The international corporate taxation landscape is undergoing significant transformations. The most important upcoming changes include scheduled changes to the U.S. Tax Cuts and Jobs Act (TCJA), which will increase the effective tax rates on a variety of its international provisions, and the Pillar Two global minimum tax agreement brokered by the Organisation for Economic Co-operation and Development (OECD).
The OECD may also come to an agreement on another global tax agreement known as Pillar One, which would apportion some corporate income according to the location of sales, rather than the location of production. Additionally, the United Nations is also creating a working group on global tax policy.
These changes reflect a legitimate need to adapt the international tax system to a changing economy. Cross-border transactions have become more frequent and more global income has become attributable to so-called intangibles: abstract ideas like intellectual property that are difficult to pin down to a specific location.
When the definition or location of income is ambiguous, multinational enterprises (MNEs) have a pecuniary incentive to report their income in ways that incur a lower tax burden. This behavior presents a problem for policymakers. While low effective tax rates can be a fine policy applied broadly, it is undesirable for MNEs to achieve low effective rates haphazardly through tax planning.
Corporate tax avoidance behaviors take a variety of forms, depending on the kind of tax the MNE intends to avoid. These include transfer pricing, interest and thin capitalization, intellectual property location, and treaty shopping.
As the international corporate taxation landscape continues to evolve, it is crucial for MNEs to stay informed and adapt their strategies accordingly. The consequences of non-compliance can be severe, including hefty fines and damage to reputation. By understanding the changes and their implications, MNEs can make informed decisions and fulfill their tax obligations responsibly.
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