## Fixing International Corporate Taxation—Not Just a Problem for Advanced Economies

_IMF Blog, June 25, 2014_

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## Bibliographic details
- Authors: Michael Keen
- Published: June 25, 2014

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### Overview and context
- Author: Michael Keen
- Date: June 25, 2014
- Core issue: tax rules set by countries create cross-border spillovers that allow some multinationals to pay very little corporate tax; these spillovers have powerful implications for macroeconomic performance and economic development.

### Key findings on FDI and tax-driven capital flows
- Several countries’ tax arrangements make them attractive conduits to route investments (referenced: Table 1).
- Example observations:
  - The Netherlands leads the world in its share of the world’s FDI.
  - Mauritius is home to FDI “25 times the size of its economy.”
- Tax arrangements that exploit gaps between national tax systems can yield very large associated tax revenue losses—especially for developing countries.

### Vulnerability of developing countries
- Developing countries raise a larger revenue share from corporate taxation than advanced economies (referenced: Chart 1).
- In some country cases, revenue collected from a handful of foreign companies can be large not just relative to corporate tax but relative to all tax revenue:
  - “10–15 percent” in some cases.
- New evidence in the paper shows patterns are systematic: developing countries are much more affected by spillovers from other countries' tax systems than advanced economies, making them overly vulnerable to taxation changes elsewhere.

### Concerns about tax treaties
- Over the past two decades, developing countries have signed a huge number of tax treaties (referenced: Chart 2).
- Evidence on whether tax treaties deliver hoped-for benefits is mixed.
- IMF country work finds sometimes significant leakage of revenue through treaty provisions.
- The IMF has urged great care in ceding tax discretion by signing tax treaties; this view is now more widely accepted.

### Nature of spillovers and challenges to the current architecture
- Spillovers occur when one country’s tax decisions affect others; common mechanisms include:
  - Low or zero tax rates making a jurisdiction attractive to shift profits through paper transactions, eroding tax bases elsewhere.
- Preliminary estimates in the paper suggest these spillover effects are both “strongly significant and large.”
- Current international tax framework dates from the League of Nations “nearly a century ago” and is misaligned with modern realities:
  - Growth of intra-firm trade
  - Increased importance of services and intangibles (patents and the like)
  - Increased digitalization

### International responses and reform options
- The G20-OECD Action Plan on Base Erosion and Profit Shifting (BEPS) is an ambitious effort to address many current problems.
- Debate on more fundamental reform includes proposals such as:
  - Taxing multinationals on a consolidated basis and using “formula apportionment” to allocate income across countries based on shares of assets, payroll, and/or sales.
- The paper stresses that “formula apportionment” could create significant new problems and might not necessarily benefit developing countries.
- Other fundamental reforms remain tentative; the IMF does not offer simple universal solutions.

### Policy implications and IMF role
- These fundamental questions and the need for practical advice to countries taxing multinationals will persist.
- The IMF’s experience, mandate, and global membership position it as an increasingly important participant in this technically challenging policy debate.

*Source: Fixing International Corporate Taxation—Not Just a Problem for Advanced Economies, Michael Keen, June 25, 2014.*

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## Content in this bundle

- **Spillovers in International Corporate Taxation; IMF Policy Paper; May 9, 2014**
  - [Spillovers in International Corporate Taxation; IMF Policy Paper; May 9, 2014 (Markdown version)](/external/np/pp/eng/2014/050914.pdf.md){rel="alternate" type="text/markdown"}
  - [Spillovers in International Corporate Taxation; IMF Policy Paper; May 9, 2014 (PDF)](/external/np/pp/eng/2014/050914.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2014/06/table-1-fdi-stocks-relative-to-gdp.jpg](https://www.imf.org/wp-content/uploads/2014/06/table-1-fdi-stocks-relative-to-gdp.jpg)
- [https://www.imf.org/wp-content/uploads/2014/06/chart-1-revenue-from-corporate-tax.jpg](https://www.imf.org/wp-content/uploads/2014/06/chart-1-revenue-from-corporate-tax.jpg)
- [https://www.imf.org/wp-content/uploads/2014/06/chart-2-numbers-of-btts.jpg](https://www.imf.org/wp-content/uploads/2014/06/chart-2-numbers-of-btts.jpg)

_Source: https://www.imf.org/en/blogs/articles/2014/06/25/fixing-international-corporate-taxation-not-just-a-problem-for-advanced-economies_