Papers & Reports

This chapter describes one of the key anti-tax-avoidance rules to combat profit shifting by multinational corporations—Controlled Foreign Corporation (CFC) rules, including GILTI—that directly target income in low-tax countries. They find that GILTI seems to be ineffective when it comes to profit shifting, but it has consequences for real activity. The authors explain some key institutional features of CFC provisions and argue that research on CFC regulations and GILTI can be informative in assessing the recent global minimum tax initiative.

Michael Overesch, Dirk Schindler & Georg Wamser, Design and Consequences of CFC and GILTI Rules: A Review and Potential Lessons for the Global Minimum Tax (CESifo Working Paper No. 11018, 2024).

This article finds evidence to suggest that where a subsidiary is located in a country with a larger unique treaty network, the sensitivity of reported profits increases with regards to the statutory tax rate; the author concludes that this correlation suggests increased profit shifting. They note that this profit shifting enhancing effect decreases with host countries’ levels of tax enforcement.

If Congress chooses not to adopt Pillar 1 of the OECD/G20 proposal to allocate some taxing rights to market countries, digital services taxes (DSTs) will likely continue and proliferate. Adopting Pillar 1 would likely shift the right to tax some profits of multinationals to market countries, increase U.S. firms’ taxes, and lose U.S. revenue, but would reduce the number of DSTs. These two options (i.e., adopting or not adopting Pillar 1) have different economic consequences, which are relevant to this choice.

This paper evaluates the Multilateral Convention to implement Pillar I Amount A, released by the OECD in October 2023, and the alternative proposal of Art. 12B for tax treaties suggested by the UN, with a particular emphasis on the perspective of developing countries. It provides a comparative analysis of the proposals using an integrated economic and legal approach. The assessment is based on the two proposals’ ability to generate tax revenue and their implications for net-importing countries. The legal analysis demonstrates significant differences between the two proposals in the implied reallocation of taxing rights, depending on the considered (digital) business model. The paper contends that overall and despite its complexity, Pillar I Amount A addresses the specific interests of developing countries better than Art. 12B UN Model. In particular, Pillar I Amount A will likely outperform the UN’s proposal in terms of its tax revenue potential.

Heckemeyer, Jost and Heckemeyer, Jost and Schulz, Inga and Spengel, Christoph and Winter, Sarah, The Digital Economy, Global Tax Reforms and Developing Countries – An Evaluation of Pillar I and Art. 12B UN Model (March 28, 2024).

The EU suffers from ‘tax leakage’ in which profits are shifted from high-tax to low-tax EU countries, and from there onto no or low-tax non-EU jurisdictions, often without the application of withholding taxes. So far, an opportunity for what could be seen as a tax at the border of the internal market, aiming to protect the market from harmful competition, may have been missed. Such a tax could reflect the undertaxed profit rule agreed as part of the international deal on the corporate minimum tax. Focusing on protecting the revenues of EU members by common tax borders could offer scope for new own resources.

This IMF working paper highlights that the international agreement on a corporate minimum tax is a milestone in global corporate tax arrangements. The minimum tax disturbs the equivalence between otherwise equivalent forms of efficient economic rent taxation: cash-flow tax and allowance for corporate equity. This paper shows that the marginal effective tax rate initially declines as the statutory tax rate rises, reaching zero where the minimum tax is inapplicable and increases thereafter. The key insight is that a minimum tax, akin to Pillar Two, breaks the equivalence between cash-flow taxation and the allowance for corporate equity (ACE).

Shafik Hebous & Andualem Mengistu, Efficient Economic Rent Taxation Under a Global Minimum Corporate Tax, (IMF Working Paper No. 2024/057, 2024).

This technical report aims to provide a seminal analysis and strategic roadmap that aims to empower Africa to assert its voice and agency in shaping inclusive and transformative international tax cooperation and governance. It provides African policymakers and leaders with a nuanced blueprint to recalibrate international tax cooperation, underscoring principles of inclusivity, equity, and transparency. Through highlighting the urgency of addressing illicit financial flows and the disproportionate impact of global crises on developing nations, this report advocates for a globally inclusive, intergovernmental tax process at the UN that ensures equal representation and participation of all countries.

This paper analyses developments in the CJEU’s case law regarding withholding taxes and the constraints that fundamental freedoms impose on Member States in this area.

Ivan Lazarov, Case Law Trend: Withholding Taxation Under the Fundamental Freedoms, 51 Intertax 524 (2023).

This paper investigates the introduction of Controlled Foreign Company (CFC) rules by the Anti-Tax Avoidance Directive (ATAD) in the European Union. The authors study whether the implementation of CFC rules, in the context of the ATAD, alters the location, financial, and economic activity decisions of multinational enterprises (MNEs). The results reveal that the newly implemented CFC rules are only partly effective in reducing profit shifting. Instead, the overall number of CFC subsidiaries decreased, and the financial revenue of the persisting subsidiaries remained largely unchanged. The authors observed positive effects on the costs of employees assigned to a CFC subsidiary, suggesting that the economic activity exemptions introduced by the ATAD allow MNEs to circumvent the rules. This permits them to opt for a simple approach, enhancing economic activity in these locations.

The staff of the Joint Committee on Taxation describes legal and economic background relating to the taxation of income earned by multinational enterprises and the potential economic and revenue effects of Pillar One Amount A.