Why Corporate Taxation Should Mean Source Taxation: A Response to the OECD's Actions Against Base Erosion and Profit Shifting

World Tax Journal (IBFD), Vol. 9, No. 3, pp. 352 (2017)

6 Pages Posted: 3 May 2016 Last revised: 21 Sep 2017

See all articles by Luzius U. Cavelti

Luzius U. Cavelti

Altenburger legal + tax

Christian Jaag

Swiss Economics; University of St. Gallen - Institute of Public Finance and Fiscal Law

Tobias Rohner

Baker McKenzie

Date Written: May 2, 2016

Abstract

It is widespread practice around the world that corporate entities pay taxes to the country where they are formally registered and to the country in whose territory they have a permanent establishment. While the former is generally known as the ‘country-of-residence’ the latter is usually referred to as the ‘country-of-source’.

This article questions separate taxation based on this distinction between the country-of-residence and the country-of-source. It argues for a departure from the traditional international allocation of the right to tax corporate income and suggests that a corporate entity should instead pay income tax exclusively to the countries in which it has relevant business activities. Moreover, in examining the question of where business activities of multinational corporations effectively take place, this article describes criteria for determining source countries. Furthermore, it offers a method for formulary apportionment of corporate income between those countries in which a given multinational corporation generates income. The article argues that source taxation of corporate income would be coherent with the economic nature of corporate income taxation. Source taxation of corporate income would also make the arbitrary concept of corporate residence irrelevant, and it would allow the outdated legal concept of permanent establishment to be abolished.

This article takes an interdisciplinary approach to argue from both legal and economic perspectives. It adds to the body of literature that discusses how countries should tax corporate entities doing business across national borders. It also contributes to the ongoing debate about the OECD’s recent controversial efforts to prevent corporations shifting profits between countries to minimize their exposure to national tax systems (base erosion and profit sharing, or BEPS).

Keywords: BEPS, Base Erosion and Profit Shifting, Corporate Taxation, Source v Residence, Permanent Establishment

Suggested Citation

Cavelti, Luzius U. and Jaag, Christian Yvo and Rohner, Tobias, Why Corporate Taxation Should Mean Source Taxation: A Response to the OECD's Actions Against Base Erosion and Profit Shifting (May 2, 2016). World Tax Journal (IBFD), Vol. 9, No. 3, pp. 352 (2017). Available at SSRN: https://ssrn.com/abstract=2773614 or http://dx.doi.org/10.2139/ssrn.2773614

Luzius U. Cavelti (Contact Author)

Altenburger legal + tax ( email )

Seestrasse 39
Kusnacht - Zurich, 8700
Switzerland

Christian Yvo Jaag

Swiss Economics ( email )

Stampfenbachstr. 142
Zurich, CH-8006
Switzerland

University of St. Gallen - Institute of Public Finance and Fiscal Law ( email )

Rosenbergstrasse 51
St. Gallen, St. Gallen CH-9000
Switzerland

Tobias Rohner

Baker McKenzie ( email )

Holbeinstrasse 30
Zurich, 8034
Switzerland

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