Wednesday, March 23, 2005

Cross-Border Tax Arbitrage - finding a distortion

Cross-border tax arbitrage can be defined as “taking advantage of inconsistencies between different countries’ tax rules to achieve a more favorable result than that which would have resulted from investing in a single jurisdiction”. Examples include dual resident companies and double dip leases, partnerships, etc. Basically, with a good structure an enterprise may end up claiming the same deduction in two countries. As you can imagine, this structures raise a great deal of attention, not only from a legal perspective but also from an economical standpoint.

Daniel N. Shaviro from New York University has published recently More Revenues, Less Distortion?: Responding to Cross-Border Tax Arbitrage. Here is a short abstract:

This paper briefly examines cross-border tax arbitrage in light of national and worldwide welfare considerations, along with an additional point: the importance of countries’ strategic interactions, which are directly raised in this setting. It concludes that the transactions, while not really arbitrages or tax arbitrages as these terms are commonly used, can have troubling efficiency consequences. Accordingly, where duplicative tax benefits are being achieved in each of two countries, either country, by unilaterally denying its benefit, may combine raising revenue with increasing both national and worldwide efficiency. The only problem is that the other country may want to share in the revenue gain from allowing the tax benefits, potentially leading to double denial of any tax benefit. While this is probably not as bad a result as duplicative allowance of tax benefits, since taxpayers can use self-help to minimize the resulting problems, it suggests that bilateral coordination to allow the tax benefits a total of only once may be the best response when feasible. While this would require greater coordination between countries’ tax systems than has been usual to date, it does not require anything approaching worldwide harmonization of tax systems. Countries need not adopt the same rules in order to cooperate in addressing peculiar interactions between their rules.


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