Call for Consultation

Consultation on Economic "Spillovers" in International Taxation

Last Updated: February 12, 2014

Background

I

t is widely agreed that the current international tax system—which emerged nearly a century ago, and was designed for a world very different from the globalized economy in which today’s multinationals operate—is now under considerable stress. Significant public concerns at tax avoidance activities by multinationals have emerged in both advanced countries (where consolidation needs have intensified revenue and fairness concerns) and developing countries (where revenue mobilization is needed to finance development of physical and human capital.

Current international tax arrangements give rise to substantial opportunities for legal tax avoidance through mismatches, gaps, and inconsistencies in the system, particularly by large companies that operate across (many) borders. These opportunities are the focus of, notably, the G20-OECD "base erosion and profit shifting" project (BEPS), intended to rectify by mutual agreement these gaps and mismatches. They have also attracted considerable attention from academics and civil society, and are of significant interest to the private sector.

The issues at stake are relevant to the work of the Fund by virtue of their effects on macroeconomic performance of its members, and the extensive technical advice in tax matters that it is called on to give to its membership. The issues may indeed be especially important to lower income members of the Fund, which are often especially dependent on corporate tax revenue and so particularly vulnerable to its erosion. They are inherently issues on which a multilateral perspective is needed, the central point being that one country’s decisions in its approach to the taxation of border-crossing income can substantially affect the interests of others. In focusing on these spillovers, the work of the Fund is intended to complement and inform other initiatives and work underway elsewhere.

The work, which will be guided by the distinct perspective provided by the Fund’s mandate, expertise and membership, will look both at some of the main opportunities to exploit problems in the current taxation system and how they might be addressed, and deeper aspects of international tax architecture and its future. There will be a particular but not exclusive focus on developing country concerns. The paper will look, for example, at questions such as how the current trend among industrial countries to shift from worldwide toward territorial taxation will affect low income countries, and how the basic choice to adopt an "arm’s length pricing" method for dividing profits across jurisdictions in specific transactions affects them.

Questions for Consultation

We are seeking your input into our assessment of how national policy and tax design choices under the current international tax architecture influence economic outcomes for other countries, together with your wider assessment of that architecture and alternatives to it. We are especially, though not exclusively, interested in the outcomes for lower-income, developing countries in terms of tax revenues, underlying economic activities and international investment flows, and implications for countries’ own tax systems.

A broad sense of the issues to be addressed is provided by an earlier note on these issues. Some specific questions you may wish to address:

1. How does the current network of bi-lateral double taxation treaties, and the spillovers that can arise from treaty shopping, affect low income countries? What changes in the design of treaties could be beneficial for those countries? Is the existence of bi-lateral tax treaties important to the attraction of international capital, and if so why/how?
   
   
2. How (if at all) does the asymmetric tax treatment of debt and equity contribute to any unintended reduction in the tax bases of individual countries, and of the world’s overall taxable profit? What solutions would you prefer, if you see this as a problem?
   
   
3. Have you observed any shifts in capital or investment flows as a consequence of recent shifts in large capital exporting economies toward territorial taxation and away from worldwide taxation?
   
   
4. Would an end to deferral of taxation under worldwide taxation regimes (such as that in the US) be beneficial for some countries?
   
   
Do you have suggestions regarding amendments or the introduction of possible special regimes under the arm’s length pricing method that would be of benefit for developing countries, in terms of revenue outcomes and/or administrability?


6. Do you have views on the potential outcomes of an adoption of formulary apportionment and/or unitary taxation—of some degree (including, for example, some form of 'residual profit split')—for developing countries? Other countries? International business? If you support such a system, what allocation factors would you suggest?
   
   
7. How should the international tax architecture treat jurisdictions where significant corporate profits are booked, but which have relatively little substantive economic activity?
   
   
8. In your view, does the existence of tax competition—whether directly, through the setting of tax rates, or indirectly, through the shifting of tax bases—serve a useful purpose? Can one identify particular forms of tax competition that are 'harmful'?
   
   

Procedures

The IMF tax policy team will review all comments, and staff will post a summary of those received. Senders may request that their comments remain confidential. All interested stakeholders are encouraged to submit input through the following channels:

• E-mail: IMFConsultation@imf.org
• Fax: +1 202 623 6220

When submitting your comments, via fax or email, please include the following information so that your comments are registered: name of sender; organization you represent; address; country; phone number; and e-mail address.

Comments should be submitted no later than March 31, 2014.

Next Steps after this Consultation

Staff will submit a paper to the IMF Executive Board, for discussion in early May 2014. After that discussion it is anticipated that the paper will be made public through posting on the IMF website. Additionally, staff intends to continue analytic work on these and related questions, and will continue to welcome input into, and as always comments upon, our work.

• Spillovers in International Corporate Taxation (2014)
• Issues in Inernational Taxation and the Role of the IMF (2013)
• OECD Centre for Tax Policy and Administration - Base Erosion and Profit Shifting
• Factsheet on Fiscal Transparency


• 
  Consultations should be sent to:


• IMFConsultation@imf.org or Fax: +1 202 623 6220