Towards fundamental reform of the international taxation of business

The Oxford International Tax Group of economists and lawyers, chaired by Michael Devereux, has spent some years discussing options for the fundamental reform of the international system for taxing business profit. The Group will publish their work as an Oxford University Press book in 2020.  

One proposal which they have developed is for a new system that they identify as Residual Profit Allocation by Income, or RPAI. This has been published in advance of the book as a working paper. The proposal is one of a family of schemes based on separating the total profit of a multinational enterprise (MNE) into two parts – the ‘routine’ profit and the ‘residual’ profit. This distinction is familiar in the context of profit splits. The RPAI allocates the right to tax routine profit to the country where functions and activities take place. It allocates the right to tax residual profit to the market, or destination, country where sales are made to third parties.  

This proposal has echoes in the OECD’s current work on ‘Pillar 1’ of its consideration of the challenges arising from the digitalisation of the economy. However, the RPAI is more comprehensive and consistent than the ideas that the OECD is considering.  

The group argues that the RPAI has attractive properties – while it is far from perfect, it matches well reasonable criteria for evaluating proposals for tax reform: economic efficiency, fairness, robustness to avoidance, ease of implementation, and incentive compatibility. The RPAI is based firmly on concepts employed by the existing system.  Its superior performance under these criteria relative to the existing system stems primarily from allocating taxing rights for residual profit to the destination country. The relative immobility of the third-party purchaser of goods and services sold by the company – especially in the case of individuals – implies that the location of the taxation of residual profit is not easily manipulated. This is true of manipulation by shifting real economic activity – which creates economic distortions and hence inefficiencies – and also of the manipulation of the location of taxable profit.  Thus the introduction of the RPAI would be likely to result in a significant improvement in the performance of the existing system, both in terms of economic efficiency and robustness to avoidance.  


Michael Devereux, Alan Auerbach, Michael Keen, Paul Oosterhuis, Wolfgang Schön and John Vella ‘Residual Profit Allocation by Income’, Oxford University Centre for Business Taxation Working Paper 19/01