Jack M. Mintz

Transfer pricing rules and corporate tax competition

Abstract A multinational parent sells a non-marketed commodity to a foreign subsidiary that uses the product as an input to produce a product it then sells. The subsidiary is controlled by a local managing partner whose compensation consists of a lump-sum payment plus a share of the subsidiarys profit. The parent chooses an optimal transfer price taking into account incentives for the subsidiarys managing partner and taxes. Home and host governments impose corporate income taxes on the parent and subsidiarys respective profits subject to a transfer pricing rule (e.g. cost plus price method or comparable profit method). A Nash equilibrium is derived for effective tax rates chosen by home and host governments. We then examine harmonization and suggest that tax rates would be reduced.

The optimal threshold for a value-added tax

Abstract One of the key features of a value-added tax—and often one of the most contentious—is the threshold level of turnover at which firms are obliged to register for the tax. Despite its importance, however, the question of the appropriate level at which to set this threshold has received little analytical attention. This paper first develops a simple rule characterizing the optimal threshold (when firms’ sizes are fixed) in terms of a trade-off between tax revenues and collection costs. It then considers, in principle and by simulation, the implications for the optimal threshold of the production inefficiencies implied by the differential treatment of those above and below the threshold.

Capital Mobility and Tax Competition

This text surveys the literature on the implications of international capital mobility for national tax policies. Our main issue for consideration in this survey is whether taxation of income, specifically capital income will survive, how border crossing investment is taxed relative to domestic investment and whether welfare gains can be achieved through international tax coordination. Our analysis puts special emphasis on multinational firms and the problem of financial arbitrage.

U.S. Interest-Allocation Rules: Effects and Policy

In 1986, the U.S. government undertook a significant reform of its income tax system. One important change for U.S. multinational corporations is related to the allocation of interest expense. This work analyzes the impact of the new U.S. interest allocation rules on the investment and financial decisions of U.S. multinationals. We test the effect of these rules on financing behavior using data from a survey of multinationals assembled by Price Waterhouse for this project. We also calculate effective tax rates for investments at home and abroad, taking the interest allocation rules into account.

Corporate Tax Harmonization in Europe: It's All About Compliance

Although the hope may be to reduce economic distortions in captial markets, the primary focus of corporate tax consolidation among member states of a federation is to reduce compliance and administrative burdens. For example, the Canadian provinces have sufficient flexibility to determine their corporate tax policies, and effective tax rates on captial vary considerably by province, but they still have achieved a considerable degree of harmonization of tax bases. The European Union should also try to implement a consolidated tax base for companies. A compulsory base would be best, but it is likely that the optional consolidated tax base is most practical at this time.

On the taxation of multinational corporate investment when the deferral method is used by the capital exporting country

Abstract The user cost of capital for a subsidiary is derived when the capital exporter uses the deferral method for the taxation of the parents foreign-source income. The Hartman-Sinn result implying that the capital exporters tax on remitted dividends is irrelevant to a subsidiary using retentions to finance investment is shown to be correct only when host and home countries have similar corporate income tax bases. Otherwise, both the home and host country corporate tax provisions influence the cost of capital. It is also shown that a cash flow tax by the capital importer is not neutral owing to interactions with the capital exporters tax regime.

Exploring formula allocation for the European Union

This paper explores the efficiency impacts of two methods of consolidated base taxation with formula allocation under consideration in the European Union. The first method, common (consolidated) base taxation (CCBT), would allow companies to choose a single tax base for their EU-wide operations. This tax base would be common throughout the participating member states. The second method, Home State taxation (HST), would also allow companies to choose a single tax base for their EU-wide operations. But, unlike with CCBT, the tax base would be defined according to the rules in the companys residence, or “home,” state. Thus, several different tax bases would exist within the EU. Both methods would use a common formula to distribute profits across countries. This paper finds that since countries continue to set corporate income tax rates, economic inefficiencies continue to exist under both methods. However, under HST, since the tax base differs according to residence, additional inefficiencies may arise depending on whether countries reduced their tax rates to combat the incentive for companies to relocate to locations with narrow tax bases.

An Empirical Estimate of Corporate Tax Refundability and Effective Tax Rates

The provisions of generous tax incentives during the 1970s and the recession of the early 1980s led to a marked increase in the number of nontaxable corporations in Canada. During the 1977 to 1982 period, over 40 percent of investment was done by corporations that were rarely taxable; 30 percent by corporations that were normally taxable; and the balance undertaken by corporations that were taxable about half the time.1 The degree to which taxable losses can be used to shelter other forms of taxable income has important implications with regard to the study of effective tax rates on capital income. This paper attempts to quantify the impact of imperfect loss offsetting or refundability on industry effective tax rate measurements. Section II of this note provides an estimate of the extent to which tax losses are written off current or future taxable income in a present value sense. Refundability is measured by discounting the estimated proportion of a taxable loss written off by companies through carryback and carryforward provisions. Section III uses the refundability measures to estimate effective tax rates on Canadian firms by industry. Three cases are compared. (i) The Taxpaying Firm. This firm expects to use all deductions and credits immediately. (ii) The Nontaxpaying Firm. This firm expects to be nontaxpaying with probability 1 in the period in which new investment is undertaken. Marginal tax losses on new investment are used up slowly over time.

Conduit Entities: Implications of Indirect Tax-Efficient Financing Structures for Real Investment

As well known, companies shift income from high to low tax jurisdictions. Typically, profit shifting is achieved by “direct” financing structures whereby companies use debt finance in the high tax entity and equity finance in the low tax entity. However, certain tax policies can lead to “indirect” financing structures whereby a conduit entity provides an opportunity to achieve at least two deductions for interest expenses for an investment made in the host country. The effect of “direct” and “indirect” financing structures on real investment is compared.

Measuring Effective Tax Rates in the Presence of Multiple Inputs: A Production Based Approach

We suggest a new method for comparing tax regimes acrossjurisdictions. The approach aggregates taxes on inputs by focussingon production, rather than investment, decisions. Taxes on variousinputs affect production decisions by increasing marginal costs.By calculating the difference between the tax-inclusive and tax-exclusivemarginal cost of production, we determine the effective excisetax rate on marginal costs implied by all of the various taxesimposed upon the firm‘s inputs. The effective tax rate on marginalcosts provides a convenient summary measure of the potentialimpact of taxes on all inputs on production location decisions.