Global Firms, National Corporate Taxes: An Evolution of Incompatibility

IMF Working Papers, September 4, 2020

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Research question: How did the rise of multinational enterprises (MNEs) put pressure on the prevailing international corporate tax framework?
Core finding: MNEs of the 21st century operate differently from prior periods and have evolved to become global firms—with important tax ramifications.
Central thesis: The fragility of international tax arrangements was present at the outset of designing international tax rules, but the challenges have drastically intensified with:
- the global integration of business,
- the increased trade in hard-to-price services and intangibles,
- and the rapid growth of the digital economy.

The paper presents a set of empirical observations and a synthesis of strands of the literature to explain why recent concerns about vulnerabilities in international tax arrangements and the taxation of MNEs have become unprecedented.
Historical context: MNEs, firms with market power, and the corporate income tax (dating to the early 20th century) are not new; what is new is the operational evolution of MNEs into global firms that exploit features of modern economic integration and digitalization.
Key drivers of intensified tax challenges:
- deeper cross-border business integration,
- greater prevalence of transactions involving hard-to-price services and intangibles,
- expansion of the digital economy enabling activities that are difficult to locate or tax under traditional nexus and profit-allocation rules.

The evolution of MNEs into global firms increases vulnerabilities in national corporate tax systems and the compatibility of those systems with cross-border business models.
Traditional international tax rules, designed when business was less globally integrated and intangible-intensive, are increasingly strained by:
- difficulty in pricing and allocating profits from intangibles and services,
- challenges in establishing taxable presence (nexus) for digital activities,
- the potential for tax avoidance amplified by complex corporate structures and cross-border flows.

Source: Global Firms, National Corporate Taxes: An Evolution of Incompatibility, Shafik Hebous, IMF Working Paper (September 4, 2020).