Destination-Based Income Taxation and WTO Law: A Note

Abstract

In recent years, there is a growing tendency in international taxation to move the right to tax the corporate income of multinational enterprises to the jurisdiction where their customer base is located. One widely discussed proposal applies a sales-only formula to group-wide profits of multinationals (or to the residual profit of the firm after allocating routine returns to local production factors). A more recent proposal pleads for a “destination-based corporate income tax” including border adjustments for value transfers between countries. This article lays out the constraints existing under WTO law, in particular the non-discrimination rules of the GATT and the prohibition on export subsidies under the ASCM. It turns out that while the general move towards a destination basis is not a problem under WTO law (even for direct taxes), border adjustments are more critical due to their tendency to benefit local production.

Keywords: International taxation, multinationals, destination-based taxation, WTO law, GATT, ASCM

JEL Classification: F13, F15, F23, H25, K34