Allocation of the International Tax Base Using the Fractional Taxation Model

Fundamentals for tax base allocation, inter alia economic affiliation and neutrality to tax jurisdiction, are discussed, and fractional taxation is proposed as an alternative to overcome transfer pricing’s, CCCTB’s and BEFIT’s flaws in tax base allocation.

Why This Book?

“There are worlds other than this” expresses the fundamental lesson from the thesis, as it breaks with the transfer pricing system – the cornerstone of international tax allocation – CCCTB and BEFIT. Instead, it proposes fractional taxation as a whole model for tax base allocation.

In the aftermath of the financial crisis the flaws of international tax base allocation were exposed to the broad public, resulting in the OECD/G20’s BEPS Project and the subsequent GloBE Project. Parallelly, the European Union promoted the CCCTB, later replaced by BEFIT. Can these adjusted mechanisms allocate the international tax base in a manner which is generally accepted as fair, or is an alternative mechanism necessary?

After a brief discussion of forms of double taxation follows a short description of the reasons for tax structurings and an explanation of the elementary instruments MNEs apply. Based on that, an open and expandable grid of generally accepted criteria for a structured evaluation and development of tax allocation rules is created. One focus is on the discussion of the definition of economic affiliation which is seen as fundamental for a tax base allocation perceived as fair and just. Another focus lies on the newly created neutrality to tax jurisdiction to deter MNEs and countries alike from manipulating the tax base allocation.

After this ground-laying work follows a comparative evaluation. It concludes that the adjusted transfer pricing system, the CCCTB and the BEFIT meet the criteria only to a limited extent. Thus, fractional taxation is introduced.

Fractional taxation is based on Georg Schanz’s allocation concept of 1892. At that time taxpayers were burdened with double and triple taxation, inter alia, resulting from still existing particularism in the newly formed German Empire. The concept is adapted to the “modern” internationally integrated, digital economy, and is shown to outperform the discussed alternatives.