On February 21, 2019, the Executive Board of the International Monetary Fund (IMF) discussed a paper setting out the current state of international corporate income tax arrangements.

The policy paper Corporate Taxation in the Global Economy stresses the need to maintain and build on the progress in international cooperation on tax matters that has been achieved in recent years, and in some respects now appears under stress. With special attention to the circumstances of developing countries, the paper identifies and discusses various options currently under discussion for the international tax system to ensure that countries, and in particular low-income countries, can continue to collect corporate tax revenues from multinational activities.

Areas of opportunity

Stressing that the IMF is not a standard setting body in this area, the paper does not endorse any specific proposals for international tax reform, recognising that views differ widely. Instead, it identifies and discusses potential criteria by which alternatives might be assessed and provides some empirical analysis to support discussions.

Amongst opportunities for improvement, the paper considers:

  • Minimum taxes on outbound investment, as significant protection against profit shifting and tax competition with the potential for positive spillovers.
  • Minimum taxes on inbound investment particularly for lower income countries, although it highlights tradeoffs and the potential for distortions, as well as the need for added robustness in the long term.
  • Schemes of residual profit allocation (RPA) to reduce profit shifting and further the discussion on the allocation of taxing rights.
  • Featured in many proposals, the paper assesses the allocation of taxing rights to destination countries to be the most effective way to address tax competition and profit shifting. From such schemes, border adjusted taxes (combining VAT-like treatment of trade with a wage subsidy) are highlighted as the most complete solution. Nevertheless, the paper notes, these are most remote from the current policy debate and problematic given World Trade Organisation regulations, refund problems and potential spillover effects from unilateral adoption.

Directors emphasised that, to better inform the ongoing debate, considerable further analysis of the reform proposals is needed with respect to legal issues, practical consequences, including distributional effects, and implications for various groups of countries with similar or unique characteristics.

(Source: IMF Policy Paper No. 19/007 | Press release)

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