Global Taxation after the Crisis: Why BEPS and MAATM are Inadequate Responses, and What Can Be Done About It

51 Pages Posted: 16 Jan 2016 Last revised: 11 Feb 2016

See all articles by Reuven S. Avi-Yonah

Reuven S. Avi-Yonah

University of Michigan Law School

Haiyan Xu

University of Michigan Law School; University of International Business and Economics (UIBE) Law School

Date Written: January 15, 2016

Abstract

In the early 21st century most cross-border income is untaxed. In the case of multinationals, this is because the source jurisdiction either lacks the authority to tax because in the age of electronic commerce it is easy to avoid the required physical presence in the source country; or because source jurisdictions grant tax holidays to multinationals. Residence jurisdictions do not tax active income currently for fear that multinationals will establish their headquarters elsewhere, as the current US inversion saga confirms. In the case of individuals, exchange of information has not proven effective in deterring tax evasion via offshore secrecy jurisdictions, and no withholding taxes are levied by source jurisdictions.

The problem with this state of affairs is that in the absence of taxation of cross-border flows, the progressive income tax cannot be maintained, because it is easier for the wealthy to earn cross-border income. The result has been a world-wide shift to taxing consumption rather than income. But consumption taxes are regressive, and cannot by definition reach the unconsumed income of the rich. And without progressive taxation, it will not be possible to maintain the public's commitment to social insurance that is globalization's main defense against growing inequality.

While both the MAATM and the BEPS projects are helpful, neither is likely to solve the underlying issues described above. In both cases the problem is that too many countries need to cooperate for the regime to be effective. In the case of MAATM, every tax haven has to sign on because otherwise all the funds can be routed through the non-cooperating haven. We are far from there, and the US has not implemented MAATM (it has implemented FATCA, but that applies only for US residents and can be avoided by using financial institutions with no US presence.)

In the case of BEPS, the project only addresses artificial profit shifting, not tax competition, and it only applies to the OECD and G20, not to the many source countries outside these two organizations. Thus, it is likely that multinationals can avoid BEPS by sourcing income in countries that are not subject to it.

Fundamentally, if the income tax is to be preserved in the 21st century, multilateral solutions are needed. Both MAATM and BEPS are such solutions but they are hampered by the focus on residence jurisdictions for passive income and source jurisdictions for active income. There are too many residence jurisdictions in the first case, since every country has rich people, and too many source jurisdictions in the second, since multinationals operate globally.

Thus, in our opinion it is time to re-evaluate the benefits principle. Most of the current issues can be solved if we taxed passive income primarily at source and active income primarily at residence.

Keywords: BEPS, MAATM, tax competition, tax coordination

JEL Classification: H26

Suggested Citation

Avi-Yonah, Reuven S. and Xu, Haiyan, Global Taxation after the Crisis: Why BEPS and MAATM are Inadequate Responses, and What Can Be Done About It (January 15, 2016). U of Michigan Public Law Research Paper No. 494. Available at SSRN: https://ssrn.com/abstract=2716124 or http://dx.doi.org/10.2139/ssrn.2716124

Reuven S. Avi-Yonah (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4033 (Phone)

Haiyan Xu

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

University of International Business and Economics (UIBE) Law School ( email )

No. 10, Huixin Dongjie, Room 724, Ningyuan Buildin
Chaoyang District
Beijing
China

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