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Double Taxation’ Yesterday to Avoiding ‘Double Non-Taxation’ Today: the Urgent Need for an International Tax Regime Based on Unitary Tax Principles

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Double Taxation’ Yesterday to Avoiding ‘Double Non-Taxation’ Today: the Urgent Need for an International Tax Regime Based on Unitary Tax Principles University of Michigan Law School University of Michigan Law School Scholarship Repository SJD Dissertations Other Publication Series 2016 From Avoiding ‘Double Taxation’ Yesterday to Avoiding ‘Double Non-Taxation’ Today: The Urgent Need for an International Tax Regime Based on Unitary Tax Principles Zachée Pouga Tinhaga University of Michigan Law School Follow this and additional works at: https://repository.law.umich.edu/sjd Part of the Taxation-Transnational Commons, and the Tax Law Commons Citation Pouga Tinhaga, Zachée, "From Avoiding ‘Double Taxation’ Yesterday to Avoiding ‘Double Non-Taxation’ Today: The Urgent Need for an International Tax Regime Based on Unitary Tax Principles" (2016). SJD Dissertations. This Dissertation is brought to you for free and open access by the Other Publication Series at University of Michigan Law School Scholarship Repository. It has been accepted for inclusion in SJD Dissertations by an authorized administrator of University of Michigan Law School Scholarship Repository. For more information, please contact [email protected]. From Avoiding ‘Double Taxation’ Yesterday to Avoiding ‘Double Non-Taxation’ Today: The Urgent Need for an International Tax Regime Based on Unitary Tax Principles A Study of Unitary Taxation as a Solution to the Ills of the Current System of Taxing MNEs, and as a Remedy for Developing Countries’ Tax Struggles Zachée Pouga Tinhaga, Esq. Ann Arbor, Michigan, USA, October 28, 2016 1 From Avoiding ‘Double Taxation’ Yesterday to Avoiding ‘Double Non-Taxation’ Today: The Urgent Need for an International Tax Regime Based on Unitary Tax Principles A Study of Unitary Taxation as a Solution to the Ills of the Current System of Taxing MNEs, and as a Remedy for Developing Countries’ Tax Struggles Dissertation Submitted to Satisfy the Requirements of the S.J.D. By Zachée Pouga Tinhaga, Esq., University of Michigan Law School Dissertation Committee Members: Professor Reuven Avi-Yonah – Chair Professor Laura Nyantung Beny – Member Professor Alan Schenk - Member Ann Arbor, Michigan, USA, October 28, 2016 2 Table of Contents Abstract & Introduction Part 1 The Current International Tax System: A Broken Construct Not Fit for Purpose Chapter I Historical Background A. History of Taxation in General 1. Taxation and Colonial America 2. Taxation and Medieval Europe 3. Taxation and Africa 4. Common Denominator in Global Tax History: Tax Disdain B. History of International Taxation Specifically 1. The Taxing Power Pre-Compromise Debate 2. The Taxing Power Compromise 3. The Taxing Power Post-Compromise evolution Chapter II Overview of the Major International Tax Policy Philosophies Driving International Tax Rule Making in the Developing World A. Attracting Investments: Tax Incentives B. Encouraging Exports C. Inability to Reach the Hard to Tax and Reliance on Corporate Taxation D. Need for Simplicity E. Special Regimes for Extractive Sectors Chapter III Current international Tax Positions in the Developing World, Case Studies A. Current International Tax Positions in Africa 1. Cameroon: A Case Study 2. Nigeria: A Case Study B. Current International Tax Positions in Latin America 1. Argentina: A Case Study 2. Panama: A Case Study C. Current International Tax Positions in Asia 3 1. Malaysia: A Case Study 2. Indonesia: A Case Study Chapter IV The Current Ills of the International Tax System A. Global Ills B. Ills Specific to Developing Countries C. The BEPS project, a Case Study Part 2 The UT as the Panacea for the Current Ills of the International Tax System Chapter V The Building Blocks of a UT A. A Unitary Business B. Combined Reporting C. Formulary Apportionment Chapter VI Rebuttal of the Regular Arguments Leveled Against UT, and Current Experiences with UT A. Rebuttal of the Regular Arguments Leveled Against the UT B. The US States Experience with UT C. The European CCTB Chapter VII The Case for Unitary Taxation as the Answer to the Current International Tax Shortcomings A. Unitary Taxation is a Better Alternative for Developed Countries 1. Access to information 2. Credibility of the Systems B. Unitary Taxation is a Better Alternative for Businesses and the Private Sector 1. Predictability and Simplicity 2. Reduction in Compliance (Planning) Costs C. Unitary Taxation is a Better Alternative for Developing Countries 1. Access to Information 2. Easy Administration Chapter VIII The Design of an International Tax Reform Based on Unitary Taxation, and the Case for Compatibility with Current International Tax Treaty Network. 