Corporate Taxation and International Profit-Shifting: A Survey of the Evidence and Directions for Policy

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Title: Corporate Taxation and International Profit-Shifting: A Survey of the Evidence and Directions for Policy
Authors: Germain, Nicolas
Date: 2014-12-31
Abstract: This paper aims to inform international tax policy development in light of three of the most prominent tax avoidance channels: treaty shopping, debt structure and transfer pricing. Looking at Canadian domestic tax laws as well as the tax treaties, we find that although several policies in place work well to counter profit shifting, the rules would benefit from strengthening. Specific, quantifiable tests such as those of the limitation-on-benefits article in tax treaties are more effective than overarching rules such as the general anti-avoidance rule of the Income Tax Act to combat treaty shopping. Thin capitalization and earnings stripping tests should be widened to include third-party debt and should have added flexibility to recognize that different industries require different levels of leverage. For transfer prices, priority should be given to two-sided profit allocation tests whenever a satisfactory comparable uncontrolled price cannot be found as opposed to the simpler one-sided tests. We also advance policy proposals that are more difficult to implement but that may have a greater impact. Multilateral tax agreements can obviate treaty shopping. A comprehensive business income tax would invalidate profit shifting through debt and a formula apportionment can potentially render profit shifting through any channel obsolete.
URL: http://hdl.handle.net/10393/32015
CollectionScience économique - Mémoires // Economics - Research Papers
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