Where should profit be taxed?

The international corporation tax system has developed in a way which has resulted in the primary place of taxation being where capital, or economic activity, is located. Although this is the international norm, its theoretical rationale is weak. As a proxy for personal income tax, corporation tax should be levied where the shareholder resides. But existing taxes do not follow this pattern, with the result that economic activity and profits are diverted between countries for tax reasons. This research project makes a theoretical contribution to analysing the most efficient location for taxing profit. It considers taxation at residence, source and destination (like VAT). It shows that a destination-based corporation tax can be neutral with respect to investment and location decisions. It also shows that an individual country could benefit from switching to a destination-based tax even if no other countries did so.

Michael Devereux