Is the destination-based cash flow tax open to avoidance?

An important issue for the destination-based cash flow tax (DBCFT) is its robustness to tax avoidance. A research project in this area has generated two published two research papers. The first paper, “International Tax Planning under the Destination Based Cash Flow Tax” considered the robustness of the DBCFT to three common ways of shifting taxable profits between countries: through manipulation of transfer prices, the use of debt, and locating intangible assets in low taxed jurisdictions. It shows that none of these profit-shifting strategies would be available under a DBCFT, if adopted by all countries. This is because intra-group payments between two countries would not affect tax liabilities in either country. If adopted unilaterally, however, there would be an incentive to shift profit – but this would be to the adopting country, at the expense of non-adopting countries.

The second paper, “Gaming Destination Based Cash Flow Taxes”, complements the first by considering domestic tax avoidance under a DBCFT. It does not reach a strong conclusion on whether the DBCFT is more robust to domestic avoidance than the typical corporate tax system currently found in most countries. But the analysis undertaken suggests that it is not more vulnerable. This paper also reaffirms the conclusion of the first: that the DBCFT appears more robust to international tax avoidance than the existing system. It does so by carefully examining the planning strategies proposed when the tax was under consideration in the USA in 2017. The paper argues that the proposed strategies either do not work under a properly designed DBCFT, do not work against the interest of the adopting country, or constitute evasion rather than avoidance. 

Irem Guceri and Li Liu, “Effectiveness of fiscal incentives for R&D: Quasi-experimental evidence”, American Economic Journal: Economic Policy, Vol.11, No.1, February 2019.