Taxation

Jay Pil Choi, Jota Ishikawa, Hirofumi Okoshi, 27 July 2020

It is well known that multinational enterprises take advantage of corporate tax systems worldwide to avoid taxation. Transfer pricing is one common method used for profit-shifting, as intra-firm transactions are shielded from the market mechanism. Numerous guidelines and regulations have been implemented to tackle such profit-shifting, but challenges remain. This column theoretically explores how one such regulation, the ‘arm’s length principle’, affects the licensing strategies of multinationals in the presence of a tax haven. It shows that the mere existence of this principle may lead to further profit-shifting and may worsen the welfare of high-tax countries. 

Jay Pil Choi, Taiji Furusawa, Jota Ishikawa, 26 June 2020

To address the issue of tax avoidance by multinational enterprises, governments impose transfer-pricing rules to control transfer-price manipulation. Using a theoretical framework allowing for the possibility of profit shifting, this column explores the interplay between transfer-pricing regulations and tax competition. It finds that the nature of tax competition can depend on the tightness of transfer-pricing regulation, and a tax-haven country does not always prefer lax transfer-pricing regulation. Thus, the incentives of the host and FDI source country can be aligned to set up global regulatory standards for transfer pricing.

Ethan Ilzetzki, 11 June 2020

Public debt has risen to unprecedented peacetime levels, due to policies put into place to address the economic fallout from COVID-19. Nevertheless, as this column reveals, the Centre for Macroeconomics panel was nearly unanimous that the Treasury should not take any action to decrease the deficit in the upcoming budget. The panel is split on when it would be wise to publicly announce long-run plans to address the deficit and the debt. The majority of the panel supports a mix of financing options when action is taken, with tax increases receiving strong support and not a single panellist supporting public spending cuts.

Francesco D'Acunto, Daniel Hoang, Michael Weber, 08 June 2020

The German administration has just released their €130 billion economic stimulus package, the most prominent measure of which is an unconventional fiscal policy in the form of a sudden drop in VAT. The aim is to create a future path of increasing sales taxes by increasing prices and hence stimulating inflation expectations and aggregate demand today. This column argues that earlier episodes have shown that unconventional policy is effective because it is easily understood by non-expert households and households react to it strongly. Alternative unconventional measures, instead, such as forward guidance, are largely ineffective in part because households do not understand what such policies imply for their consumption.  

Thiess Buettner, Felix Kreidl, 14 May 2020

Investors have increasingly used the instrument of withholding taxes to evade dividend taxation, employing ‘cum-ex’ transactions around ex-dividend dates. Using German stock trading data, this column provides evidence for these types of transactions, showing that there is a substantial increase in the number of stocks traded immediately before the ex-dividend date, with much stronger increases in ‘over-the-counter’ transactions, where trades are particularly easy to arrange.  Given the evidence, withholding-tax non-compliance in the form of cum-ex transactions should not be regarded as some type of financial market arbitrage exploiting a tax loophole but a form of deliberate tax fraud.

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