Hi Johannes, thanks for your comment. Glad to hear you’re working in this area too and thanks for providing that additional context for the global minimum tax.
One difficulty in international tax policy is that it can be really hard to work out what good tax policy looks like, apart from any national interests. I’ve only been loosely following the global minimum tax and I understand there are competing views as to whether the minimum tax is a good idea and what level it should be set at (i.e. a higher rate is not necessarily always better).
Personally I’m agnostic on this because I simply don’t know enough about the various arguments and counterarguments, which is why my original post focused at a higher level on international tax policy being a relatively neglected cause area and on how international tax policy development is dominated by developed countries focusing on their own national interest (two points I feel more confident about).
But I’d be keen to discuss this and other tax issues with globally-minded people like yourself. I’ll send you a private message :)
Tax Geek
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Hi James, thanks for your comment. A couple of points in response:
OECD Model and residence-based taxation
I disagree that the OECD Model has led to a predominantly source country-based tax system. Quite the opposite — relative to the UN Model, the OECD Model favors residence-based taxation.
In broad terms, under the OECD Model, residence States have taxing rights over an enterprise’s business profits (Article 7) unless the DTA provides otherwise. The key exceptions are:
Article 5 (Permanent Establishment (PE)). To the extent those business profits are attributable to a PE in another State, the residence State gives up taxing rights over those profits. While virtually all countries agree with this general principle, source States and residence States have different negotiating positions on this, with source States preferring a broad definition of “PE” and residence States preferring a narrow definition. You can see this by comparing the OECD Model’s relatively narrow PE definition and the UN Model’s broader definition.
This is what I meant when I said above that “taxing rights are primarily based on physical presence”. The concept of a PE has historically been based on physical presence. Over the years, the definition has broadened to include things like dependent agents but not all of those changes will be fully picked up by States that favor residence taxation.
Article 6 (Immovable property—i.e. land and natural resources). Apart from the PE Article, this is probably the main article giving a broad taxing right to source states. It is a longstanding and widely accepted principle that source States have primary taxing rights over immovable property.
Articles 10 and 11 (Dividends and Interest). Under the OECD Model, residence States give up some taxing rights over dividends and interest income, but they limit the source States’ rights to apply withholding tax to some fixed percentage of the dividend or interest (e.g. 10% on the gross interest payment). The exact rates will be key issues in any treaty negotiation. Residence States tend to seek lower rates; source States tend to want higher rates.
Article 12 (Royalties). This is an important difference between the UN and OECD Models. The OECD Model does not provide for any source State withholding tax on royalties. The UN Model does provide for source State taxation but leaves the rate to be determined in bilateral negotiations. The lack of source taxation on royalties can lead to double-non-taxation because if the residence State doesn’t tax foreign-sourced royalties, the royalty income escapes taxation altogether. So this creates an incentive for multinationals to shift their intellectual property to countries that won’t tax foreign-sourced royalties (or only tax them lightly). (I should note that, despite the OECD Model, many OECD countries do agree to some source taxation on royalties in their DTAs. But that will be decided in bilateral treaty negotiations.)
Article 13 (Capital gains). Residence States get taxing rights with some limited exceptions such as if the property is immovable property or part of a PE in the other State. Put simply, this means residence States get sole taxing rights over capital gains from most share sales.
Just to clarify, when I say poorer/developing countries tend to prefer source country taxation, that is a simplification and generalisation. There are some developed countries like Canada that favor strong source taxing rights (I think this is because of its heavy reliance on natural resources and possibly because so many more US businesses operate in Canada than the other way around—but this is speculation on my part).
Consumer-country based taxes
I haven’t read Piketty’s book but I generally like the idea of ‘destination-based taxes’ which are those based on the destination/location of consumers like you describe. Consumption/sales taxes tend to be destination-based whereas income taxes tend to be ‘origin-based’.
My understanding is quite a lot of academics and economists like destination-based taxes, particularly the ‘destination-based cash flow tax’ and some prominent economists have written some detailed papers on it (see e.g. Auerbach et al, 2017). In 2016, the US Republican Party even included a proposal for it, but that did not go ahead.
I am broadly sympathetic to the idea but I have not looked at it in detail and it’s not my area of expertise. I might look into it more at some point in the future, especially if the idea gains traction in the US (I suspect it would be hard for other countries to implement it unilaterally).
Hope that is helpful and happy to clarify if there’s anything I haven’t explained well. I’ll also flick you a PM.