Revenue Implications of Destination-Based Cash-Flow Taxation
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Revenue Implications of Destination‑Based Cash‑Flow Taxation Shafik Hebous1 · Alexander Klemm1 · Saila Stausholm1
© International Monetary Fund 2020
Abstract We estimate the revenue implications of a destination-based cash-flow tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or— perhaps surprisingly—are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many—but not all—other countries to follow the DBCFT adoption. Keywords Tax revenue · Destination-based cash flow tax · Border adjustment tax JEL Classification H25 · H87
Electronic supplementary material The online version of this article (https://doi.org/10.1057/s4130 8-020-00122-4) contains supplementary material, which is available to authorized users. * Alexander Klemm [email protected] Shafik Hebous [email protected] Saila Stausholm [email protected] 1
Fiscal Affairs Department, International Monetary Fund, 700 19th Street, Washington, DC 20431, USA Vol.:(0123456789)
S. Hebous et al.
1 Introduction There is an intense debate about the vulnerability of current corporate income tax (CIT) arrangements to profit-shifting practices by multinational enterprises (MNEs) and tax competition between countries. One approach to addressing these challenges is through reforms within the current system, such as by tightening anti-tax avoidance rules and enhancing tax transparency—e.g., through the G20-OECD Base Erosion and Profit Shifting (BEPS) initiative. Another approach is a fundamental reform of profit taxation that would resolve the vulnerabilities to profit shifting and tax competition. One specific option for a fundamental reform is a destination-based cash-flow tax (DBCFT), occasionally referred to—slightly misleadingly—as a border-adjusted corporate income tax or a border-adjustment tax. The DBCFT was first proposed in Bond and Devereux (2002) and recently further analyzed in various papers (e.g., Auerbach et al. 2017a, b). Beyond the academic interest, in 2017 the US congressmen Ryan and Brady proposed introducing a variant of the DBCFT in the USA.1 While the US tax reform in December 2017 ultimately did not include a DBCFT, the proposal triggered unprecedented policy interest in destination-based profit taxation. The DBCFT has two components. First, a cash-flow component enables full expensing of investment and denies interest expense deduction. This component ensures that the DBCFT is a tax on economic rents, leaving normal returns untaxed. Secon
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