulties and “may not benefit developing countries.”
- The institutional framework for addressing international tax spillovers is weak; growing recognition of spillovers strengthens the case for an inclusive and less piecemeal approach to international tax cooperation.

### Quantitative and empirical highlights (selected)
- Table 1: FDI stocks relative to GDP—The Top Ten (2012) (average of outward and inward positions; source: IMF Coordinated Direct Investment Survey)
  - Luxembourg: FDI in percent of GDP = 4,710; Share of world FDI (%) = 10.2; Share of world GDP (%) = 0.07
  - Mauritius: FDI in percent of GDP = 2,504; Share of world FDI (%) = 1.1; Share of world GDP (%) = 0.01
  - Netherlands: FDI in percent of GDP = 530; Share of world FDI (%) = 15.4; Share of world GDP (%) = 0.91
  - Hong Kong SAR: FDI in percent of GDP = 409; Share of world FDI (%) = 4.1; Share of world GDP (%) = 0.31
  - Cyprus: FDI in percent of GDP = 252; Share of world FDI (%) = 0.2; Share of world GDP (%) = 0.03
  - Ireland: FDI in percent of GDP = 171; Share of world FDI (%) = 1.4; Share of world GDP (%) = 0.25
  - Hungary: FDI in percent of GDP = 170; Share of world FDI (%) = 0.8; Share of world GDP (%) = 0.15
  - Switzerland: FDI in percent of GDP = 148; Share of world FDI (%) = 3.6; Share of world GDP (%) = 0.75
  - Malta: FDI in percent of GDP = 101; Share of world FDI (%) = 0.0; Share of world GDP (%) = 0.01
  - Belgium: FDI in percent of GDP = 100; Share of world FDI (%) = 1.8; Share of world GDP (%) = 0.57
- Since the early 1980s, the stock of inward FDI in developing countries relative to their GDP has roughly tripled, to about 30 percent.
- Corporate income tax (CIT) is more important as a share of total revenue in low and upper middle income countries than in advanced economies (see Figure 1; IMF staff estimates). Notes: Total tax revenue excluding social contributions; resource-rich countries excluded.

### Key concepts and framing
- Current international tax arrangements rest on concepts of companies’ ‘residence’ and the ‘source’ of their income; globalization has made these concepts increasingly fragile.
- Distinction between worldwide tax systems (tax residence wherever income arises, with credit for taxes paid abroad) and territorial systems (residence country exempts business income arising abroad); in practice there is a spectrum between these extremes.
- MNEs use many devices—often highly complex, interlocking, and very effective—to reduce total tax bills (see Box 1 referenced in the document).
- The paper focuses on two broad types of fiscal externalities:
  - Base spillovers: one country's actions directly affect others’ CIT bases.
  - Strategic spillovers: one country's actions induce changes in other countries’ tax policies.
- Such spillovers potentially give rise to a collective loss of revenue and welfare—but not all countries are necessarily losers.

### Specific concerns for developing countries (summary)
- Developing countries face larger vulnerability because:
  - Corporate tax comprises a greater proportion of government revenue for many developing countries.
  - Individual tax planning cases can involve tens or hundreds of millions of dollars—large relative to some developing countries’ revenues.
  - Tax incentives that undermine revenue in developing countries may be a spillover reaction to policies in other countries (tax competition).
- The paper pays particular attention to quantification of spillovers on developing countries and to specific international tax arrangements that IMF TA has found problematic.

### Policy responses and institutional considerations
- Paper assesses a wide set of possible responses, beyond the G20-OECD BEPS project, including reforms to international tax architecture.
- Some proposed reforms address spillovers but could create distortions and “may not benefit developing countries.”
- Capacity building, domestic law reform, and improvements in international arrangements are all necessary to limit adverse spillovers on developing countries.
- The institutional framework for international tax cooperation is characterized as weak; a stronger, more inclusive, and less piecemeal approach is argued for.

### Structure of the full paper (contents overview)
- Main sections include: INTRODUCTION; CONSIDERING INTERNATIONAL CORPORATE TAXATION (A. Current Practice and Key Concepts; B. Spillovers); ASSESSING THE SPILLOVERS (A. Quantification; B. Welfare Implications); SELECTED KEY ISSUES FOR DEVELOPING COUNTRIES (A. Tax Treaties; B. Indirect Transfers of Interest; C. Interest Deductibility; D. Arm's Length Pricing); DEALING BETTER WITH SPILLOVERS (A. Changing the Architecture; B. Challenges of Coordination).
- Appendices cover consultations; Taxation and the ‘Digital Economy’; Estimating Spillovers; Using Gross Operating Surplus; Tax Treaties and Withholding Tax Rates; Gains on Transfers of Interest; Guiding Principles for International Tax Design; Formula Apportionment details; and supporting appendix tables and figures.

*Prepared by a staff team from the Fiscal Affairs Department comprising Michael Keen, Victoria Perry, Ruud de Mooij, Thornton Matheson, Roberto Schatan, Peter Mullins, and Ernesto Crivelli; production assistance by Liza Prado; research assistance by Kelsey Moser; editorial assistance by Linda Long.*

### 7.      The present international corporate tax framework is defined by the interplay of

### 7.      The present international corporate tax framework is defined by the interplay of

### The current architecture: domestic laws and treaties
- The framework is defined by the interplay of domestic laws and tax treaty obligations.
- There is no comprehensive architecture comparable to that which regulates international trade.
- Current arrangements have evolved over the last century with little explicit coordination, other than bilateral treaties that touch only a subset of relevant matters.11

### Taxing rights: source and residence
- Taxing rights over business profits are based on:
  - Identifying the ‘source’ of profits:
    - “Source” refers very loosely to where investment is made and production takes place.
    - Traditionally determined largely by the physical presence of labor and/or capital.
    - Certain thresholds of contact—proxies for the creation of value—must be met to create a permanent establishment (PE) and thus liability to pay tax to the source country.
    - The location of ‘sales’ is not taken under this long-standing architecture to give rise to a place of ‘source,’ nor to trigger income taxation.
    - Under territorial taxation (exemption method), tax on business profits is levied only in the source country.
  - Identifying the ‘residence’ of corporate taxpayers:
    - Residence means the place where the company receiving the income is deemed to have its primary location.
    - Common tests include place of incorporation (applicable, for example, in the U.S.) or place from where it is effectively managed (in most countries).
    - Assertion in domestic law of the right to tax profits from any geographic source based on domestic residence is referred to as worldwide taxation.
    - Double taxation—taxation by both source and residence countries—is typically avoided by the residence country granting a foreign tax credit13 against its own tax on the same profits taxed by the source country.
    - The result is that the residence tax is limited to the excess of the residence country’s effective tax rate over that in the source country.

### Practical forms: worldwide vs territorial in practice
- In practice, neither worldwide nor territorial taxation is found in pure form. Importantly:
  - ‘Worldwide’ basis countries generally provide for deferral of tax on active business profits earned elsewhere, not levying tax until earnings are repatriated to the residence country—bringing the system closer to source taxation for active business income.
  - Controlled Foreign Corporation (CFC) rules:
    - Vary significantly across countries.
    - Essentially bring immediately into tax passive income arising abroad that has not paid tax there of at least some minimum amount.
    - For worldwide countries, CFC rules provide protection against tax avoidance through deferral.
    - For territorial countries, CFC rules typically ensure that only active—not passive—income is exempt in the residence country.
    - CFC rules normally apply only to passive income, making the passive/active distinction critical for modern tax planning.
- There is a spectrum between worldwide and territorial systems; movements along it can have major effects on other countries’ tax bases.

### Emerging challenges to the architecture
- Identifying the country that is the ‘source’ of income is increasingly problematic:
  - Increased importance of intra-firm transactions (about 42 percent of the value of U.S. goods trade in 2012).
  - Increased importance and mobility of intangible assets (patents, trademarks, other intellectual property (IP)) which can be much more easily relocated than physical facilities.
  - Digitalization of economic activity raises issues for which the present system was not designed.
  - The notion of residence is not entirely clear cut; companies can change residence, and disconnects between a company’s country of residence and that of its shareholders reduce the concept’s relevance.
- These issues and associated planning devices are the primary focus of the OECD BEPS project.

### International tax planning: common tools (Box 1)
- Essential aim: shift taxable income to low tax jurisdictions.
- Common strategies include:
  - Abusive transfer pricing (stretching, violating or exploiting weaknesses in the arm’s length principle), including transfer of IP rights to low tax jurisdictions early when hard to value verifiably.
  - Taking deductions in high-tax countries by, for example, borrowing there to lend to affiliates in lower-tax jurisdictions.
  - Passing on funds through conduit companies to enable double dipping—taking interest deductions multiple times without offsetting tax on receipts—leading to thin capitalization.
  - Risk transfer—conducting operations in high-tax jurisdictions on contractual basis to limit profits arising there.
  - Exploiting mismatches—where different countries classify the same entity, transaction, or instrument differently (e.g., U.S. ‘check the box’ rules).
  - Treaty shopping—using treaty networks to route income and reduce taxes.
  - Locating asset sales in low jurisdictions to avoid capital gains taxes.
  - Deferral—delaying repatriation to defer home taxation for companies resident in worldwide-system countries.
  - ‘Inversion’—changing residence to escape repatriation charges or CFC rules.
- Schemes commonly combine several devices, hinge on fine legal distinctions, and span several countries and tax systems; they are often extraordinarily complex.17

### Allocation tensions and fairness
- The core allocation rule for assigning earnings within corporate groups is the arm’s length principle—valuing intra-MNE transactions at prices that would be agreed by unrelated parties—which leaves scope for manipulation to shift tax bases away from high tax (often source) countries.
- While the architecture might seem to favor source countries, the network of bilateral double taxation treaties based on the OECD model significantly constrains source-country rights.
- Arrangements perceived as unfair may give rise to unilateral domestic measures, risking uncoordinated defensive actions that undermine international tax coherence.

### Spillovers: definition and channels
- ‘Spillover’ = impact that one jurisdiction’s tax rules or practices has on others; fiscal externalities arising through corporate-level cross-border taxation.
- Main channels by which a country’s international tax decisions may affect others:
  - Real and financial flows: impacts on FDI and corporate financing arrangements, with potential effects on growth and macroeconomic stability.
  - The corporate tax base (base spillover): taxable profits change due to real responses (investment shifts) and profit-shifting responses (where profits are booked for tax purposes).
  - Tax-setting incentives (strategic spillovers): other countries may change national tax rules in response to tax changes abroad—‘tax competition’ and potential ‘race to the bottom.’
  - World prices: tax-induced changes in investment and saving behavior can affect world interest rates and wages (pecuniary externalities).
- Relationships among channels:
  - Decisions on location of real activities are influenced by profit-shifting opportunities.
  - Awareness of ability to affect world prices can create tax-setting incentives (analogous to optimal tariff logic).

### Sources of spillovers beyond headline rates
- Spillovers arise from more than statutory rate differences:
  - Preferential regimes (e.g., ‘IP boxes’ charging reduced rates on income from patents and IP) create incentives to shift profits.
  - Network externalities within double tax treaty systems (e.g., treaty between A and B and A and C may effectively create a treaty link between B and C).
  - Mismatches in national rules (e.g., treatment of an instrument as debt in one country and equity in another).
  - Tighter CFC rules in one country can indirectly affect others by raising the tax cost of investing in low-tax jurisdictions.

