Destination-Based Cash-Flow Taxation: A Critical Appraisal

University of Toronto Law Journal, 67:3 (2017), pp 301-347

33 Pages Posted: 19 Dec 2016 Last revised: 22 Jun 2017

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2016


This article offers the first comprehensive scholarly response to proposals for destination-based, cash-flow taxation (DCFT). DCFT proposals have attracted heightened public attention in 2016 because of its incorporation into the U.S. House Republican Blueprint for tax reform and Donald Trump’s subsequent election to the White House. They also continue to fascinate tax specialists by suggesting that corporate profit can not only be taxed in countries of “source” or “residence,” but also (or even exclusively) in the countries where sales to final consumers occur. This Article clarifies the logical structure of DCFT proposals and exposes substantial gaps between their rhetoric and technical details.

I argue first that it is crucial to distinguish between two versions of the DCFT. Version 1 resembles proposals for taxing corporate income by sales-factor-only formulary apportionment. Version 2, which is what the House GOP Blueprint proposes, resembles a destination-based VAT with deductions for labor costs and refundable losses. DCFT Version 2 is merely a species of residence-based consumption taxation and, unlike Version 1, would not allocate revenue to countries of consumer residence as distinct from countries of investor residence. It thus introduces no fundamental new option into international tax design. Instead, it may create substantial trade distortions (and its loss refund feature is also unlikely to be administrable). DCFT Version 1 does present a new option for taxing corporate profit but is un-implementable. I also highlight ways in which DCFT proposals make ad hoc normative and behavioral assumptions. For example, in criticizing the traditional corporate income tax, DCFT proponents only refer to neutrality benchmarks and give no weight to distributional concerns, but when defending the advantage of the DCFT vis-à-vis the VAT, they introduce considerations of progressivity.

Finally, the Article offers a novel explanation of why it is difficult to incorporate information about consumer location into international tax design, and argues that “residence” is more promising than “destination” (when both are understood as capturing information about natural persons) for dealing with problems arising from capital mobility.

Keywords: international taxation, destination-based taxation, corporate taxation, BEPS, U.S. tax reform

JEL Classification: H25, H87, K34

Suggested Citation

Cui, Wei, Destination-Based Cash-Flow Taxation: A Critical Appraisal (December 19, 2016). University of Toronto Law Journal, 67:3 (2017), pp 301-347, Available at SSRN:

Wei Cui (Contact Author)

University of British Columbia (UBC), Faculty of Law ( email )

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