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Tax Avoidance in a global economy
Mark Nieuweboer
(Institute for Taxation and Economics)
2.5%
Subjects
 Fragmentation and globalisation
 Aggressive tax planning
 The case against tax avoidance
The law applies equally for all
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Tax system
Resistance against paying taxes
Free riders
If the law applies equally to all, how can one taxpayer
legally pay less than the other?
Fragmentation leads to arbitration
 Fragmentation
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State
Taxpayer
Income
Time
 Arbitration
Case study: United States v Isham (1873)
Globalisation
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World trade agreements
Liberalisation of capital markets and the euro
Information & communication
Technology
Tax avoidance is profitable
 Competition between states
 Competition between companies
 Tax systems have not globalized
Base Erosion and Profit Shifting
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Disconnect real activities from reported income
Global value chain
Drain profits through funding
Profit repatriation schemes
Connection between profits and activities
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Global Value Chain
Transfer pricing
Functions, risks & assets used
Disproportional value for intangibles and risks?
Case study: quality coffee or high value brand?
Drain profit through debt funding
 Interest charge is tax deductible
 Interest income is highly mobile
 Instruments: Base companies in ‘real’ tax havens
 Conduit companies
 Hybrid mismatches
Profit repatriation schemes
 Prevent ‘leakage’ of profits
 Instruments: Defer distribution of income ()
 Hybrid mismatches
 Conduit companies
Tax avoidance is bad, because it…
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drains the public budget
frustrates economic policy
distorts competition
is unfair and creates inequality
is economically inefficient
does not contribute to good citizenship
is not transparant
is not democratically legitimized
Tax avoidance is not bad, because it…
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has minimal effect on budget
allows for fiscal price differentiation
makes tax competition between states less harmful
facilitates foreign direct investments
protects the tax revenues
protects smaller economies
requires less government resources
Economic effects of anti-avoidance policy
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Increase in tax revenue
Incidence of corporate income tax
Capital outflow
Elimination of means does not eliminate the needs
Decrease welfare
What can we do?
 Undo globalisation
 Change the corporate tax paradigm
 Eliminate the differences between all tax systems
through harmonization
 Coordinated anti-avoidance rules
 Uniliateral anti-avoidance rules
 Nothing…
Adam Smith, Wealth of Nations (1776)
“The subjects of every state ought
to contribute towards the support of
the government, as nearly as
possible, in proportion to their
respective abilities; that is, in
proportion to the revenue which
they respectively enjoy under the
protection of the state.”