IMF: British Territorial Taxation Largely Boosts ODI In Low Tax Jurisdictions

; posted on
January 19th, 2018

The International Monetary Fund (IMF) released the working paper ‘Where Does Multinational Investment Go with Territorial Taxation? Evidence from the UK’. The paper illustrates the outcome of British favourable tax framework on investment, including the influence of UK’s territorial taxation regime and free of dividend tax.

2009 Reform to Quit Taxing Worldwide Income

In 2009, UK switched from its previous worldwide taxation to a territorial tax system. Consequently, repatriated earnings from countries with tax rates lower than the UK’s corporate tax rate are subject to a lowered effective tax rate. This imposes a strong effect on the level and location of foreign investment. On average, outbound investment by UK multinationals increased by 15.7 percent in reaction to the territorial reform that reduced taxes by 9 percentage points. This finding is thought to provide reference to the United States, which currently decided to implement territorial taxation as well.

Possible BEPS Concerns

The report finds that exemption of foreign-source income could cost considerable revenue by encouraging profit shifting abroad. In this case, consideration should be taken regarding appropriate anti-avoidance measures for the purpose of domestic tax base protection. According to existing analysis and research, the territorial reform “did not lead to systematic changes in the reported profitability of UK affiliates abroad. The average response may mask the important heterogeneity of behavioural responses at the firm level, and there are a number of alternative channels for multinationals to shift profit.” Thus, further study is needed to reveal the potential BEPS consequence stemmed from territorial taxation.

Source: IMF

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