4 Abstract The purpose of this Dissertation is to analyze the current ills of the international tax system with a special focus on developing countries, and to structure and present a Unitary Taxation System (“UT”) as a solution to the legitimate and multifaceted complaints about current international taxation of multinational companies (“MNEs”). The research aims at presenting a UT that would restore credibility in the international tax arena by providing fiscal predictability and certainty to MNEs, and ensuring appropriate taxation by all countries (specifically developing nations) of all “real” economic activity within their borders. Although this issue has been previously explored, there is currently a vacuum to be filled concerning a coherent and complete UT as an alternative to the current taxation of MNEs from a developing countries’ perspective. Specifically, there is a need for a major research and elaboration of a specific UT that would satisfy the legitimate concerns of developing countries while not alienating the developed world and MNEs. That is the goal of this Dissertation. The international tax regime was created in an effort to avoid situations where the same income was subject to double taxation due to the exclusive fact that it had a cross border character. However, sovereign tax laws and tax regimes have grown so different, and international economic activity has grown so large that the debate ought to shift from the exclusive legitimate need to avoid double taxation to the urgent imperative to prevent double non-taxation and other undue tax arbitrage schemes1 that are threatening the very existence and credibility of the international tax regime. The current debate2 in the international tax world about the 1 David Rosenbloom, International Tax Arbitrage and the International Tax System, 53 Tax L. Rev. 137 (1999). 2Avi-Yonah, Kimberly Clausing, and Michael Durst, Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split. Michigan Law School: Public Law and Legal Theory Working Papers (2008). 5 inappropriateness of arm’s length standards and its disservice to tax authorities across the globe is opening a tremendous opportunity to reflect and design an international tax system that is fair to MNEs by providing them with fiscal certainty, and fair to all countries, particularly developing countries, by allowing them adequate taxation of economic activity through independent and sovereign tax policies. This research is a response to the current global outcry about the misfortunes of the international tax treatment of MNEs, largely based on the separate accounting arm’s length standard (“ALS”). Currently MNEs that operate in different countries have very complex and burdensome tax rules applicable to them. The economic realities of MNEs’ operations have shown completely irrelevant in the design of the applicable tax rules. MNEs have therefore proven extreme creativity in using tax rules to their advantage since these rules are not inspired and usually have no real impact on the economics of their transactions. The need to conduct a business in a foreign country in the form of a Permanent Establishment (“PE”) for example is very comparable, on a strict economic standpoint, to the regime of conducting the same business in the form of a Controlled Foreign Corporation (“CFC”). However, in the view of tax law, the not so economically relevant fact of choosing a PE or a CFC has tremendous fiscal consequences. The debate over “check the box” regime in the U.S. and its use abroad by U.S. MNEs is a telling example.3 The main focus of this research is twofold: on the one hand I intend to analyze the current ills of taxation of MNEs, their negative impact on tax authorities in developing countries specifically, 3 Steven Dean, Attractive Complexity: Tax Deregulation, the Check the Box Election, and the Future of Tax Simplification, 34 Hofstra L. Rev. 405 (2005). 6 and the urgent need for a different approach. On the other hand, I intend to design and structure a proposal for a better way of taxing MNEs. Through this structure, I intend to align international tax rules to economic realities. The UT proposed in this research would provide for equitable taxation of MNEs in every jurisdiction they operate in, specifically, in the developing world. The research therefore aims at providing an in-depth study and explanation of the current unsustainable international tax regime, its weaknesses and unfairness in taxing MNEs; then the construction of a new and better structure to approaching and taxing MNEs: the UT. First, the discussion of the ills of the current system, focusing specifically on the developing countries, would require empirical research of current specific international tax policies in selected sample countries. Also, the design of a new structure would require answering several questions including: what is a UT (an agreement on definitions of Unitary Business, Combined Reporting and Formulary Apportionment)? What
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