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International Taxation. Authorship team: Rachel Griffith, James Hines, and Peter Birch S ø rensen. The chapter assesses the role of international considerations in tax design, emphasizing issues related to capital taxation.

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International taxation l.jpg
International Taxation

  • Authorship team: Rachel Griffith, James Hines, and Peter Birch Sørensen.

  • The chapter assesses the role of international considerations in tax design, emphasizing issues related to capital taxation.

  • In truth, all of the volume’s chapters have international components; this one is perhaps merely the most explicit.


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Importance of International Considerations in UK tax policy

  • The scope and magnitude of foreign direct investment.

  • The (rising) significance of cross-border share ownership.

  • Imports and exports of goods and services.

  • Magnitude of international factor payments, including interest, rents, and royalties.

  • Importance of footloose activities, such as R&D.



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Figure 1

Note: Figure shows annual outward FDI flows in 2000 US$ billion

Source: OECD


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Figure 2

Note: Figure shows annual outward FDI flows as a % GDP

Source: OECD


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Figure 3

Note: Figure shows % of UK listed ordinary shares owned by Rest of World. UK offshore islands were re-classified to RoW in 1997

Source: ONS, Share Ownership 2004.


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Figure 4 UK international investment position - investment abroad

Note: Figure shows Balance Sheet nominal values at the end of the year in £bn, HLXV only available from 1987

Source: The Pink Book, 2006, Tables 1.3 or 8.1, http://www.statistics.gov.uk/statbase/TSDSeries1.asp


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Figure 5 UK international investment position - investment in the UK

Note: Figure shows Balance Sheet nominal values at the end of the year in £bn, HLXW and HLYD only available from 1987

Source: The Pink Book, 2006, Tables 1.3 or 8.1, http://www.statistics.gov.uk/statbase/TSDSeries1.asp


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Figure 6 UK royalty and licence fees in the UK

Note: Figure shows nominal trade flows in £bn

Source: The Pink Book, 2006, Tables 3.8, http://www.statistics.gov.uk/statbase/TSDSeries1.asp


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Figure 7 UK trade in goods and services in the UK

Note: Figure shows nominal trade flows in £bn

Source: The Pink Book, 2006, Tables 2.1 and 3.1, http://www.statistics.gov.uk/statbase/TSDSeries1.asp


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Figure 8: R&D by UK plc compared to R&D in the UK in the UK

R&D by UK PLC

conducted anywhere in the world

R&D in the UK

by UK and foreign firms

Source: Abramovsky, Griffith and Harrison (2005)

values have been deflated by the GDP deflator and re-based to equal 100 in 1996.


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Figure 9: share of BERD undertaken in the UK financed from abroad

Source: Authors’ calculations using OECD MSTI.


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Figure 10: abroadshare of BERD undertaken in the UK financed from abroad

Source: OECD Main Science and Technology Indicators, 2004


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Incidence and efficiency of capital taxes in open economies. abroad

  • Distinguishing taxes on saving from taxes on investment.

  • What are the effects of source-based taxation of investment income in open economies? How open must the economy be in order to apply the analysis of small open economies?

  • Residence v. source basis for taxing business and personal income.

  • Who bears the burden of source-based and residence-based taxation in open economies?


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Evidence of behavioral responses to international taxation abroad

  • Effects of taxation on the magnitude and location of foreign direct investment.

  • Effects of taxation on various forms of tax avoidance. Effectiveness of anti-avoidance rules.

  • Effects of taxation on factor prices.

  • Are FDI and tax avoidance likely to become even more responsive to tax differences in the future?


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Tax reform proposals in open economies abroad

  • Which reform proposals fare best in open economy environments? Consumption v. income taxation. How much of a concern is revenue erosion through avoidance?

  • What are the effects of tax asymmetries in open economies? For example:

    • Favorable treatment of startup firms.

    • Treatment of tax losses.

    • Subsidies for R&D.

    • Transaction-based taxes such as capital gains taxes and stamp duties.


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International choices embedded in the UK tax system abroad

  • What aspects of the post-1977 evolution of UK taxes are attributable to international pressures?

    • Statutory tax rates

    • Abolition of the ACT

    • Treatment of R&D

    • Double tax relief

  • What costs and tradeoffs are implicit in various international features of the tax system?

    • Tax asymmetries from an international perspective

    • Tax revenues v. tax distortions


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The tax treatment of foreign income abroad

  • The UK taxes on a worldwide basis, allowing foreign tax credits.

  • Taxation largely on the basis of repatriation, with foreign tax credit limits.

    • Restrictions on cross-crediting.

    • Controlled foreign corporation regime.

  • What are the costs are associated with this system? What would be the revenue implications of major reform?


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Domestic-Foreign Interactions abroad

  • Closely related to the taxation of foreign income is the tax treatment of domestic activities that contribute to foreign profitability.

  • For example:

    • Deductibility of domestic interest expense.

    • General administrative and overhead expense.

    • Domestic R&D.

    • Transactions with related parties.

  • What are the costs of tax reforms that do not quite get these right?


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International cooperation and international agreements abroad

  • UK has a large network of bilateral tax treaties.

    • Are current treaty provisions sensible in light of other aspects of the UK tax system?

    • Are there reform proposals that would require renegotiation of these treaties?

  • The UK is also an EU member, and therefore also subject to ECJ rulings.

    • How would the UK be affected by EU tax coordination and/or tax harmonization?

    • What are the international implications of continued ECJ activism?


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Implications for future tax reforms abroad

  • Do open economy considerations create their own pressure for UK tax reform? Is there a model toward which the system needs to move?

  • What are the international ramifications of proposed reforms? To what extent do they depend on what other countries do?

  • What is the revenue picture going forward? To what extent will it be necessary to find alternatives to the taxation of business profits and other forms of capital income?


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