Granting Market Countries the Right to Tax Profit Without Physical Nexus

Taxing Multinational Enterprises: A Theory-Based Approach to Reform

“…After all, residual profit is supernormal profit that 𝑆𝑆 will want to tax as high as possible (Richter, 2021b). This incentive is curbed only to the extent that 𝑆𝑆's tax reduces the MNE's incentive to develop the knowhow of which the residual profit is the return (Richter, 2022). Thus, 𝑆𝑆 has to solve a trade-off when choosing its profit tax rate, which is why one can expect more convergence of tax rates in the RPS system than in the current one.…”

“…Pillar One assumes sales-based FA of an MNE's total profit, which, as shown, does not really meet the objective of aligning profit taxation with value creation. Furthermore, it has unclear efficiency effects (Richter, 2022).…”

“…The Convention's new Article 12B assigns market jurisdictions the right to levy a withholding tax on outflowing payments for ADS. In the present paper, the withholding tax is interpreted as a profit split and recommended as a model for a more general reform termed 'residual profit splitting' (RPS) by the present author in a companion paper (Richter, 2022).…”

“…The present article provides a theory-based derivation of RPS. Apart from own articles (Richter, 2021a and2022), the relevant literature consists mainly of alternative reform proposals and will therefore be discussed in my conclusion, where, having been clearly laid out, the concept of RPS can be compared with the competing ideas for reform.…”