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.
How effective are tax credits for research and development?
R&D tax credits have become increasingly popular around the world in the recent years. Many countries adopted R&D tax incentive schemes in the past decade, while the generosity of existing schemes increased substantially. A pressing question now is whether these policies are effective in generating private R&D that would otherwise not have taken place. The difficulty in finding exogenous variation in the tax price of R&D complicates any policy evaluation exercise, even when suitable data at the company level on the value of tax breaks and R&D spending is available. In this study, we exploit variation in the tax price of R&D between firms and over time arising from policy changes that took place in the UK in 2008 to identify the impact of the UK R&D Tax Relief. Our study uses a rich company-level dataset on beneficiary firms and their qualifying R&D spending in HMRC’s corporation tax returns. We find that the UK R&D tax credits were successful in generating R&D spending which would have otherwise not been carried out. In response to a one percent drop in the tax price of R&D, we find that UK companies increased their qualifying R&D spending by about two percent. We also find that the early announcement of the policy changes affect companies’ strategies in shifting R&D spending to later periods when such spending becomes cheaper, but our results about the additional effect of the policy hold even when such strategic timing effects are taken into consideration.
Irem Guceri and Li Liu