Improving the Efficiency of Anti-Tax Base Erosion Regimes through Tax Modelling

Abstract

This article describes ways to enhance the efficiency of anti-tax base erosion measures aimed at preventing transnational corporations (TNCs) from shifting their profits from home countries to lower-tax jurisdictions. The research methodology comprises a set of mathematical models applied for a comprehensive analysis of tax planning methods used by TNCs and the counter-methods used by national governments. The models with postulated equilibrium consider tripartite financial structures (consisting of a parent company, a subsidiary in a loyal jurisdiction and an affiliate in an offshore jurisdiction) based on the principle of economic equilibrium in the distribution of incomes of different jurisdictions. The models are parametrized by using the data on tax regimes in different jurisdictions. The computational experiment focused on the tax regimes of a parent jurisdiction (Russian Federation), a typical loyal jurisdiction (Laos) and a typical offshore jurisdiction (British Virgin Islands). Thus, we considered the most important cases in international taxation regarding TNCs’ economic interests and the national welfare of the parent jurisdiction. The experiment tested the efficiency of different methods of fiscal regulation of international income and capital flows and showed that although the rules of controlled transactions are considered crucial for countering tax planning, they fail to bring the desired results in contemporary economic reality characterized by expanded international network of financial structures and accelerated growth of digital transactions. Based on our research findings, we formulated the following recommendations. The governments of parent jurisdictions are recommended to extend the rules of controlled transactions and controlled foreign corporations not only to offshores but also to loyal jurisdictions. For the Russian government, it may be effective to test and adopt the rules of secondary adjustments in combination with the rules of controlled transactions and controlled foreign corporations, to lower the rate of the tax on foreign dividends and to make the unreturned foreign dividends exempt from the additional tax should they be repatriated to Russia. Enhanced international cooperation in this sphere can maximize the efficiency of these measures. For citation Polezharova L. V. Improving the Efficiency of Anti-Tax Base Erosion Regimes through Tax Modelling. Journal of Tax Reform . 2019;5(2):148–165. DOI: 10.15826/jtr.2019.5.2.065 Article info Received June 28, 2019 ; accepted August 6, 2019