How would a destination-based tax fit with existing double tax treaties?
The destination-based cash flow tax (DBCFT) has been proposed as a major reform of the international tax system by Michael Devereux and co-authors. The idea was seriously considered in the USA in 2005 and was again the subject of intense debate in the USA in 2017. Although it was ultimately rejected on both occasions, the political and economic forces that led to its consideration remain, and one can reasonably expect that it will be considered again in the future. This indicates the need for further analysis of the proposal. This paper discusses how a DBCFT, if adopted by one or more states, would fit with existing double tax treaties.
The provisions of most double tax treaties are based on the OECD Model Tax Convention on Income and on Capital, reflecting the assumption that both contracting states operate a traditional income tax system. Given that a DBCFT is economically equivalent to a VAT combined with a reduction in payroll taxes, it is not surprising that, as the discussion in the paper shows, treaties are poorly equipped to accommodate a DBCFT.
The treatment of a DBCFT under a double tax treaty depends crucially on whether a DBCFT falls within the scope of the “taxes covered” provisions which are typically included in tax treaties, and in relation to which the various provisions of the treaty are intended to operate. The analysis on this point is not straightforward and the paper therefore considers the relevant implications in the situation both where the DBCFT is covered, and where it is not.
The discussion identifies a number of existing difficulties with the OECD Model Treaty which have a wider relevance than simply to the status of the DBCFT for treaty purposes. For example, there is a discussion of the vague and imprecise standards for assessing the nature of a tax on “income” for treaty purposes. The paper also considers the key policy considerations. This includes the likely treaty policy of states enacting a DBCFT, as well as the implications for states with no DBCFT.
Richard Collier and Michael Devereux, “The Destination-Based Cash Flow Tax and Double Tax Treaties”, Oxford University Centre for Business Tax Working Paper 17/06, July 2017.
An abbreviated version of the paper, “The Border-Adjusted Tax and Tax Treaties”, was published in Tax Notes International, December 28, 2017, 1181.