The aim of this article is to examine the differences in perception of 'fairness' between developing and developed countries, which influence developing countries' willingness to embrace the Base Erosion and Profit Shifting (BEPS) proposals and to recommend as to how to overcome these differences. The article provides an introduction to the background of the OECD's BEPS initiatives (Action Plan, Low Income Countries Report, Multilateral Framework, Inclusive Framework) and the concerns of developing countries about their ability to implement BEPS (Section 1); a non-exhaustive overview of the shortcomings of the BEPS Project and its Action Plan in respect of developing countries (Section 2); arguments on why developing countries might perceive fairness in relation to corporate income taxes differently from developed countries (Section 3); and recommendations for international organisations, governments and academic researchers on where fairness in respect of developing countries should be more properly addressed (Section 4).
In their discussions on corporate income tax systems the International Organizations (IOs) OECD, UN, IMF and World Bank, Supranational Organizations (SOs), Non-Governmental Organizations (NGOs), associations of practitioners and Governments often refer to the concept of fairness without proper definition of what in the context of their arguments is fairness and how the fairness can be achieved. The consequence is that fairness in taxation is a blurred concept. This article shows that fairness in taxation has an economical, juridical, philosophical and political perspective. Following the overview of these perspectives, this article calls for more research on global perceptions of fairness and for formulating an agenda for discussing this issue by IOs, SOs, NGOs and Governments.
One of the vexing questions in tax law is whether or not the legal form should make a difference in taxing companies. This question arises amongst others when companies do business outside their country of residence.Companies may set up a subsidiary. The subsidiary, being a separate legal person, will in most countries be taxed as a resident company in the state of incorporation and/or in the state in which it has its effective management. It will be taxed as if it acts on an arm's length basis with the parent company and other associated companies. In case the taxpayer performs its foreign activities without setting up a subsidiary the income derived from these foreign activities may also be taxed in the country where the activity is performed. Most countries tax non-residents on income derived from sources in their country including income derived from permanent establishments situated in that country. These countries generally use the concept of permanent establishment both in their domestic law and in tax treaties. A permanent establishment generally is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. PE-profits are determined on the basis of the separate enterprise theory for allocating profits to permanent establishments: the PE-state taxes the profits which the permanent establishment might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. Important exception is the United States. In its tax treaties the United States uses the PE-concept. However, in its domestic law the United States uses the fixed place of business concept in combination with the "income effectively connected with a trade of business" rule.
Rainer Prokisch and I first met some twenty years ago. At the time he was working on a book on the German approach to taxing permanent establishments. I had defended my dissertation on the allocation of profits to permanent establishments in 1991 and, together with Rijkele Betten had set up the – at the time loose-leaf, nowadays electronic – publication “Permanent Establishments” for IBFD in 1993. I remember interesting discussions we had on the topic. Therefore my contribution to Rainer’s liber amicorum concerns this topic.
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