### Dependence on overall architecture
- The form and severity of spillovers depend on the international tax framework:
  - Under a pure worldwide taxation system without deferral, source tax rates would not matter for corporate decisions because residence tax would apply to all earnings.
  - Addressing spillovers therefore raises questions about the wider architecture, not only specific arbitrage opportunities.

### Distributional and efficiency implications
- Spillovers are not zero-sum and can create collective inefficiency while benefiting some jurisdictions:
  - Profit shifting reduces collective revenue but can increase revenue in low-tax recipient jurisdictions.
  - Non-cooperative policymaking with externalities can yield inefficient collective outcomes even if some countries gain.
  - In second-best settings, non-cooperative tax policymaking can interact with other distortions in complex ways; such issues are explored further in the final section.

### Assessing the spillovers — Key messages
- Substantial evidence exists that tax considerations significantly affect FDI and a wide range of corporate decisions, but estimating aggregate revenue effects remains elusive.
- New evidence for a large panel of countries suggests:
  - Both base and strategic spillovers are significant and large.
  - Base spillovers arise at least as much from profit shifting as from effects on real activities.
  - These spillover effects are especially strong for developing countries.
- Assessing welfare effects of tax spillovers remains problematic:
  - While spillovers are presumptively a source of inefficiency, low tax rates on the most mobile activities ease economic distortions from the corporate tax.
  - A small observed collective revenue loss associated with spillovers (from profit shifting, for instance) does not imply a small efficiency loss, as the overall level of taxation could be too low.

### Quantification (introductory note)
- The following section assesses evidence on the nature and importance of the first three types of spillovers identified above, beginning with real and financial flows.

*Source: _050914 - 7.      The present international corporate tax framework is defined by the interplay of*

### 19.      Aggregate international investment positions and behavior are strongly marked by tax

### Aggregate international investment positions and behavior are strongly marked by tax considerations

### Patterns of FDI destinations and tax-driven conduits
- Tables 2 and 3 show that jurisdictions known for attractive tax regimes and extensive treaty networks commonly feature prominently as ‘conduits’ through which investments pass (example: 16 percent of outward investment from Brazil goes (as least initially) to the Cayman Islands).
- Such routing is consistent with taxation playing a key role in shaping the structure of international capital flows.
- Some flows reflect ‘round tripping’: investing through an entity abroad to obtain (legally or not) more favorable treatment than is available by investing directly at home.

### Tax changes and aggregate investment effects
- A meta analysis (De Mooij and Ederveen (2008)) suggests that a 10 percentage-point reduction in a country’s effective average tax rate increases its stock of FDI, on average and in the long run, by over 30 percent.
- Not all FDI represents ‘greenfield’ (new productive capacity); estimates suggest that more than half may reflect mergers and acquisitions.
- Indications that greenfield investments are a larger proportion of total FDI in lower income countries than in more advanced economies.

### Evidence of profit shifting and revenue implications
- Evidence indicating extensive profit shifting:
  - More than 42 percent of the net income earned by U.S. majority-owned affiliates is earned in ‘tax havens’, while less than 15 percent of their value added is created there.
  - The presence of an additional ‘tax haven’ subsidiary reduces the consolidated tax liability of a corporate group by 7.4 percent of total assets.
- Attempts to quantify overall revenue losses are difficult and produce widely varying estimates:
  - One U.S. estimate points to a revenue loss of $60 billion—about 25 percent (at that time) of CIT revenue.
  - Christian Aid (2008) estimates an aggregate annual loss for non-advanced countries from trade mispricing alone of USD 160 billion; such estimates have been criticized.
- Caution: one country’s revenue loss may be offset, though only partly, by other countries’ revenue gains.

### Firm-level mechanisms and empirical findings (Box 2)
- Transfer pricing abuse: mixed direct evidence; Clausing (2003) and Heckemeyer and Overesch (2013) find significant effects while Swenson (2001) reports very small responses.
- Location of intangible assets: CIT rates have large negative effects on the number of patents filed by a subsidiary and on the magnitude of intangible assets reported.
- Intra-company debt shifting: substantial evidence that taxation induces intracompany borrowing to reduce tax payments, with larger effects for affiliates in developing economies.
- Mismatches and ‘check-the-box’ rules: U.S. rules created a revenue loss of $7 billion between 1997 and 2002 (Altshuler and Gruber (2008)).
- Treaty shopping / conduit use: Tables 2 and 3 provide prima facie evidence; firm-level studies find strong effects (Mintz and Weichenrieder (2010); Weyzig (2014)).
- Inversion: Between 1997 and 2007 about 6 percent of all MNEs relocated their headquarters; a 10 percentage point higher tax on repatriations increases the probability of such relocation by more than one third (Voget (2011)).
- Deferral: The 2005 U.S. repatriation tax reduction from 35 percent to 5.25 percent led corporations to repatriate $312 billion; estimates suggest eliminating deferral would yield an annual U.S. revenue gain between $11 and $14 billion, allowing a revenue-neutral CIT rate reduction to around 28 percent.

### Base effects: how one country’s tax policy affects others
- One country’s tax policy impacts others’ CIT bases by affecting either real activities or shifting of paper profits.
- Panel data analysis (103 countries, 1980-2013) indicates:
  - Spillover base effects through real activities are significant and large. Weighting other countries’ tax rates by GDP, the (short run) semi-elasticity of the implicit corporate tax base with respect to statutory CIT rates abroad is around 3.7; that is, a one point reduction in the statutory CIT rate in all other countries reduces the typical country’s corporate tax base by 3.7 percent.
  - With corporate tax rates having fallen, on average, by 5 points or so over the last 10 years, this implies a sizable effect.
  - Spillover base effects through profit shifting are also large and no less significant. ‘Haven-weighted’ effects prove to be marked; spillovers from this group imply as large an effect as is found using GDP weights—and one estimated with greater confidence.
- Own tax base effect from the appendix implies a short-run semi-elasticity between −1 and −2.

### Disproportionate impacts on low-income and developing countries
- Tax base spillovers are especially pronounced for low-income countries; IMF technical assistance has found single cases that account for a significant part of all revenue.
  - Examples include extractive-sector cases: a gold mining sector with USD 100 billion invested but almost entirely debt financed; a potential loss from effective elimination of withholding taxes on a single project equivalent to around 15 percent of total revenue.
  - Telecom companies in Africa being almost entirely debt financed and highly profitable are other examples.
- Econometric evidence (Appendix III) and a preliminary ‘apparent spillovers’ exercise (Appendix IV) suggest:
  - The spillover base effect is largest for developing countries: compared to OECD countries, base spillovers from others’ tax rates are two to three times larger, and statistically more significant.
  - The apparent revenue loss from spillovers, relative to a benchmark akin to source taxation, is more than twice as large in non-OECD as in OECD countries.
  - Country examples show losses of more than 50 percent of current CIT revenue in several cases.
  - The (unweighted) average revenue loss across all countries in the sample is about 5 percent of current CIT revenue—but almost 13 percent in the non-OECD countries.

### Strategic spillovers and tax competition
- Strong evidence of strategic interactions in tax setting:
  - Dramatic worldwide decline in statutory CIT rates over the last three decades, most significant in Europe and Central Asia, somewhat less in Sub-Saharan Africa and Latin America—and perhaps now leveling off.
  - Spread of IP boxes is highly suggestive of strong strategic spillovers, especially for the most mobile elements of tax base.
  - For OECD countries, a one percentage point decrease in statutory CIT rates of others generates, on average, a cut of 0.7 percentage points in response (Devereux and others (2008)).
  - Evidence of a race to the bottom among special regimes, notably in Africa where tax burdens under these regimes have fallen to almost zero.
- Appendix III finds a significant strategic tax response of statutory CIT rates (using either GDP or ‘haven’ weights’) of around unity.
- Strategic responses measured in terms of effective corporate tax rates tend to be insignificant, suggesting tax competition is driven at least as much by profit-shifting concerns (including in relation to ‘havens’) as by the desire to attract real investments.

*Source: SPILLOVERS IN INTERNATIONAL CORPORATE TAXATION, International Monetary Fund (excerpt)._050914 - 19.*

### 27.      Strategic responses diminish the direct revenue effect of base spillovers, but do not

### 27.      Strategic responses diminish the direct revenue effect of base spillovers, but do not eliminate it

### Strategic responses and simulated impacts on CIT bases
- Holding its own tax rate constant, a one percentage point reduction in statutory rates in all other countries reduces the typical country’s CIT base (in the long run) by about 6.5 percent (Table 4, simple average).
- Anticipated strategic reaction: the country will on average cut its own CIT rate by 0.5 points.
  - This own-rate cut increases its CIT base by 4.0 percent (simple average).
  - Net effect on the country’s CIT base (simple average) = -2.5 percent.
- GDP-weighted simulation (Table 4):
  - Spillover effect on country i's tax base (in percent): -12.8
  - Estimated reaction of country i's own CIT rate: -1.0
  - Own-tax rate effect on country i's tax base (in percent): 7.0
  - Net effect on country i's tax base: -5.8
- Important caveat: the proportional revenue loss will be larger than the proportional base reduction because the rate cut reduces revenue across the entire base.
- Note: there may be additional revenue loss from indirect strategic consequences (e.g., changes in the top personal income tax rate), not explored here.

### Welfare implications of spillovers
- Spillovers are presumptively sources of collective inefficiency if there are no other distortions; measured revenue losses provide at best a lower bound indication of associated welfare losses.
- Example of extreme case: if all tax rates were competed to zero, observed profit–shifting or revenue loss could be nil, yet there would still be collective welfare loss from inefficiently low taxation.
- Heterogeneous country effects:
  - Theory suggests small countries can be winners in tax competition games because they have relatively little to lose from reducing taxation of their small domestic bases but much to gain from attracting large bases from abroad.
- Interactions with other distortions:
  - Tax competition may counteract a political bias towards excessive public expenditure, though this argument has become less prominent with fiscal consolidation needs and possible reliance on fiscal rules.
  - Spillovers may ease distortions from the corporate tax by reducing marginal effective tax rates on investment.
  - If avoidance opportunities are more easily exploited by firms whose assets or activities are more mobile, this can produce a more efficient tax system by taxing more elastic tax bases at lower rates; low tax and conduit countries can improve the efficiency of capital allocation in this respect.
- Empirical knowledge is limited; these considerations are disputed and remain essentially uninformed by empirical evidence.

### Financial stability and surveillance implications
- Tax planning through intra-group borrowing amplifies (unconsolidated) leverage but may pose few financial stability risks because lending to affiliates is akin—in all but tax terms—to an equity investment, with risk borne at the group level.
- The potential significance of spillovers may warrant discussion in Article IV consultations, consistent with the integrated surveillance decision.
- IMF staff have suggested G20 members assess spillover effects on developing countries of major tax reforms proposed (in a report to the Development Working Group of the G20, jointly with the OECD, UN and World Bank).

### Selected key issues for developing countries — key messages
- ‘Treaty shopping’—the use of tax treaty networks to reduce tax payments—is a major issue for many developing countries; they should sign treaties only with considerable caution.
- Many developing countries need better protection against avoidance of tax on capital gains on natural resources and some other assets realized in low tax jurisdictions.
- Many developing countries still lack effective provisions to guard against the use of borrowing to shift profits to lower tax jurisdictions.
- Addressing transfer pricing challenges requires capacity building and clearer, appropriately simplified rules and guidance.
- Coping with international taxation challenges should not distract from wider and more fundamental tax reform objectives.

