Abstract:
About 140 countries have agreed to reallocate the rights to tax international corporate profits and to introduce minimum tax rates. The agreed plan is the product of pragmatism and a search for consensus, but ambitious. It requires far-reaching system changes such as a move towards unitary profit taxation, better known as formula apportionment. The formulary apportionment of profit earned by a multinational enterprise (MNE) assumes international agreement on common rules for the determination of taxable profit. This is a critical departure from the well-established tradition of separate entity accounting (SEA) and may still turn out to be a serious design flaw of the reform. This paper argues for a reform that retains SEA and addresses the flaws in the current system of corporate taxation at their root rather than merely fixing symptoms. To this end, a reform aimed specifically at the rules governing the taxation of intangible assets is recommended. The proposed system can be interpreted as a theory-based generalization of the withholding tax solution of Article 12B of the UN Model Tax Convention to cases where an MNE maintains a physical presence in the source country or intra-group supplies of goods and services entail allocable costs.
