Destination-Based Cash Flow Taxation

Abstract

This paper presents, analyses, and further develops the idea of a destination-based cash-flow tax (DBCFT). Its purpose is expositional: to describe the DBCFT, how it might work, what its effects would be and some of the challenges that its implementation would face. The paper starts by introducing the basic mechanics of the DBCFT before evaluating it against five criteria: economic efficiency, robustness to avoidance and evasion, ease of administration, fairness and stability. It does so both for the case of universal adoption by all countries and the more plausible case of unilateral adoption. The paper then looks closely at the application of DBCFT treatment to the financial sector, which is a familiar problem under the VAT but has been little considered under the DBCFT. Finally, the paper sets out some core implementation issues, and how they might be addressed. It also compares the implementation of a DBCFT with the economically equivalent reform option that introduces a broad-based, uniform rate VAT (or achieves the same effect through an existing VAT), and reduces taxes on payroll by the same proportion.

Keywords: International Tax; Tax Reform; Cash Flow Tax; DBCFT; BEPS Destination-Based Cash Flow Taxation; Consumption Tax

JEL Classification: H20; H21; H22;H23: H25; H27