### Tax treaties (BTTs): benefits, costs, and empirical evidence
- BTTs set allocation of taxing rights between source and residence countries and typically specify maximum rates of withholding tax (WHT) on interest, dividends, royalties and other payments from source countries.
- WHT rates have been trending down in both treaties and domestic law; BTTs also generally provide: agreed PE definitions; specification of taxes for which foreign tax credits will be provided; non-discrimination rules; dispute resolution procedures; and sometimes provisions for exchange of taxpayer information (EOI).
- Proliferation of BTTs over the last twenty years has been driven by an increasing number involving developing countries; overall, there are now around 3,000 BTTs.
- The number of TIEAs has increased dramatically since 2009, reflecting renewed focus on EOI after the 2009 Pittsburgh Summit and the work of the Global Forum on Transparency and Information Exchange.
- Whether a capital-importing country benefits from signing a BTT depends on whether increased FDI gains offset revenue loss from reduced WHT rates; EOI aspects of BTTs may increase source country revenue but could discourage inward investment.
- Empirical evidence on investment effects of treaties is mixed:
  - Macroeconomic studies find a wide range of effects, with some signs of positive FDI effects for middle-income countries.
  - Firm-level studies find treaties significantly affect firm entry into a country but not the level of investment once present.

### Treaty shopping and revenue loss
- With a treaty in place, MNEs may extract income in forms that attract low or zero WHT rates (e.g., management fees, royalties) that host authorities find difficult to value.
- Treaty shopping (routing through low tax conduit countries) can turn a bilateral treaty into, effectively, a treaty with the rest of the world.
- Examples and estimates:
  - One estimate: treaties with the Netherlands led to foregone revenue for developing countries of at least EUR 770 million in 2011.
  - Rough calculations suggest U.S. tax treaties cost their non-OECD counterparts perhaps $1.6 billion in 2010 (dividends and interest only).
- Developing countries rarely cancel treaties; Mongolia and Argentina cancelled treaties since 2011, indicating heightened concern.
- Limitation of Benefit (LOB) provisions:
  - LOB provisions can restrict treaty benefits to entities meeting genuine presence tests (e.g., minimum resident ownership or active trade/business income).
  - LOBs have not been the norm outside U.S. treaties; anti-abuse provisions are spreading (India, Japan, Netherlands intentions).
  - LOB provisions are complex and not self-executing; verification can be difficult where capacity and information access are limited.
- Policy caution:
  - Countries should exercise considerable caution before entering BTTs, especially primarily capital-importing countries.
  - Reciprocal treaty benefits may be of little value except for EOI aspects, which can be achieved via TIEAs or the Convention on Mutual Administrative Assistance.
  - Key treaty provisions can be provided in domestic law; treaties are inherently discriminatory as between partners and others.
  - Some advise developing countries not to sign BTTs, or at minimum to include LOB clauses and provide for LOB in domestic law.
  - Treaties should not be entered into lightly and require well-advised attention to risks created.

### Indirect transfers of interests
- Issue: owners of assets (e.g., telecom or mineral licenses) can avoid tax in the host country by holding the asset through a chain of companies and selling the claim in a low tax jurisdiction, resulting in little or no revenue to the source country.
- This has become a macro-relevant concern in several low income countries.
- Legal response needed:
  - Many developing countries’ laws need strengthening to tax gains on indirect transfers.
  - Conceptual debate exists whether such gains ought to be taxed at all, since they may reflect accumulated and expected earnings that could be taxed elsewhere.
  - Most countries aim to tax such capital gains; non-taxation raises equity and political concerns.
  - Domestic law reforms may include ensuring ‘immovable property’ is defined clearly and broadly (including for treaty purposes) and extending taxing rights sufficiently far into multi-tiered corporate structures.
  - Many existing treaties do not make clear provision on indirect transfers or define source rights narrowly.

*Italicized source: Excerpt from chapter "SPILLOVERS IN INTERNATIONAL CORPORATE TAXATION" (section 27–42) from the provided IMF PDF.*

### 43.      Implementation, however, can be problematic—especially for developing countries.

### _050914 - 43.      Implementation, however, can be problematic—especially for developing countries.

### Implementation challenges for indirect transfers
- Difficulties arise in both discovering the transactions and collecting the tax due.
- Mechanisms to address discovery and collection include:
  - Requiring that relevant authorities be notified of any indirect disposal.
  - Sharing of tax information between countries.
  - Requiring a resident to be liable for tax on behalf of a non-resident and/or imposing non-tax penalties (such as withdrawal of a mining license) for non-payment.
- Appendix VI elaborates on rules and procedures that can be used to bring indirect transfers into tax.

### Interest deductibility
- Debt shifting through intra-group loans is a significant concern in many developing countries.
- With interest deductible under the CIT, and low or no withholding taxes, lending through low tax jurisdictions can shift profits out of high tax jurisdictions.
- Restrictions on interest deductibility have considerable potential to address avoidance through debt shifting.
- Forms of rules used:
  - Some based on debt/equity ratios.
  - Others based on net interest payments.
  - Some apply only to intracompany debt, others apply to all debt.
- Restrictions are generally limited to larger companies; banks are often specially treated.
- Several countries have adopted comprehensive earnings stripping rules that restrict deductions for interest payments exceeding some specified proportion of a company’s income.
- Such measures are relatively easy to apply and can be especially attractive for developing countries in protecting their tax base from base erosion.
- Many countries remain vulnerable due to the absence of such provisions.

### Arm’s Length Principle (ALP): rationale and criticisms
- ALP values intra-firm transactions at the prices that unrelated parties would reach; it is central to current international tax arrangements.
- Rationale: using ALP to allocate income across group members preserves neutrality between MNEs and independent operations and defines the tax base on which countries exercise primary taxing rights.
- ALP is self-assessed; taxpayers must document that transfer prices correspond to arm’s length prices; tax authorities may challenge this.
- Verifying ALP requires reviewing functions performed, assets used, and risks assumed by entities within an MNE—fact-specific and resource-intensive.

- Conceptual criticisms:
  - Coase (1937) argument that MNEs exist as a more efficient alternative to market transactions does not necessarily undercut ALP; market prices remain relevant at the margin.
  - Some MNE operations (e.g., to overcome ‘hold up’ problems) or transactions lacking a unique comparable price pose genuine challenges.
  - Guidelines include the ‘residual profit split method’ (RPS) to attribute total profit associated with a transaction among transacting entities according to relative contributions.

- Significant issues arise because intra-group transactions may exist primarily to exploit cross-border tax differentials:
  - Transfer of intangible assets within a group at an early stage to low tax jurisdictions raises severe valuation problems given absence of comparables and asymmetric information.
  - Risk transfer among affiliates (risk stripping) can convert highly taxed entities into routine operations with low profit margins; valuing such risk transfers is difficult because no comparable prices between unrelated parties exist.
  - The current methodological framework asks what independent parties would do when no comparables exist; ALP may allow re-characterizing transactions as artificial, introducing discretion, uncertainty and complexity.

### Practical difficulties and implications for developing countries
- Applying ALP imposes substantial burdens on companies (to justify) and on authorities (to verify); these burdens will increase as businesses become more knowledge-intensive and geographically diffuse.
- Developing countries face particular challenges:
  - Administrative capacity is often weak; capacity building and improving access to information will be key.
  - Many situations significant in developing countries receive little attention in existing transfer pricing guidance.
  - Large proportions of non-natural resource based multinationals in developing countries are organized as low risk, routine, light manufacturing or commercial ventures with low profit rates; transfer pricing methods often assign these operations a fixed rate of return that may not translate productivity gains into higher local profit margins.
  - Simplified schemes (safe harbors) risk perpetuating inappropriately low fixed profit rates if they do not respond to changing commercial circumstances.

### Policy agenda and transitional measures for developing countries
- A specific agenda to protect and expand corporate tax bases should include:
  - Introducing appropriate transfer pricing rules (including for domestic transactions as well as cross-border).
  - Making best use of existing ALP tools, developing concrete guidance where lacking, and repudiating perverse interpretations of the ALP (e.g., condoning risk stripping without documented productivity gains).
  - Carefully designed safe harbors that apply a fixed mark up to certain costs can play a greater role, subject to caveats about responsiveness to changing commercial circumstances.
- Transitional, simpler anti-avoidance measures that may be relied upon include:
  - Withholding taxes on payments for services.
  - Restricting allowable deductions for some types of expense (e.g., services provided by parent company headquarters).
  - Limitations on interest deductions, perhaps particularly targeting operations with low tax jurisdictions.
- A coherent agenda rests on four pillars:
  - Introducing appropriate anti-avoidance rules.
  - Developing more detailed guidance on how the ALP should be applied in concrete situations of specific concern to developing countries.
  - Improving public data availability for comparability studies.
  - Capacity building.

### Box 5 — Challenges in Arm’s Length Pricing for Developing Countries (summary)
- Geographical adjustments:
  - Absence of public data on market transactions in developing countries leads taxpayers to use comparables from advanced economies; no guidance exists on how to make geographical adjustments (market structure differences, appropriate interest rates, country risk differences).
- Location savings:
  - No generally accepted guidance on sharing location savings between host economy and headquarters; some countries have devised arbitrary approaches.
- Non-competitive business arrangements:
  - Intra-MNE arrangements may mimic non-competitive markets among independents; no guidance on how ALP should apply; developing countries are ill-placed to conduct bargaining or apply adjustments using knowledge of such market structures.
- Asymmetric approaches:
  - Some methods allocate routine profits to one party and residual profits to the other (often outside developing countries), risking omission of value-adding functions in developing countries.
- Risk transfer:
  - Current guidelines do not explain how an MNE could benefit from shifting risks within the group, so cannot help developing countries apply ALP to risk transfers.

### Balancing ALP efforts with core domestic tax strengthening
- Addressing ALP and international tax challenges should not detract from strengthening domestic tax systems.
- Prospective revenue gains from better ALP implementation should not be overstated.
- Priority remains unglamorous work such as building effective personal income tax systems many developing countries still lack.

### Dealing better with spillovers — Key Messages (verbatim)
- Current initiatives, which operate within the present international tax architecture, will not eliminate spillovers.
- Unlike many other areas of tax policy, in international taxation there is little consensus as to the practicable principles that should guide efficient tax design.
- Among alternative frameworks that have been proposed, which differ in the degree to which they depart from current arrangements:
  - Minimum taxes can in some cases be useful in protecting the revenue derived from inward investments.
  - Strengthening worldwide taxation may help limit tax competition, but would put more pressure on fragile and increasingly arbitrary notions of corporate residence.
  - ‘Formula apportionment,’ which has attracted much attention, would limit conventional transfer pricing problems, but would create new difficulties around the factors used to apportion profits across jurisdictions, and would not necessarily shift tax base towards developing countries.
  - Hybrid schemes that combine straightforward ALP methods and a formulaic allocation of profits not easily allocated by these means merit closer study, as do more radical proposals for destination –based corporate taxes.
- The obstacles to effective and inclusive action on adverse international tax spillovers are both political and conceptual, and are substantial.

*Source: SPILLOVERS IN INTERNATIONAL CORPORATE TAXATION (excerpt).*

### 58.      This section reviews proposals that have been made for alternative international tax

### 58. This section reviews proposals that have been made for alternative international tax arrangements.

### Overview
- Proposals for alternative international tax arrangements differ substantially in how far they diverge from current practice.
- A significant change in direction may be impractical in the immediate future, but considering long-run evolution can inform current choices.
- The literature has not produced guiding principles for international taxation with the force of those in other tax domains; proposed alternatives are often framed as responses to perceived difficulties or implicit judgments on fairness rather than explicit efficiency and cross-country equity goals.

