Extending Taxation of Interest and Royalty Income at Source An Option to Limit Base Erosion and Profit Shifting?

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Extending taxation of interest and royalty income at sourcean option to limit base erosion and profit shifting? ‡ Katharina Finke*, Clemens Fuest**, Hannah Nusser*** and Christoph Spengel**** September 2014Abstract: This paper discusses tax policy measures to reduce corporate tax avoidance by extending taxation in the source country without imposing double taxation. We focus on four options: Bilaterally restricting interest and royalty deductibility, introducing an inverted tax credit system, levying withholding taxes on all interest and royalty payments and levying withholding taxes as an anti-avoidance regulation. We calculate the tax revenue effects of introducing a minimum withholding tax on royalty payments and an inverted tax credit. For the withholding tax we find that the US would suffer the greatest tax revenue losses, while some other countries would increase their tax revenue. In general, gains and losses depend not only on net balances in royalty income flows but also on withholding tax and credit rules under the status quo. The inverted tax credit would increase tax revenue in particular in high-tax countries. Revenue redistribution would only arise if withholding taxes were replaced by the inverted credit.JEL Classification: H20, H21, H 32, F23, K34

Corporation taxes in the European Union: Slowly moving toward comprehensive business income taxation?

“…Caution is advisable because the current tax-induced changes in corporate financing and intangible ownership patterns may, to a large extent, serve to reduce the distortions of real investment and saving decisions. 53 A start could be made with the common 10% withholding tax on interest and royalties, also on intra-group transactions, proposed by Finke et al (2014). 54 Presumably, full source-based taxation of capital income in EU Member States would require coordination with the EU's major trading partners, particularly the USA.…”

Transfer pricing regulation and taxation of royalty payments

“…In 2014, a Norwegian government committee on capital taxation in a small open economy discussed practical options for royalty taxation, but voiced mixed opinions (NOU, , chapter 7.3). In an empirical analysis, Finke, Fuest, Nusser, and Spengel () estimate the revenue effects of various kinds of withholding taxes to curb profit shifting. They show that most countries would benefit from a withholding tax on royalty payments, whereas the United States that receives the largest royalty income worldwide would lose a significant share of its revenue.…”

Tackling Spillovers by Taxing Corporate Income in the European Union at Source

“…55 If, under CBIT, corporations were allowed to write off the cost of capital goods, the CBIT would in fact become a cash flow tax: only economic rents would be taxed while the return on marginal investments would be exempted. 56 In a very thorough survey, Finke, et al (2014) assess the impact of various measures to strengthen source taxation in OECD member countries. Four options are discussed: bilaterally restricting interest and royalty deductibility, replacing the deductibility of payments by an inverted tax credit system (Lodin, 2011(Lodin, , 2013, levying withholding taxes on all interest and royalty payments, and levying withholding taxes as an anti-avoidance regulation.…”