Papers & Reports

The complexity of transfer pricing regulations is a severe challenge for tax authorities and MNEs. In the context of the OECD BEPS project policymakers and stakeholders had to navigate complex technical tradeoffs. For the Amount A reforms such complexities are largely attributable to the necessity of balancing opposing interest in a zero-sum game. Designing Amount B, however, does not constitute a zero-sum game. The mandate for Amount B, that is the application of the arm’s length principle for baseline distribution functions can only be attained when eliminating complexities. This paper discusses a risk management perspective to evaluate tradeoffs implied in determining the scope and thresholds for applying Amount B. The paper also illustrates that such an assessment framework to assess tradeoffs will address the needs of low-capacity jurisdictions and facilitate a positive outcome for taxpayers.

The author starts with the premise that multinational firms invest more and shift less profits out of countries with strong reputations, and study the correlation between this fact and lower corporate tax rates in these countries, finding an explanation in a government’s optimal taxation. They categorize governments into two types: commitment types and opportunistic types. According to this categorization, a commitment type of government commits to its tax rate; opportunistic governments may deviate from set rates after a firm’s investment. In the study, the author takes the government type as an unknown, and models the government reputation as a probability of a government falling into the commitment category. The model illustrates that firms maximize their expected profits based on a government’s reputation and shift profits once a government finalizes its tax rate in each period.

The article investigates the degree to which tax arbitration is associated with foreign direct investment. Using the staggered adoption of tax arbitration under tax treaties, the author finds that investments from developed OECD countries into developing host countries significantly increase following tax arbitration. The effect on developing host countries is driven by investments in middle-income developing. Overall, the provides novel evidence on investment response to tax arbitration.

This paper investigates the association between the effectiveness of mutual agreement procedures provided for in bilateral tax treaties (MAP) and foreign direct investments by analyzing MAP statistics and distinct MAP components. Using firm-level ownership data, the authors find that MNEs invest more frequently in countries with good MAP policy structures and qualities (e.g., MAP components and fast dispute resolution). Vertically integrated MNEs and small parent MNEs most favor countries with several effective MAP components.

The U.S. tax reform in 2017 introduced the Global Intangible Low-Taxed Income (GILTI) tax to discourage US multinational companies (MNCs) from shifting intangible income offshore. The reform simultaneously introduced the Foreign Derived Intangible Income (FDII) tax incentive to encourage companies to locate intangible income derived from export sales in the United States. This article examines whether these two tax initiatives affect the investment decisions of US R&D MNCs. The paper finds that these MNCs increase foreign tangible investments to minimize their GILTI tax burden but do not appear to decrease domestic tangible investments. The paper also observes that MNCs increase investments in both foreign and domestic human capital to maximize their FDII tax benefits. The paper further shows that FDII incentivizes MNCs to cultivate a new R&D workforce in the US as opposed to merely recruiting seasoned R&D personnel from other firms.

The OECD frequently lauds its Pillar 2 project as a cooperative global effort to ensure that large multinational enterprises pay a minimum tax regardless of where they are headquartered and regardless of the jurisdiction where their operations are located. At least 137 other nations have all agreed that global tax cooperation is consistent with their fiscal interests and their fiscal priorities. It is on these grounds that this paper attempts to identify the deficiencies and/or challenges of the Pillar 2 model rules and to propose necessary reforms to ensure that pillar 2 achieves the agreed-upon aspirational goals.

This article argues that the fact that the 2021 global tax deal, particularly Pillar 2, is cooperative, is not in itself proof of the deal being beneficial for all parties. Developing countries may benefit less and even lose from the agreement. The article focuses on two features of cooperation that may tilt the playing field in favor of developed countries – one is the agenda influence and the other structural incentives to cooperate. Since the OECD had control over both the agenda and the ways in which the deal was structured, it is not surprising that the deal served the interests of its members.

This article explores the need for interest limitation rules targeting intra-group debt financing, together with certain design options. It is concluded that most issues related to intra-group debt financing are already covered by the anti-tax avoidance directive (ATAD), transfer pricing rules and the Pillar 2 reform. Only the debt/equity balance is not addressed by these rules. Therefore, thin capitalization rules appear to be the most motivated type of targeted rule, if such rules are to be adopted. Other types of targeted rules, such as those taking into account the level of taxation of the recipient or the intention to avoid tax are hardly justified in cases covered by the Pillar 2 reform. In addition, thin capitalization rules can be designed in a manner that does not distinguish between domestic and cross-border situations, hence raising fewer issues of compatibility with the EU fundamental freedoms than other types of targeted rules that rely on the difference in taxation between domestic and cross-border loan transactions.

The OECD deleted Article 14 from its Model Tax Convention (MTC) in 2000, however, the UN decided to retain it in 2009. The OECD has since been chastised for eliminating it and the UN eulogized for retaining it. This article, contrary to the prevailing perspective, supports the deletion, albeit for reasons diametrically different from those canvassed by the OECD for the deletion. The paper berates the UN for retaining article 14 by debunking the grounds thereof and by mounting new arguments. The paper postulates that without a robust built-in anti-base erosion principle, which was deleted in 1999, Article 14 presence in the UN MTC is counterproductive, base eroding, and inimical to fiscal interests of developing countries.

Global tax hubs are the black boxes of the international tax regime (ITR). The driving forces of their strategic interaction with other building blocks of the ITR remain undertheorized. This paper offers the first theory of tax hubs as a two-sided global marketplace. It argues that tax hubs are the matchmakers of the ITR. International investors, tax hubs and endpoint jurisdictions play different yet interrelated roles within the same ecosystem i.e. the two-sided platform. The theory is positive rather than normative. It aims to explain how the creeping marketization of the ITR, as part of international law, has been frequently instrumented worldwide over the last century. The paper provides a stress test to the theory’s explanatory power and its limitations.