### Minimum Domestic Taxation (MT)
- An MT aims to protect the CIT base by charging tax on measures less subject to manipulation than taxable income (commonly turnover, book earnings or assets), with overall tax payment being the larger of liability under MT and under standard CIT.
- Corporate MTs are already found in over 30 countries.
- Schemes differ widely and can cause complexity and distortions:
  - A charge on net assets can reinforce debt bias.
  - A charge on gross assets can introduce distortions between firms with differing capital structures.
- MTs have proved useful and practicable in protecting domestic tax bases and might be used to combat aggressive international tax planning related to inward investment.
- MTs could address, in a simplified aggregate way, the need for increased limitations on deductibility of certain cross-border payments flowing from developing countries.

### Strengthening Elements of Worldwide Taxation
- Recent trend: movement away from worldwide and towards territorial systems.
  - Seventeen OECD countries have moved significantly towards territoriality since the 1990s.
  - Territorial countries now export about twice as much capital as do countries that tax on a worldwide basis.
- The U.S. is now the only large OECD country applying a worldwide system; many large emerging markets, including the BRICs, do so.
- Nominally territorial regimes differ widely (exemption of dividends from abroad is the hallmark; some also exempt capital gains abroad; differences in strength of CFC provisions).
- Reasons for movement away from worldwide taxation include:
  - Perception that firms resident in worldwide-tax countries face competitive disadvantage abroad (linked to capital import neutrality).
  - Revenue risk from inversion (moving tax residence of a company); legislation can discourage this, though views differ on effectiveness.
  - Foreign tax credit arrangements can create opportunities for base erosion.
  - The apparent disincentive for earnings repatriation created by deferral; one estimate cited is "$1.4 trillion" retained abroad by U.S. companies.
  - Practical complexities: perhaps 40 percent of the compliance costs of U.S. MNEs relate to international aspects; the average cost for Fortune 500 companies was around USD 1 million (dated study).
- Territoriality can amplify profit shifting and intensify tax competition, a particular concern for developing countries whose CIT bases may already be weakened by incentives.
  - Empirical evidence: foreign acquisitions by U.K. and Japanese corporations increased following their 2009 shifts to exempting foreign business profits; U.K. outward FDI became more sensitive to source country CIT rates.
- Spillovers would likely be less under worldwide taxation without deferral—or territoriality with tough CFC rules—though such systems put increased pressure on notions of residence (practical issues around inversion and conceptual issues about where activity is located).

### Formula Apportionment (FA)
- FA is long-established at subnational level and was proposed for the EU as a 'Common Consolidated Corporate Tax Base' (CCCTB).
- FA treats a multijurisdictional enterprise's tax base on a unitary, consolidated basis and allocates this total across jurisdictions by formula (combinations of shares of sales, assets, payroll and/or employees).
- Primary appeal: removes the need to value intra-group transactions, reducing direct opportunities to shift profits via transfer pricing.
- FA holds the prospect of aligning tax payments more closely with economic fundamentals by allocating base according to proxies for activity.
- FA may be attractive for developing countries due to their vulnerability to profit shifting given capacity limitations.
- Major issues with FA:
  - Cross-country allocation of revenue is highly sensitive to choice of apportionment factors; early CCCTB work showed effects could be very large for some countries: up to 50 percent of current CIT revenue.
  - Advanced economies generally gain tax base whichever factor is used; conduit countries lose; emerging and developing economies gain base only if heavy weight is placed on employment (illustrated in Figure 4 based on reallocation of U.S. MNE taxable income using sales, assets, payroll, and employees).
  - Precise definitions matter (e.g., sales measured by destination vs origin, inclusion or exclusion of intra-group sales); example: using sales by origin including intra-group sales may be a generous upper bound for lower income countries.
  - Valuation and avoidance issues remain: FA would shift firms' incentives toward manipulating the factors in the apportionment rule (e.g., routing sales through low-tax jurisdictions if destination-based sales are used; hiring low-paid workers in low-tax jurisdictions if employment is weighted).
  - Strategic tax-setting concerns: countries have incentives under FA to attract factors given high weight in the formula, potentially intensifying tax competition—possibly more than under territorial taxation.
  - Practical complications: definitions of corporate group, necessity of traditional allocation forms if FA applies only up to a 'water's edge', incentives to merge or spin off.
- Prospects for international FA adoption seem remote given the legal and institutional infrastructure around current arrangements and resistance (for example, within the EU to CCCTB).

### Formulary Profit Split (FPS)
- FPS is a hybrid combining formulaic and ALP-based methods: calculate tax base on a unitary basis, apply ALP where straightforward (transactions with third parties), and use an FA-like formula to allocate the 'residual' profit remaining after arm’s-length transactions.
- FPS builds on strengths of present arrangements while remedying some defects.
- Properties and implications:
  - Choice of apportionment factor(s) for allocating residual profit matters (as under FA).
  - Potential problems: a group with an aggregate loss could nonetheless face a strictly positive tax liability.
  - Preliminary analysis suggests spillovers may be weaker under FPS than under either separate accounting or FA.

### Destination-based corporate taxation
- Radical proposal: shift corporate taxation to a destination basis—exclude exports from the base and provide no deduction for imports.
- In simplest form, tax levied on a cash flow basis: no deduction for interest or other financial costs; all investment spending immediately deductible.
- Equivalent, broadly, to a VAT plus a labor subsidy at the same rate (since value added = cash flow profit + wages).
- Unresolved issues include treatment of services and consistency with the WTO prohibition on direct tax equivalents of export subsidies.
- Strong appeal: like the VAT, cross-country spillovers would be expected to be minimal (no tax benefit from under-pricing sales from a high tax country to a low tax one because exports attract no tax and imports attract no relief).
- Effect of moving to destination-based corporate tax: shift the tax base towards countries where sales are concentrated—potentially adverse for developing countries as with some sales-based FA variants.
- The approach raises deeper issues concerning the role of the CIT that the current debate has largely set aside.

*Source: Excerpt from section 58–74 of the IMF chapter "Spillovers in International Corporate Taxation".*

### 75.      Substantial coordination to address spillovers in international taxation has proved

### 75.      Substantial coordination to address spillovers in international taxation has proved 

### Coordination challenges and political economy
- Substantial coordination to address spillovers in international taxation has proved very difficult to achieve.
- Even if spillovers cause collective harm, identifying and securing agreement on appropriate measures of coordination is likely to be highly problematic.
- Countries’ interests diverge widely, most obviously between low and high tax countries, and in other respects (e.g., capital exporting countries vs. resource-rich countries).

### Potential mutually advantageous coordination
- Minimum effective tax rates can be beneficial even for low tax countries initially below the minimum, since an enforced increase in their own tax rates may lead to an induced increase in tax rates elsewhere from which they can benefit.
- Diversity of interests makes securing agreement on coordination measures harder.

### Institutional framework gaps
- There is no institutional framework comparable to that regulating international trade.
- Bilateral tax treaties (BTTs) provide an important structure but touch only a subset of corporate tax design issues.
- Proposals for a ‘World Tax Organization’ face very remote prospects—partly reflecting the absence of guiding principles with the force of arguments for free trade.
- The OECD has taken an inclusive approach to the BEPS project and plays a powerful role; long-standing UN expertise on treaty and transfer pricing and participation of other international and regional organizations may help move toward a more coherent framework.

### Definitional and analytical issues: “harmful tax practices”
- The notion of ‘harmful tax practices’ remains ill defined.
- Attempts to identify particular sources of tax spillover as being distinctively ‘harmful’ have largely focused on preferential regimes.
- Aggressive competition for very mobile parts of the tax base may be preferable to less intense competition over a wider base; practical resolution remains unresolved.
- Empirical hint: for the same data set used in the spillover analysis, ‘havens’ tend to have higher CIT rates, conditional on their size (GDP or population) and other features, than do non-havens (described as “very tentative evidence”).

### Risks of partial or piecemeal coordination
- Coordination among only a subset of countries (e.g., regional) may be more practicable but can make participating countries more vulnerable to pressures from lower tax jurisdictions elsewhere.
  - IMF supports regional efforts but highlights potential benefit from negotiating with leading non-participants.
- Coordinating only on a subset of instruments can worsen distortions by putting more pressure on those not coordinated.
  - Example: Making treaty abuse more difficult might lead to more aggressive use of transfer pricing or intra-group borrowing.
- Important to view elements of the BEPS Action Plan as a package; avoid a piecemeal approach.

### Appendix I — Consultations: stakeholders and key issues raised
- Consultation process included:
  - Civil society discussions (including a panel at the 2014 IMF-World Bank Spring Meetings).
  - A conference call with international business (six major corporations) organized through the Confederation of British Industry (CBI).
  - Meetings with academic economists and lawyers.
  - Participation in OECD consultations with developing countries (regional event in Colombia and global meeting in Paris).
  - Many submissions via an online invitation on the IMF’s external website.
- Civil society views and concerns:
  - International inequities in the corporate tax take, particularly affecting developing countries with capacity constraints.
  - Misalignment of taxation and value creation.
  - ‘Non-inclusive’ international processes in standard-setting.
  - Tax treaties pose significant risks to developing countries (treaty shopping, lowering/abolition of withholding taxes); benefits of treaties for investment are doubtful.
  - Tax havens and profit shifting cause significant revenue losses; call for more transparency and scrutiny of transactions lacking economic substance.
  - ALP (arm’s length principle) may have reached limits; need for fundamental review of allocation rules; simplified approaches (fixed margins, profit split methods, cost caps) may help developing countries.
  - Tax competition seen as harmful, especially via tax incentives (e.g., tax holidays) with doubtful benefits for developing countries.
- Civil society proposed steps:
  - Systematic analysis of spillovers to guide policy action and ensure coherence.
  - Limitation of interest deductions in broader, more effective ways.
  - Better data to quantify spillovers.
  - Further research on unitary taxation with formula apportionment, a multilateral treaty approach, and global harmonization of accounting standards; some urged action rather than only research.
  - Greater transparency, including publicly disclosed country-by-country reporting by MNEs and automatic exchange of information—recognizing capacity constraints for developing countries.
- Business sector points:
  - Risk of conflict over tax take, double taxation, increased tax uncertainty, and rising litigation from new rules.
  - Country-by-country reporting could significantly raise compliance burden for MNEs.
  - Unitary taxation with formula apportionment judged to have little merit internationally due to impossibility of agreement on formula.
  - Residual profit split risks increased uncertainty as governments negotiate tax take.
  - Tax incentives are not a major factor in location choice; discretionary incentives can deter investment by creating uncertainty.
  - Digital economy transactions should be subject to common rules based on the same principles as elsewhere, not special treatment.
- Developing country representatives highlighted:
  - Difficulties tackling specific tax planning cases.
  - Problems with service charges by headquarters, assignment of low value-added functions to subsidiaries.
  - Need to revise allocation of taxing rights across countries, not just tackle avoidance.
  - Harm from tax competition, especially proliferation of incentives.
- Other individual submissions:
  - Multi-lateral tax treaties will be necessary medium to long term.
  - Tax competition is a major problem.
  - Strengthened CFC regimes, restrictions on interest deductibility, and increased/invigourated withholding taxes combined would help reduce avoidance and base erosion.
  - Arm’s length method should be adjusted to give less deference to contractual arrangements.
  - Formulary apportionment offers a reasonable way forward but will require considerable policy and administrative design work over years; IMF participation requested.
  - Public distrust rooted in belief that existing system does not fairly split tax base across countries; technology has shifted allocation of taxing rights.

