Some of the major economies are cutting corporate tax rates – most likely in an attempt to stimulate flagging productivity but perhaps also in response to the growing awareness of so-called profit shifting, whereby companies locate their headquarters in lower-rate jurisdictions so they can pay less corporate income tax. The US has made progress in getting its tax reform bill through Congress and the changes to the US tax code, which will see the corporate tax rate cut from 35 per cent to 21 per cent, are expected to be voted in tomorrow. And Japan has also approved measures to reduce corporate tax to 25 or 20 per cent from April 2018, but only for companies that comply with incentives on giving 3 per cent pay rises to employees or investing in new technologies. The rate was 38 per cent when Prime Minister Shinzo Abe came to office in 2012.

But what if governments didn't have to 'compete for business' by seeing who can offer the lowest corporate tax rate? Research by Alan Auerbach, Michael Devereux, and Helen Simpson, published almost 10 years ago, suggests an alternative system, whereby corporate income is taxed at the point of sale, where goods or services are sold. In this excellent article, Rita de la Feria, from the school of law at Leeds University and international research fellow at the Oxford University Centre for Business Taxation, discusses the proposal, which would remove the incentive for companies to base their headquarters in low-tax jurisdictions. She writes:

“The most common tax avoidance techniques rely on one crucial premise: that moving your headquarters or activities will affect where profits are taxed. If your patents are located in a country with lower corporate income tax rates, then the income they generate will be taxed at lower rates; if your management activities are located in that country, most of your profits may be taxed there. What these avoidance schemes have in common is their reliance on mobility: moving can result in a lower tax bill.”

Tax 'at destination' not perfect - but is it the best model we have?

Taxing at the 'destination' point of goods and services removes the possibility of paying less tax by moving the company's operations (headquarters or where patents are registered). De la Feria points out that customers are relatively immobile, tying a corporate's tax obligations to their customer base – so that taxes are paid in the country where the purchase occurs, or where the consumer is resident. She adds: “At a single stroke, we could almost completely eliminate tax competition and avoidance. Crucially, although international cooperation would make that more effective, it could still work if only one country unilaterally moved towards a destination-based corporate income tax.”

There are problems with this model – one only has to think of a company manufacturing goods in a developing country and selling them in a wealthy nation. Taxes would then go to the wealthier nation, detracting tax funds from a developing nation. But De la Feria argues that destination-based tax would not necessarily be detrimental to developing nations and that in any case, the current system is far from equitable. She notes: “many developing countries, such as most of Latin America and India, for instance, already use destination-based taxation in relation to services. They tend to import significant amounts of products, which would be a good indicator for estimating sales; and those with natural resources could easily apply a natural resources tax.”

Importantly, the destination-based tax system would end the pressure on governments to compete with each other to offer lower tax environments for multinationals.

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CTMfile take: Has your company carried out any analysis into how a destination-based corporate tax system would affect its corporate tax arrangements? Would you benefit? What in your opinion would be the best means of taxing corporate income?