Residual Profit Allocation by Income

Oxford University Centre for Business Taxation Working Paper WP19/01

Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2019-04

106 Pages Posted: 22 Mar 2019 Last revised: 28 Mar 2019

See all articles by Michael P. Devereux

Michael P. Devereux

Centre for Business Taxation, Oxford University; CESifo (Center for Economic Studies and Ifo Institute); Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR); University of Oxford - Said Business School; University of Oxford - Said Business School

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Michael Keen

International Monetary Fund (IMF) - Fiscal Affairs Department; CESifo (Center for Economic Studies and Ifo Institute); Institute for Fiscal Studies (IFS)

Paul Oosterhuis

Independent

Wolfgang Schoen

Max Planck Institute for Tax Law and Public Finance, Department of Business and Tax Law

John Vella

Oxford University Centre for Business Taxation; University of Oxford - Faculty of Law

Date Written: March 22, 2019

Abstract

This paper is a draft chapter of a forthcoming book on the taxation of international business profit by the authors of this paper, to be published by Oxford University Press. The group has been meeting regularly for five years, to identify and discuss the key problems of the existing international tax system, and to develop potential options for reform. The book will study two proposals for reform in depth. One is the destination based cash flow tax – a draft chapter on this proposal has already been released. The second proposal – for a form of residual profit allocation - is presented here.

We refer to the proposal set out in this paper as a Residual Profit Allocation by Income, or RPA-I. The RPA-I allocates the right to tax routine profit to the country where functions and activities take place. It allocates the right to tax residual profit to the market, or destination, country where sales are made to third parties. We argue that the RPA-I has attractive properties – while it is far from perfect, it matches well the criteria by which we aim to evaluate proposals for tax reform: economic efficiency, fairness, robustness to avoidance, ease of implementation, and incentive compatibility.

Keywords: International Tax, Tax Reform, Transfer Pricing, Digitalisation, OECD, Transfer Pricing, Intangibles, Tax Avoidance, Tax Competition, Tax Havens, Profit Shifting

JEL Classification: H 20, H25, H26, H34

Suggested Citation

Devereux, Michael P. and Auerbach, Alan Jeffrey and Keen, Michael and Oosterhuis, Paul and Schön, Wolfgang and Vella, John, Residual Profit Allocation by Income (March 22, 2019). Oxford University Centre for Business Taxation Working Paper WP19/01; Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2019-04. Available at SSRN: https://ssrn.com/abstract=3358291 or http://dx.doi.org/10.2139/ssrn.3358291

Michael P. Devereux (Contact Author)

Centre for Business Taxation, Oxford University ( email )

Said Business School
Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Alan Jeffrey Auerbach

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-0711 (Phone)
510-643-0413 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Michael Keen

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Paul Oosterhuis

Independent ( email )

No Address Available

Wolfgang Schön

Max Planck Institute for Tax Law and Public Finance, Department of Business and Tax Law ( email )

Marstallplatz 1
Munich, 80539
Germany

John Vella

Oxford University Centre for Business Taxation ( email )

Saïd Business School
Park End Street
Oxford, OX1 1HP
United Kingdom

HOME PAGE: http://www.sbs.ox.ac.uk/community/people/john-vella

University of Oxford - Faculty of Law ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

HOME PAGE: http://www.law.ox.ac.uk/profile/john.vella

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