### Appendix II — Taxation and the ‘Digital Economy’ (digitization of the economy)
- Terminology: preference for ‘digitization of the economy’ as tax issues are generic across business activity, not confined to purely digital sectors.
- Collision of new business models and increased value from intangibles (intellectual property) with older rules relying on physical presence has created substantial gaps in the taxing model.
- Historical view:
  - Until recently, digitization problems were seen as most important for indirect (consumption) taxation; OECD Technical Advisory Group (about 10 years ago) viewed existing income tax concepts as sufficient for neutrality across e-commerce and physical transactions.
  - In the late 1990s: consumption taxation problems seen as “urgent but not fundamental,” corporate income taxation problems as “fundamental but not urgent.”
  - Consumption tax issues have been more fully addressed; corporate income tax issues have become urgent, complex, and controversial.
- Indirect taxation issues:
  - Applying VAT/sales tax to online ordering of physical goods raises practical collection problems when goods are imported directly by final consumers.
  - Place of taxation typically defined as ‘place of supply’; for non-physical digital products, place of supply must be defined.
  - New EU rules effective January 1, 2015: treat place of supply for all purchased electronic services as the country where the customer is located.
  - Core indirect tax issues are practical (administration and enforcement), not conceptual.
- Direct taxation issues and core conceptual problems:
  - Locating the ‘source’ of corporate profits is challenged by digitization.
  - Key problems:
    - Location of ‘intangible’ factors of production: intellectual property can be strategically located in low tax jurisdictions, with payments (service fees, royalties) shifting value.
    - Sales alone do not create a basis for CIT in a jurisdiction under standard architecture; need to determine where enterprise has ‘economic presence’ absent physical presence.
    - Advances in technology enable “scale without mass,” facilitating economic activity with little or no employees present.
  - Debate over whether the country where consumers are located should capture a portion of the company’s tax base; possible rule changes include:
    - Creating a ‘virtual permanent establishment’ in the customer country.
    - Lowering the threshold for what activities give rise to a permanent establishment (PE).
  - Wide agreement that rules should apply to all enterprises irrespective of degree of digitalization; if sales alone trigger CIT liability, the change would be profound.
  - Special case: unpaid user participation (e.g., “clickers”) may create value for the enterprise—raises questions whether corporate tax base or VAT obligations should be allocated accordingly.

*Source: IMF content unit "_050914 - 75.      Substantial coordination to address spillovers in international taxation has proved"*

### Appendix III. Estimating Spillovers from International Corporate Taxation

### Appendix III. Estimating Spillovers from International Corporate Taxation

### Empirical strategy
- Model estimated (equation (1)) includes:
  - Dependent variable: CIT base B_it (implicit corporate tax base; ratio of CIT revenue to GDP divided by statutory CIT rate).
  - Own statutory CIT rate τ_it (in percent).
  - Weighted average of foreign statutory CIT rates Σ_wj τ_jt with three weighting schemes considered:
    - GDP-weighted across other countries (weights ω_j = country’s share of global GDP).
    - Simple unweighted average across all other countries.
    - Simple unweighted average across jurisdictions classified as ‘tax havens.’
  - Lagged dependent variable to allow sluggish response of tax base.
  - Control vector X_it: log GDP per capita, agriculture share of value-added, trade openness (non-resource exports + imports relative to GDP), inflation, oil rents; plus country and time fixed effects.
- Interpretation of coefficients:
  - Short-run own-rate marginal effect: β (expected negative).
  - Long-run own-rate effect: θ(β) ≡ β/(1−β) as presented (text denotes θ(β) ≡ β(1/(1−β))).
  - Short-run spillover from others’ rates: γ (expected positive).
  - Long-run spillover: θ(γ) ≡ γ/(1−β) (text denotes θ(γ) ≡ γ(1/(1−β))).
- Channels considered:
  - Real investment channel: weights by GDP plausible because capital flows respond to relative size/technology; spillovers larger from large advanced economies.
  - Profit-shifting channel: gains from shifting driven by statutory rate differences and ease of shifting; havens may matter even if small.
- Strategy to estimate strategic spillovers (equation (3)):
  - Regress τ_it on weighted average τ_jt of others using same three weighting schemes to capture countries’ strategic responses.
- Estimation method:
  - System-GMM (Blundell and Bond, 1998) to address endogeneity of lagged dependent variable and possibly weighted foreign rates.
  - Instruments: first lag of differences in CIT base (collapsed) for levels equation and second lags of levels in differenced equation (see notes to tables).

### Data
- Sample: unbalanced panel of 173 countries, period 1980-2013.
- CIT rate data: full country coverage (unbalanced over time).
- Implicit corporate tax base data available for 121 countries (CIT revenue unavailable for others).
- Total observations:
  - For CIT rates (strategic spillovers): 3,037 observations.
  - For CIT base (base spillovers): 2,161 observations.
- Resource-rich countries excluded.
- Controls: log GDP per capita, agriculture share, trade openness, inflation, oil rents; year dummies included.
- Classification of ‘havens’ follows Gravelle (2013) list (as indicated in Appendix Table 4).
- Estimation diagnostics: Arellano and Bond tests for serial correlation (M1 present, M2 absent); Hansen statistics reported to check instrument proliferation.

### Key estimation results — Base spillovers (Appendix Table 1)
- Own-rate short-run marginal effects (CIT rate i):
  - Column (1) GDP-weighted: -0.1747*** (standard error 0.0552).
  - Column (2) Simple average: -0.1494*** (0.0514).
  - Column (3) Haven-weighted: -0.0839** (0.0439).
- Long-run own-rate effects θ(β) (reported):
  - Column (1): -0.5976* (0.3472).
  - Column (2): -0.6881*** (0.2641).
  - Column (3): -0.3154** (0.1396).
- Short-run spillovers (CIT rate j):
  - GDP-weighted (column (1)): 0.3211** (0.1693). Interpretation: a one percentage-point reduction in the GDP-weighted world average CIT rate (excluding own rate) reduces a typical country’s CIT base in the short run by 0.3 percent of GDP.
  - Simple average (column (2)): 0.1220* (0.0725).
  - Haven-weighted (column (3)): 0.2973*** (0.0971).
- Long-run spillovers θ(γ) (reported):
  - Column (1) GDP-weighted: 1.0981* (0.9341).
  - Column (2) Simple average: 0.5622* (0.3441).
  - Column (3) Haven-weighted: 1.116** (0.5146).
- Other notable coefficients (column (1) example):
  - CIT Base, lagged: 0.7075*** (0.1452).
  - Trade openness: 0.0665*** (0.0248).
- Diagnostics (column (1)):
  - M1 (p value) 0.000; M2 (p value) 0.303; Hansen (p value) 0.710.
  - Observations 1547; Number of instruments 73; Number of countries 102.
- Authors’ interpretation:
  - Own-rate effects are significant and large: short-run marginal coefficient 0.17 implies a 1 percentage-point increase in a country’s CIT rate reduces its CIT base by 0.17 percent of GDP; long-run effect θ(β) suggests an ultimate reduction of around 0.56 percent of GDP (text example).
  - Spillovers are economically sizable: long-run tax-base spillovers between 0.56 and 1.12 percent of GDP depending on weights, with both GDP-weighted and haven-weighted estimates at the higher end.
  - Evidence points to both real investment and profit-shifting channels being significant, with a distinct haven effect even given data limitations.

### Heterogeneity and time variation (Appendix Table 2)
- Estimates using haven-weighted foreign rates by income group:
  - OECD sample (column (1)):
    - CIT Base, lagged: 0.6041*** (0.1164).
    - CIT rate i: -0.0747* (0.0421).
    - CIT rate j, weighted tax havens: 0.1051* (0.0620).
    - Long-run spillover θ(Υ): 0.2657* (0.1689).
    - Long-run own-rate θ(β): -0.1888** (0.0935).
  - Non-OECD sample (column (2)):
    - CIT rate i: -0.1918*** (0.0647).
    - CIT rate j, weighted tax havens: 0.2364** (0.1374).
    - θ(Υ): 0.4998* (0.3140).
    - θ(β): -0.4056*** (0.1140).
  - Low and Middle Income sample (column (3)):
    - CIT rate i: -0.2348*** (0.0844).
    - CIT rate j, weighted tax havens: 0.5520** (0.2857).
    - θ(Υ): 0.9258** (0.4966).
    - θ(β): -0.3938*** (0.0990).
- Time interaction (pre-1996 vs 1996-2013) (column “Pre- versus post 1996 period”):
  - CIT rate j, haven-weighted x Dummy (1996-2013): 0.2163** (0.1047).
  - Interpretation: spillovers from havens increased over time; spillovers significant only in 1996-2013 period.
- Authors’ interpretation:
  - Spillovers are substantially larger for non-OECD and lower income groups than for OECD countries.
  - OECD long-run marginal impact is smaller (e.g., long-run marginal impact 0.27 versus 1.1 in Appendix Table 1 context).
  - Spillovers from havens became more important in the latter period (1996-2013).

### Strategic spillovers (Appendix Table 3)
- Regression results for countries’ statutory CIT rate responses to others’ rates:
  - GDP-weighted foreign rate (column (1)): coefficient 1.2908*** (0.5406).
    - Interpretation in text: a one point CIT rate reduction in all other countries induces a 0.5 point rate cut; GDP-weighted coefficient larger and more significant, indicating larger countries’ policies have stronger effect.
  - Simple average (column (2)): 0.4649** (0.2197).
  - Haven-weighted (column (3)): 0.6725** (0.4036).
- Diagnostics (column (1)): M1 p value 0.020; M2 p value 0.469; Hansen p value 0.650; Observations 2401; Number of instruments 44; Number of countries 136.
- Authors’ interpretation:
  - Evidence of strategic complementarity in tax-setting: countries respond to tax rate reductions elsewhere by cutting their own tax rate.
  - Responses somewhat larger to rates in ‘haven’ countries, but GDP-weighted average has larger and more significant effect, implying policy influence of larger countries.

### Limitations and caveats (as reported)
- Measurement and data limitations:
  - Cross-border real investment decisions are driven by average effective tax rates (AETR) that reflect depreciation and allowances; AETR data not available consistently for developing countries in sample.
  - Strong correlation between AETRs and statutory rates provides some comfort, but measurement error remains possible; instruments used to mitigate this.
  - Tax havens’ attractiveness derives largely from special regimes and arrangements (data unavailable); identification of haven effects depends on an untested correlation between movements in their statutory rates and special regimes.
  - Results presented are indicative given data constraints.
- Sample restrictions:
  - Resource-rich countries excluded due to distinct drivers of CIT base, state-owned enterprises, and rent-based taxes.

