Extending Taxation of Interest and Royalty Income at Source – An Option to Limit Base Erosion and Profit Shifting?

47 Pages Posted: 14 Oct 2014

See all articles by Katharina Finke

Katharina Finke

University of Mannheim - Accounting and Taxation

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Hannah Nusser

University of Mannheim

Christoph Spengel

Centre for European Economic Research (ZEW)

Date Written: September 15, 2014

Abstract

This paper discusses tax policy measures to reduce corporate tax avoidance by extending taxation in the source country without imposing double taxation. We focus on four options: Bilaterally restricting interest and royalty deductibility, introducing an inverted tax credit system, levying withholding taxes on all interest and royalty payments and levying withholding taxes as an anti-avoidance regulation. We calculate the tax revenue effects of introducing a minimum withholding tax on royalty payments and an inverted tax credit. For the withholding tax we find that the US would suffer the greatest tax revenue losses, while some other countries would increase their tax revenue. In general, gains and losses depend not only on net balances in royalty income flows but also on withholding tax and credit rules under the status quo. The inverted tax credit would increase tax revenue in particular in high-tax countries. Revenue redistribution would only arise if withholding taxes were replaced by the inverted credit.

Keywords: profit shifting; multinational firm; source taxation; tax policy; tax reform; optimal taxation

JEL Classification: H20, H21, H 32, F23, K34

Suggested Citation

Finke, Katharina and Fuest, Clemens and Nusser, Hannah and Spengel, Christoph, Extending Taxation of Interest and Royalty Income at Source – An Option to Limit Base Erosion and Profit Shifting? (September 15, 2014). ZEW - Centre for European Economic Research Discussion Paper No. 14-073. Available at SSRN: https://ssrn.com/abstract=2509193 or http://dx.doi.org/10.2139/ssrn.2509193

Katharina Finke (Contact Author)

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

Schackstrasse 4 / II
Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

Hannah Nusser

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Christoph Spengel

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany

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