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Base Erosion A Myth, Says ACCA Study

by Robert Lee, Tax-News.com, London

04 April 2014


The corporate tax system is neither "broken" nor being eroded, according to the findings of a study commissioned by the Association of Chartered Certified Accountants (ACCA).

The research was conducted by the RMIT University School of Economics, Finance and Marketing, and published in a final report, Multinational corporations, stateless income and tax havens.

The report asserts that there is no evidence to support the belief that UK or US corporate income tax bases are being worn away. It acknowledges that some multinational companies do not pay as much tax in their host economies as consumers and voters may expect, but stresses that this does not necessarily imply any wrongdoing on the part of these companies.

As report author Sinclair Davidson puts it: "It is one thing to point out that multinational corporations do not pay tax in some jurisdictions but that says nothing about the actual corporate income tax base. To the extent that corporate income tax revenues have fallen in recent years, this is more likely to be a result of poor economic conditions than aggressive tax planning."

The report also takes issue with the concept of "stateless income." According to Davidson, there is no such thing as stateless income. Instead, there is "income that the governments of the UK and the US do not tax because under their own legal systems that income is not sourced in their economy. When these governments complain about stateless income, the question rather should be, 'Why do the owners of intellectual property not locate their property in your economy?'"

Davidson does nevertheless note that the "stateless income doctrine may be used as a catalyst for re-writing the corporate income tax system." Going forward, governments will need to think about the potential consequences of expanding the definition of source for corporate tax purposes.

"To the extent that stateless income is really a return on the development and ownership of intellectual property, then increasing taxation will have allocative efficiency consequences. At the same time it would also adversely affect the Irish and Dutch tax bases," the report warns.

Davidson said: "It is not clear that tampering with the tried and tested norms of corporate income tax to (possibly) generate more corporate income tax revenue while reducing the corporate income tax collected in foreign economies, and possibly reducing investment at home, employment at home and consumption at home, is good policy."

Reacting to the report, Chas Roy-Chowdhury, head of taxation at ACCA, said that questions nevertheless remain about the evasion/avoidance debate. "Multinationals need to be clear about the value they bring for the benefit of their shareholders and wider society, and to communicate to all stakeholders their underlying commitment to the building of a sustainable business. Companies must see the management of tax obligations as part of that process of creating long-term value," he advised.

TAGS: compliance | Finance | tax | investment | business | tax compliance | Ireland | Netherlands | tax avoidance | tax incentives | revenue guidance | intellectual property | Australia | United Kingdom | tax thresholds | tax authority | multinationals | tax planning | tax rates | United States | tax breaks | revenue statistics | tax reform | trade association | trade | Tax | Tax Evasion

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