*Source: Appendix III. Estimating Spillovers from International Corporate Taxation (IMF).*

### Appendix Table 5. Descriptive Statistics

### Appendix Table 5. Descriptive Statistics

### Descriptive statistics — key variables and sample sizes
- Statutory CIT Rate, in percent  
  - Observations: 3037  
  - Mean: 32.15  
  - Maximum: 61.80  
  - Minimum: 0.00  
  - Std. Dev.: 10.85
- CIT Rate, Simple Average, in percent  
  - Observations: 3037  
  - Mean: 28.40  
  - Maximum: 36.34  
  - Minimum: 20.04  
  - Std. Dev.: 4.74
- CIT Rate, GDP Weighted, in percent  
  - Observations: 3037  
  - Mean: 35.79  
  - Maximum: 42.62  
  - Minimum: 27.21  
  - Std. Dev.: 3.73
- CIT Rate, Tax Havens, in percent  
  - Observations: 3037  
  - Mean: 17.09  
  - Maximum: 24.46  
  - Minimum: 11.08  
  - Std. Dev.: 3.55
- CIT Revenue, percent of GDP  
  - Observations: 2161  
  - Mean: 2.64  
  - Maximum: 13.37  
  - Minimum: 0.00  
  - Std. Dev.: 5.45
- CIT Base, percent of GDP  
  - Observations: 2161  
  - Mean: 8.59  
  - Maximum: 29.99  
  - Minimum: 0.00  
  - Std. Dev.: 5.45

- Agriculture Value-added, percent of GDP  
  - Observations: 1817  
  - Mean: 11.71  
  - Maximum: 64.05  
  - Minimum: 0.04  
  - Std. Dev.: 10.80
- GDP per capita, 2000 USD  
  - Observations: 1970  
  - Mean: 13349  
  - Maximum: 87716  
  - Minimum: 126  
  - Std. Dev.: 15353
- Trade Openness, percent of GDP  
  - Observations: 1974  
  - Mean: 79.04  
  - Maximum: 436.95  
  - Minimum: 6.32  
  - Std. Dev.: 45.66
- Inflation, in percent  
  - Observations: 1925  
  - Mean: 36.46  
  - Maximum: 11749.64  
  - Minimum: -4.47  
  - Std. Dev.: 368.39

---

### Appendix IV. Using Gross Operating Surplus to Explore Spillovers

### Framework and data
- Definition: CIT-efficiency in country i (ܧ௜) = actual CIT revenue (ܴ௜) / (standard CIT rate (߬௜) × reference tax base (ܩ௜)). (Equation (1))
- Reference tax base used: Gross Operating Surplus (GOS) of corporations (UN Statistics Division), available for 93 countries up to 33 years.
- GOS: value added by corporations minus compensation of employees; broadly analogous to EBITDA; broader than standard CIT base (depreciation, interest not subtracted).
- Sample for GOS-tax analysis: 59 countries appear in both tax and GOS datasets; after dropping resource-rich countries, final sample contains 840 observations, 51 countries, maximum 33 years (1980-2012).
- Expectation: CIT-efficiency relative to GOS typically less than unity because GOS > standard CIT base.

### Summary statistics for CIT-efficiency (sample)
- Mean CIT-efficiency: 43 percent  
- Median: slightly lower than mean (not numerically specified)  
- Range: 7 percent (China in 1995) to 338 percent (Cyprus in 2008)  
- Std. Dev.: 29  
- Group differences: OECD and Eastern Europe and Central Asia averages exceed 40 percent; Sub-Saharan Africa, Middle East and Northern Africa, and Asia and Pacific are noticeably lower. Cyprus average exceeds 100 percent; high also in Ireland and Luxembourg; lowest in Africa.
- Time trend: upward trend in ܧ௜ over time, in both OECD and non-OECD countries (Appendix Figure 1), reflecting global trend towards lower CIT rates combined with stable or rising CIT revenue.

### Signs of profit shifting?
- Hypothesis: Profit shifting determined by differences in statutory CIT rates; high CIT rate → outward profit shifting → erosion of tax base without corresponding reduction in GOS; low CIT rate → inward profit shifting → expansion of implicit CIT base. This implies a negative correlation between ܧ௜ and ߬௜.
- Empirical approach: Regress ܧ௜ on ߬௜ controlling for time and country fixed effects.
- Main regression results (Appendix Table 6):
  - Linear specification (column 1):  
    - Constant: 85.1 (t-value (8.3))  
    - CIT rate coefficient: −1.2 (t-value (−9.4))  
    - Adj R2: 0.73  
    - Number observations: 840
  - Non-linear specification (column 2):  
    - Constant: 153.1 (t-value (3.3))  
    - CIT rate coefficient: −5.5 (t-value (−6.8))  
    - CIT rate squared coefficient: 0.06 (t-value (5.9))  
    - Adj R2: 0.77  
    - Number observations: 840
  - OECD linear (column 3):  
    - Constant: 60.7 (t-value (6.9))  
    - CIT rate coefficient: -0.7 (t-value (−7.4))  
    - Adj R2: 0.69  
    - Number observations: 558
  - Non-OECD linear (column 4):  
    - Constant: 136.6 (t-value (3.9))  
    - CIT rate coefficient: −2.4 (t-value (−7.4))  
    - Adj R2: 0.80  
    - Number observations: 282
  - Notes: t-values in parentheses, heteroskedasticity-robust standard errors; all regressions include time and country fixed effects.
- Interpretation:
  - Column (1) implies a country with a CIT rate of 10 percent would have average CIT-efficiency 73 percent (85.1 + (−1.2 × 10) = 73.1).
  - Column (2) suggests convex relationship: predicted efficiency 104 percent at CIT rate of 10 percent (using reported coefficients).
  - Tax rates have larger impact on CIT-efficiency in non-OECD countries (coefficient magnitude more than three times OECD).
  - Overall: strong negative relationship between ܧ௜ and ߬௜, suggestive of profit shifting, particularly marked for developing countries.

### Revenue implications — simulation approach
- Construct revenue without profit shifting (ܴ௜∗) as: product of country CIT rate and GOS, multiplied by average CIT-efficiency (ܧത). (Equation (2))  
  - ܧത = weighted average of countries’ CIT-efficiencies, weights by GOS: ܧത = ∑ ߱௜ ܧ௜, with ߱௜ = GOS_i / ∑ GOS_j.
- Simulated revenue change from profit shifting: Δ௜ܴ = ܴ௜∗ − ܴ௜ = ߬௜ ܩ௜ (ܧത − ܧ௜) / (scaling as in Equation (3) presentation). (Equation (3))
- Alternative expression (Equation (4)) shows Δ௜ positive iff country i’s share of world implicit CIT base exceeds its share of world GOS.
- Calculations use data between 2001 and 2012.
- Empirical facts used:
  - GOS-weighted average CIT-efficiency (2001–2012): 43 percent.
  - Appendix Figure 2 ranks average CIT-efficiency per country over 2001–2012; Cyprus reported CIT efficiency for that period is 213 percent (figure note).

### Qualifications and limitations
- Key limitations of the calculations:
  - They attribute all cross-country variation in CIT-efficiency to profit shifting (strong assumption).
  - Variation in ܧ௜ may reflect differences in tax incentives, exemptions, compliance and enforcement, or other structural factors.
  - Approach captures only profit shifting between countries in the sample; excludes profit shifting to countries not in sample (e.g., havens), thereby potentially understating revenue losses.
- Decomposition of actual CIT revenue into components (Equation (5)):
  - ܴ௜ ߬௜ = ܩ௜ (ܣ௜ × ܥ௜ × ܪ௜) — where ܣ௜ = profit shifting within sample, ܥ௜ = profit shifting vis-à-vis countries not in sample, ܪ௜ = exemptions/incentives/compliance gaps.
- Derived result (Equation (7)) shows Δ௜ equals true revenue effect of profit shifting only if last term in brackets is zero, which requires:
  - (i) base effects due to exemptions, incentives and compliance gaps proportional to GOS share for all countries; and
  - (ii) no profit shifting from sample countries to rest of world.
- If these conditions fail, Δ௜ may overestimate gains from profit shifting (or underestimate losses).

---

### Appendix V. Tax Treaties and Withholding Tax Rates—Evidence

### Investment and tax treaties — empirical evidence
- Cross-country studies of BTTs on FDI: mixed results.
  - Four studies find no or negative impact (Blonigen and Davies, 2004 and 2005; Egger and others, 2006; Louis and Rousslang, 2008) — largely OECD-focused.
  - Millimet and Kumas (2007): positive impact for countries with low initial FDI, negative for high initial FDI.
  - Neumayer (2007): positive impact on U.S. outbound FDI only for middle-income countries.
  - Di Giovanni (2005): positive impact on mergers and acquisitions (155-country dataset).
  - Barthel and others (2010): positive impact on FDI stocks, particularly for middle-income countries (105-country dataset).
- Firm-level studies reduce reverse causality concerns:
  - Davies and others (2009), Swedish firm-level: treaties raise probability of entry by 17 percent relative to sample average, but little impact on investment conditional on presence.
  - Egger and Merlo (2011), German firm-level: treaty increases probability of entry by 58 percent relative to sample mean (controlling for host country tax rate).
- Treaties contain both incentives for FDI (reduced WHTs, clarity) and possible disincentives (commitment to information exchange, EOI); aggregating treaty presence may confound effects.
  - Blonigen and others (2011), U.S. firm-level: interacting treaty dummy with industry vulnerability to EOI finds treaty increases average foreign affiliate sales by 45 percent; interacted EOI term reduces them by 28 percent. Presence of BTT roughly doubles entry rate of new foreign affiliates when netting effects.
- Evidence on tax sparing provisions:
  - Tax sparing provisions that preserve host-country tax incentives by crediting tax spared can encourage FDI.
  - Hines (1998) and Azémar and Delios (2007): tax sparing positively impacts Japanese outward FDI.
  - Davies and others (2009), Swedish firm-level: tax sparing increases affiliate production, sales and exports (but not entry).
  - Trend towards territorial taxation reduces relevance of tax sparing, but evidence shows what the trend implies.

### Withholding taxes (WHTs) and FDI — empirical findings
- Studies on WHTs find mixed evidence:
  - Egger and others (2006): outbound FDI of OECD countries negatively related to source country dividend WHTs, controlling for CIT and depreciation allowances.
  - Egger and others (2009): bilateral cross-border tax rates incorporating WHTs have negative effect on FDI, controlling for home and host country CIT rates (which have positive influence).
  - Barrios and others (2012): for European MNEs, overall cross-border corporate tax regime influences subsidiary location, but dividend WHTs exert no independent influence when separated from home and host CIT effects.
  - Huizinga and others (2008): overall cross-border tax regime influences MNE financing (higher taxation of dividends relative to interest correlates with greater debt share), but interest and dividend WHTs have no independent effect on financing when isolated from CIT effects.
  - Arena and Roper (2010): lower ratio of interest to dividend WHTs results in higher leverage ratio for foreign subsidiaries.
- Interpretation: importance of WHTs remains unclear; they often shift revenue from source to residence without lowering overall tax rate.

### Trends in withholding tax rates
- Both domestic-law and treaty WHT rates have trended downward over past decades (Appendix Table 7 referenced).
- Since early 1980s, tax treaty WHT rates on portfolio dividends, interest and royalties have on average fallen by about 30 percent; average rate on participating dividends has fallen almost 50 percent.
- Key drivers: EU directives (2003/123/EC and 2003/49/EC) eliminating intra-EU taxes on parent-subsidiary dividends and reducing WHTs on interest and royalty payments to a maximum of 10 percent.

