International Tax Coordination for a Second-Best World (Part II)

In the first part of this article (1 World Tax Journal (2009), p.67) the basic framework for international tax coordination has been laid out. It has been established that neither the ability-to-pay principle nor the benefit principle provides a guiding light when the allocation of taxing rights between countries is concerned. Likewise, the standard requirements of CEN, CIN and CON do not give a full and systematic picture either. In recent years, the dynamics of tax competition have ensured that market power of governments and the attractiveness of countries for investors play a major role when it comes to the shaping of unilateral and bilateral tax provisions on international taxation of business. Against this background, it has been proposed in the first part of this article to rely on a “continuity approach”, which tries to avoid abrupt and discontinuous changes in the tax treatment of different sources of income without taking one-dimensional solutions for granted. This has been exemplified for the choice between permanent establishments and subsidiaries. In the second part of this article, this analysis is extended to the choice between portfolio and direct investment (portfolio shares v. controlling shareholdings), the choice between debt and equity and the exploitation of intellectual property. While there are good reasons to align treatment for small and large shareholdings, the specific treatment of interest versus dividends or of royalties versus other forms of business income may be justified depending on the mechanics of tax competition in a given situation. The third part will be devoted to group taxation, in particular to the choice between separate accounting and formula apportionment.