The international corporate tax system is in need of a fundamental reform. The compromise for the allocation of profit between countries, first agreed in the 1920s, is not suitable for taxing modern multinational companies as it attempts to tax similar forms of income in different ways and in different places. As a consequence, it is open to manipulation by companies seeking to reduce their worldwide tax liabilities. In addition, the system incentivises tax competition between governments, which over time has led to reductions in both tax rates and bases. Currently, there are a number of ongoing initiatives by the European Commission and the OECD to tackle those issues. However, the majority of the proposed measures do not target the fundamental problems. A stable international system must remove the incentives for governments to undermine it. If governments reach an agreement to preserve the basics of the existing system, while tightening anti-avoidance rules, there will still be an incentive for future governments to undermine that system, as their predecessors have done in the past.