---

*Appendix Table 5; Appendix IV; Appendix V — SPILLOVERS IN INTERNATIONAL CORPORATE TAXATION, INTERNATIONAL MONETARY FUND*

### Appendix Table 7. The Evolution of WHT Rates

### Appendix Table 7. The Evolution of WHT Rates

### Average Domestic Law WHT Rates (Year Comparison)
- Year: 2000
  - Dividend: 15.2
  - Participating Dividend: 14.1
  - Interest: 15.1
  - Royalty: 17.2
  - No. Countries: 107
- Year: 2013
  - Dividend: 13.1
  - Participating Dividend: 10.7
  - Interest: 14.0
  - Royalty: 15.7
  - No. Countries: 179

### Average Treaty WHT Rates (by Treaty Age)
- Treaty Age: 0-5 years
  - Dividend: 10.1
  - Participating Dividend: 5.6
  - Interest: 7.9
  - Royalty: 8
  - No. Treaties: 533
- Treaty Age: 5-10 years
  - Dividend: 11.7
  - Participating Dividend: 6.9
  - Interest: 9.1
  - Royalty: 9.3
  - No. Treaties: 635
- Treaty Age: 10-20 years
  - Dividend: 12.4
  - Participating Dividend: 8.1
  - Interest: 9.6
  - Royalty: 9.8
  - No. Treaties: 1554
- Treaty Age: 20-30 years
  - Dividend: 14.2
  - Participating Dividend: 11.2
  - Interest: 10.8
  - Royalty: 11.5
  - No. Treaties: 529
- Treaty Age: >30 years
  - Dividend: 14.6
  - Participating Dividend: 11.1
  - Interest: 11.7
  - Royalty: 11.3
  - No. Treaties: 328

*Source: International Bureau of Fiscal Documentation database, 2011.*

### References

### References

### Corporate tax competition, tax policy design, and coordination
- Altshuler, Rosanne, and Harry Grubert, 2009, “Formula Apportionment? Is it better than the current system and are there better alternatives?” National Tax Journal, Vol. 63 (December), pp. 1145–84.  
- Altshuler, Rosanne, and Harry Grubert, 2008, “Corporate Taxes in the World Economy,” in Fundamental Tax Reform: Issues, Choices, and Implications, ed. by John W. Diamond and George R. Zodrow (Cambridge, MIT Press).  
- Altshuler, Rosanne, and Harry Grubert, 2006, “Governments and Multinational Corporations in the Race to the Bottom,” Tax Notes International, Vol. 41 (February), pp. 459–74.  
- Devereux, Michael and Rachel Griffith, 1998, “Taxes and the Location of Production: Evidence from a Panel of U.S. Multinationals,” Journal of Public Economics, Vol. 68 (June), pp. 335–67.  
- Devereux, Michael, Ben Lockwood, and Michaela Redoano, 2008, “Do Countries Compete Over Corporate Tax Rates?” Journal of Public Economics, Vol. 92 (June), pp. 1210–35.  
- Devereux, Michael, and Simon Loretz, 2008, “The Effects of EU Formula Apportionment on Corporate Tax Revenues,” Fiscal Studies, Vol. 29, pp. 1–33.  
- Keen, Michael, and Kai Konrad, 2013, “The Theory of International Tax Competition and Coordination,” in Handbook of Public Economics, ed. by Alan Auerbach, Raj Chetty, Martin Feldstein, and Emmanuel Saez, Vol. 5 (June), pp. 257–328 (Amsterdam: North Holland).  
- Keen, Michael, and David Wildasin, 2004, “Pareto-efficient International Taxation,” American Economic Review, Vol. 94 (March), pp. 259–75.  
- Konrad, Kai. A., and Guttorm Schjelderup, 1999, “Fortress Building in Global Tax Competition,” Journal of Urban Economics, Vol. 46 (July), pp. 156–67.  
- Sørensen, Peter Birch, 2004, International tax coordination: regionalism versus globalism, Journal of Public Economics, Vol. 88, pp. 1187–1214.  
- Sinn, Hans-Werner, 1985, “Why Taxes Matter: Reagan’s Accelerated Cost Recovery System and the U.S. Trade Deficit,” Economic Policy, pp. 239–50.  
- Parry, Ian, 2003, “How Large are the Welfare Costs of Tax Competition?” Journal of Urban Economics, Vol. 54 (July), pp. 39–60.  
- Bettendorf, Leon, Michael Devereux, Albert van der Horst, Simon Loretz and Ruud A. de Mooij, Corporate Tax Harmonization in the EU, 2010, Economic Policy, Vol. 25, pp. 537–90.  
- Klemm, Alexander, and Stefan van Parys, 2012, “Empirical Evidence on the Effects of Tax Incentives,” International Tax and Public Finance, Vol. 19 (June), pp. 393–423.  
- Keen, Michael, 2001, “Preferential Regimes can make Tax Competition Less Harmful,” National Tax Journal, Vol. 54 (December), pp. 757–62.  
- De Mooij, Ruud A., 2012, “Tax Biases to Debt Finance: Assessing the Problem, Finding Solutions,” Fiscal Studies, Vol. 33 (December), pp 489–512.  
- De Mooij, Ruud A., and Sjef Ederveen, 2008, “Corporate Tax Elasticities: A Reader’s Guide to Empirical Findings,” Oxford Review of Economic Policy, Vol. 24 (4), pp. 680–97.  
- De Mooij, Ruud A., 2003, “Taxation and Foreign Direct Investment: A Synthesis of Empirical Research,” International Tax and Public Finance, Vol. 10 (November), pp. 673–93.  
- De Mooij, Ruud A., 2011, “The Tax Elasticity of Corporate Debt: A Synthesis of Size and Variations,” IMF Working Paper 11/95 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2011/wp1195.pdf

### Base erosion, profit shifting, transfer pricing, and tax havens
- Clausing, Kimberly A., 2009, “Multinational Firm Tax Avoidance and Tax Policy,” National Tax Journal, Vol. 62 (December), pp. 703–25.  
- Clausing, Kimberly A., 2003, “Tax-Motivated Transfer Pricing and U.S. Intrafirm Trade Prices,” Journal of Public Economics, Vol. 87 (September), pp. 2207–23.  
- Dharmapala, Dhammika, 2014, “What Do We Know About Base Erosion and Profit Shifting? A Review of the Empirical Literature,” Illinois Public Law and Legal Theory Research Papers Series No. 14-23 (Champaign: University of Illinois College of Law).  
- Johannesen, Niels, and Gabriel Zucman, 2014, “The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown,” American Economic Journal: Economic Policy, Vol. 6 (February), pp. 65–91.  
- Klemm, Alexander, and Stefan van Parys, 2012, “Empirical Evidence on the Effects of Tax Incentives,” International Tax and Public Finance, Vol. 19 (June), pp. 393–423.  
- Grubert, Harry, 2001, “Enacting Dividend Exemption and Tax Revenue,” National Tax Journal, Vol. 54 (December), pp. 811–27.  
- Kleinbard, Edward D., 2011, “Stateless Income,” Florida Tax Review, Vol. 11 (November), pp. 699.  
- Maffini, Girogia, 2012, 2009, “Tax Haven Activities and the Tax Liabilities of Multinational Groups,” Centre for Business Taxation WP 09/25 (Oxford: Oxford University).  
- Desai, Mihir, C. Fritz Foley, and James R. Hines Jr., 2006, “The Demand for Tax Haven Operations,” Journal of Public Economics, Vol. 90 (February), pp. 513–31.  
- Hong, Qing, and Michael Smart, 2010, “In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment,” European Economic Review, Vol. 54 (January), pp. 82–95.  
- Clausing, Kimberly A., 2009, “Multinational Firm Tax Avoidance and Tax Policy,” National Tax Journal, Vol. 62 (December), pp. 703–25.  
- Schatan, Roberto, 2012, “Tax-Minimizing Strategies and the Arm’s Length Principle,” Tax Notes International, Vol. 65 (January 9) pp. 121–26.  
- Durst, Michael C., 2010, “It’s Not Just Academic: The OECD Should Revaluate Transfer Pricing Laws,” Tax Notes International, January 18, 2010, pp. 247–56.  
- Durst, Michael C., 2013, Tax Management Transfer Pricing Report, The Bureau of National Affairs.  
- Organisation for Economic Co-operation and Development, 2013a, Action Plan on Base Erosion and Profit Shifting (Paris: OECD Publishing). Available via the Internet: http://www.oecd.org/ctp/BEPSActionPlan.pdf  
- Organisation for Economic Co-operation and Development, 2013b, Addressing Base Erosion and Profit Shifting (Paris: OECD Publishing). Available via the Internet: http://dx.doi.org/10.1787/9789264192744-en  
- Organisation for Economic Co-operation and Development, 2014b, Discussion Draft on Transfer Pricing Documentation and CbC Reporting (Paris: OECD Publishing). Available via the Internet: http://www.oecd.org/ctp/transfer-pricing/discussion-draft-transfer-pricing-document.pdf  
- Organisation for Economic Co-operation and Development, 2014c, BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances (Paris: OECD Publishing). Available via the Internet: http://www.oecd.org/ctp/treaties/treaty-abuse-discussion-draft-march-2014.pdf  
- Organisation for Economic Co-operation and Development, 2014d, BEPS Action 1: Address the Challenges of the Digital Economy (Paris: OECD Publishing). Available via the internet: http://www.oecd.org/ctp/tax-challenges-digital-economy-discussion-draft-march-2014.pdf

### Tax treaties, bilateral agreements, and foreign direct investment
- Barthel, Fabian, Matthias Busse, and Eric Neumayer, 2010, “The Impact of Double Taxation Treaties on Foreign Direct Investment: Evidence from large Dyadic Panel Data,” Contemporary Economic Policy, Vol. 28 (July), pp. 366–77.  
- Blonigen, Bruce, and Ronald Davies, 2005, “Do Bilateral Tax Treaties Promote Foreign Direct Investment?” in Handbook of International Trade, Economic and Legal Analyses of Trade Policy and Institutions, Volume II, ed. by Eun Kwan Choi and James Hartigan, (London, Blackwell).  
- Blonigen, Bruce, 2004, “The Effects of Bilateral Tax Treaties on U.S. FDI Activity,” International Tax and Public Finance, Vol. 11 (September), pp. 601–22.  
- Blonigen, Bruce, Lindsay Oldenski, and Nicholas Sly, 2011, “Separating the Opposing Effects of Bilateral Tax Treaties,” NBER Working Paper 17480 (Cambridge: National Bureau of Economic Research, Inc.).  
- Davies, Ronald, Pehr-Johan Norback, and Ayca Tekin-Koru, 2009, “The Effect of Tax Treaties on Multinational Firms: New Evidence from Microdata,” The World Economy, Vol. 32 (January), pp. 77–110.  
- Neumayer, Eric, 2007, “Do Double Taxation Treaties Increase Foreign Direct Investment to Developing Countries?” Journal of Development Studies, Vol. 43 (November), pp. 1501–19.  
- Louis, Henry, and Don Rousslang, 2008, “Host-Country Governance, Tax Treaties and U.S. Direct Investment Abroad,” International Tax and Public Finance, Vol. 15 (June), pp. 256–73.  
- Lang, Michael and Jeffrey Owens, 2014, “The Role of Tax Treaties in Facilitating Development and Protecting the Tax Base,” WU International Taxation Research Paper Series, Np.2014-03 (Vienna: University of Economics and Business).  
- Easson, Alex, 2000, “Do we still need tax treaties?” Bulletin for International Fiscal Documentation, pp. 619–25 (Amsterdam: International Bureau of Fiscal Documentation).  
- Krever, Rick, 2010, “Tax Treaties and the Taxation of non-residents’ Capital Gains”, in Globalization and its Tax Discontents: Tax Policy and International Investments, ed. by Arthur Cockfield, (Toronto: University of Toronto Press).  
- McGauran, Kattrin, 2013, “Should the Netherlands Sign Tax Treaties with Developing Countries?” Stichting Onderzoek Multinationale Ondernemingen (Amsterdam: SOMO).  
- Lennard, Michael, 2009, “The UN Model Tax Convention as Compared with the OECD Model Tax Convention—Current Points of Difference and Recent Developments,” Asia-Pacific Tax Bulletin, Vol. 29 (February), pp. 4–11.  
- Lennard, Michael and Armando Yaffar, 2012, “An Introduction to the Updated UN Model (2011),” Bulletin for International Taxatioņ Vol. 66 (November) pp. 590–97.  
- McGauran, Kattrin, 2013, “Should the Netherlands Sign Tax Treaties with Developing Countries?” Stichting Onderzoek Multinationale Ondernemingen (Amsterdam: SOMO).

### Profit allocation, formulary apportionment, and intangible assets
- Avi-Yonah, Reuven, and Ilan Benshalom, 2010, “Formulary Apportionment – Myths and Prospects,” Law & Economics Working Paper 28 (University of Michigan Law School).  
- Avi-Yonah, Reuven, Kimberly A. Clausing, and Michael C. Durst, 2009, “Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split,” Florida Tax Review, Vol. 9 (5), pp. 497–553.  
- Dischinger, Mathias, and Nadine Riedel, 2011, “Corporate Taxes and the Location of Intangible Assets within Multinational Firms,” Journal of Public Economics, Vol. 95 (August), pp. 691–707.  
- Karkinsky, Tom, and Nadine Riedel, 2012, “Corporate Taxation and the Choice of Patent Location within Multinational Firms,” Journal of International Economics, Vol. 88 (September), pp. 176–85.  
- Nielsen, Søren Bo, Pascalis Raimondos-Møller, and Guttorm Schjelderup, 2010, “Company taxation and tax spillovers: Separate accounting versus formula apportionment,” European Economic Review, Vol. 54 (January), pp. 121–32.  
- De Meza, David, Ben Lockwood, and Gareth Myles, 1994, “When are origin and destination regimes equivalent?” International Tax and Public Finance, Vol. 1 (1), pp. 5–24.  
- Altshuler, Rosanne, and Harry Grubert, 2009, “Formula Apportionment? Is it better than the current system and are there better alternatives?” National Tax Journal, Vol. 63 (December), pp. 1145–84.

### Tax effects on capital structure, debt shifting, and corporate finance
- Arena, Matteo, and Andrew Roper, 2010, “The Effect of Taxes on Multinational Debt Location,” Journal of Corporate Finance, Vol. 16 (December), pp. 637–54.  
- Huizinga, Harry, Luc Laeven, and Gaetan Nicodème, 2008, “Capital Structure and International Debt Shifting,” Journal of Financial Economics, Vol. 88 (April), pp. 80–118.  
- De Mooij, Ruud A., 2011, “The Tax Elasticity of Corporate Debt: A Synthesis of Size and Variations,” IMF Working Paper 11/95 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2011/wp1195.pdf  
- Blouin, Jennifer, Harry Huizinga, Luc Laeven, and Gaetan Nicodème, 2014, “Thin Capitalization Rules and Multinational Firm Capital Structure”, IMF Working Paper no. 14/12 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2014/wp1412.pdf  
- De Mooij, Ruud A., and Hendrik Vrijburg, 2010, “Enhanced Cooperation in an Asymmetric Model of Tax Competition,” Working Papers 102, Oxford University Centre for Business Taxation.  
- Desai, Mihir A., and James R. Hines Jr., 2003, “Evaluating International Tax Reform,” National Tax Journal, Vol. 56 (September), pp. 409–40.  
- Feld, Lars P., Martin Ruf, Uwe Scheuering, Ulrich Schreiber, and Johannes Voget, 2013, “Effects of Territorial and Worldwide Corporation Tax Systems on Outbound M&As,” CESifo Working Paper No. 4455 (Munich: CESifo).

### Empirical methods, panel data, and measurement of effective tax rates
- Arellano, Manuel and Stephen Bond, 1991, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,” The Review of Economic Studies, Vol. 58 (April), pp. 277–97.  
- Blundell, Richard, and Stephen Bond, 1998, “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models,” Journal of Econometrics, Vol. 87 (August), pp. 115–43.  
- Mendoza, Enrique G., Assaf Razin, and Linda Tesar, 1994, “Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption,” Journal of Monetary Economics, Vol. 34 (December), pp. 297–323.  
- Heckemeyer, Jost H., and Michael Overesch, 2013, “Multinationals’ profit response to tax differentials: Effect size and shifting channels,” Centre for European Economic Research Discussion Paper No. 13-045 (Mannheim: Zentrum für Europäische Wirtschaftsforschung GmbH).  
- Hassett, Kevin, and Aparna Mathur, 2011, “Report Card on Effective Corporate Tax Rates: United States Gets an F,” American Enterprise Institute, Tax Policy Outlook, No. 1. Available via the Internet: http://www.aei.org/files/2011/02/09/TPO-2011-01-g.pdf

### Sectoral, regional, and administrative issues (extractive industries, VAT, revenue mobilization)
- International Monetary Fund, 2012a, “Fiscal Regimes for Extractive Industries: Design and Implementation” (Washington: International Monetary Fund). Available via the internet: http://www.imf.org/external/np/pp/eng/2012/081512.pdf  
- Mullins, Peter, 2010, “International Tax Issues for the Resources Sector,” in The Taxation of Petroleum and Minerals: Principles, Problems, and Practice, ed. by Philip Daniel, Michael Keen, and Charles McPherson (Abingdon: Routledge).  
- Burns, Lee, Honoré Le Leuch, and Emil Sunley, (Forthcoming in 2014), “Transfer of an interest in a mining or petroleum right,” in Resources without Borders, ed. by Philip Daniel, Michael Keen, Artur Swistak, and Victor Thuronyi (Washington: International Monetary Fund).  
- Ebrill, Liam, Jean-Paul Bodin, Michael Keen, and Victoria Summers, 2001, The Modern VAT (Washington: International Monetary Fund).  
- Keen, Michael, and Mario Mansour, 2010, “Revenue mobilization in sub-Saharan Africa—Challenges from Globalization II: Corporate Taxation,” Development Policy Review, Vol. 28 (September), pp. 573–96.  
- International Monetary Fund, 2011, “Revenue Mobilization in Developing Countries” (Washington: International Monetary Fund). Available via the Internet http://www.imf.org/external/np/pp/eng/2011/030811.pdf

### Transparency, reporting, and data sources
- Bennett, Mary, Michael Devereux, Judith Freedman, Martin Hearson, Chris Lenon, Glen Loutzenhiser, David McNair, William Morris, Richard Parry, Douglas A. Shackelford, Roberto Schatan, and Susan Symons, 2011, “Transparency in Reporting Financial Data by Multinational Corporations” (Oxford: Oxford University Center for Business Taxation). Available via the Internet: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Reports/transparency-in-reporting-financial-data-by-multinational-corporations-july-2011.pdf  
- United States Census Bureau, 2013, “U.S. Census Bureau News: U.S. Goods Trade: Imports & Exports by Related Parties. Available via the internet at http://www.census.gov/foreign-trade/Press-Release/2012pr/aip/related_party/rp12.pdf  
- United States Senate on Permanent Subcommittee on Investigations, 2011, “Offshore Funds Located Onshore,” Majority Staff Report Addendum (Washington). Available via the Internet: http://www.hsgac.senate.gov/download/report-addendum_-psi-majority-staff-report-offshore-funds-located-onshore

### International organizations, reports, and policy statements
- International Monetary Fund, 2013a, “Issues in International Taxation and the Role of the IMF” (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/np/pp/eng/2013/062813.pdf  
- International Monetary Fund, Fiscal Monitor, October 2013b, Taxing Times (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf  
- International Monetary Fund, 2013c, “United States: Article IV Consultation Staff Report,” IMF Country Report No. 13/236 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/scr/2013/cr13236.pdf  
- International Monetary Fund, 2010, “From Stimulus to Consolidation” (Washington : International Monetary Fund). Available via the Internet: www.imf.org/external/np/pp/eng/2010/043010a  
- International Monetary Fund, 2009, “Debt Bias and Other Distortions: Crisis-Related Issues in Tax Policy” (Washington: International Monetary Fund). Available via the Internet: https://www.imf.org/external/np/pp/eng/2009/061209.pdf  
- International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations and World Bank, 2010, “Supporting the Development of More Effective Tax Systems: A Report to the G-20 Development Working Group.” Available via the Internet: www.imf.org/external/np/g20/pdf/110311  
- Organisation for Economic Co-operation and Development, 2005, “Treaty Rules and E-Commerce: Taxing Business Profits in the New Economy,” OECD Business Profits Technical Advisory Group (Paris: OECD Publishing).  
- European Commission, 2013, “Taxation Trends in the European Union,” Eurostat Statistical Books (Luxembourg: Publications Office of the European Union). Available via the Internet: http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-DU-13-001/EN/KS-DU-13-001-EN.PDF  
- European Commission, 2012, “Commission recommendation of 6.12.2012 on Aggressive Tax Planning,” (Luxembourg: Publications Office of the European Union). Available via the Internet: http://ec.europa.eu/taxation_customs/resources/documents/taxation/tax_fraud_evasion/c_2012_8806_en.pdf  
- European Commission, 2011, “Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB),” (Luxembourg: Publications Office of the European Union). Available via the Internet: http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/common_tax_base/com_2011_121_en.pdf  
- G-20, 2013, “Communiqué,” Meeting of Finance Ministers and Central Bank Governors, Moscow. Available via the Internet: https://www.mof.go.jp/english/international_policy/convention/g20/130720.htm

### Selected sectoral and country studies, and working papers
- Auerbach, Alan, and Michael Devereux, 2013, “Consumption and Cash Flow Taxes in an International Setting,” NBER Working Paper 19579 (Cambridge: National Bureau of Economic Research, Inc.).  
- Auerbach, Alan, and Helen Simpson, 2010, “Taxing Corporate Income” in Dimensions of Tax Design: the Mirrlees Review, ed. by James Mirrlees and other, (Oxford: Oxford University Press).  
- Barrios, Salvador, Harry Huizinga, Luc Laeven, and Gaetan Nicodème, 2012, “International Taxation and Multinational Firm Location Decisions,” Journal of Public Economics, Vol. 96 (December), pp. 946–58.  
- Barrios, Salvador, Harry Huizinga, Luc Laeven, and Gaetan Nicodème, 2012, “International Taxation and Multinational Firm Location Decisions,” Journal of Public Economics, Vol. 96 (December), pp. 946–58.  
- Matheson, Thornton, Victoria Perry, and Chandara Veung, 2013, “Territorial vs. Worldwide Corporate Taxation: Implications for Developing Countries,” IMF Working Paper 13/205 (Washington: International Monetary Fund).  
- Hasegawa, Makoto, and Kozo Kiyota, 2013, “The Effect of Moving to a Territorial Tax System on Profit Repatriations: Evidence from Japan,” Research Institute of Economy, Trade and Industry discussion paper series 13-E-047 (Tokyo: Research Institute of Economy, Trade and Industry).  
- Markle, Kevin S., and Douglas Shackelford, 2012, “Cross-country comparisons of corporate income taxes,” National Tax Journal, Vol. 65 (September), pp. 493–528.  
- Desai, Mihir A., and James R. Hines Jr., 2003, “Evaluating International Tax Reform,” National Tax Journal, Vol. 56 (September), pp. 409–40.

*International Monetary Fund — References section*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_050914.pdf_