International Taxation

1. International Taxation • Authorship team: Rachel Griffith, James Hines, and Peter Birch Sørensen. • The chapter assesses the role of international considerations in tax design, emphasizing issues related to capital taxation. • In truth, all of the volume’s chapters have international components; this one is perhaps merely the most explicit.

2. Importance of International Considerations in UK tax policy • The scope and magnitude of foreign direct investment. • The (rising) significance of cross-border share ownership. • Imports and exports of goods and services. • Magnitude of international factor payments, including interest, rents, and royalties. • Importance of footloose activities, such as R&D.

3. Who works for whom?

4. Figure 1 Note: Figure shows annual outward FDI flows in 2000 US$ billion Source: OECD

5. Figure 2 Note: Figure shows annual outward FDI flows as a % GDP Source: OECD

6. Figure 3 Note: Figure shows % of UK listed ordinary shares owned by Rest of World. UK offshore islands were re-classified to RoW in 1997 Source: ONS, Share Ownership 2004.

7. Figure 4 UK international investment position - investment abroad Note: Figure shows Balance Sheet nominal values at the end of the year in £bn, HLXV only available from 1987 Source: The Pink Book, 2006, Tables 1.3 or 8.1, http://www.statistics.gov.uk/statbase/TSDSeries1.asp

8. Figure 5 UK international investment position - investment in the UK Note: Figure shows Balance Sheet nominal values at the end of the year in £bn, HLXW and HLYD only available from 1987 Source: The Pink Book, 2006, Tables 1.3 or 8.1, http://www.statistics.gov.uk/statbase/TSDSeries1.asp

9. Figure 6 UK royalty and licence fees Note: Figure shows nominal trade flows in £bn Source: The Pink Book, 2006, Tables 3.8, http://www.statistics.gov.uk/statbase/TSDSeries1.asp

10. Figure 7 UK trade in goods and services Note: Figure shows nominal trade flows in £bn Source: The Pink Book, 2006, Tables 2.1 and 3.1, http://www.statistics.gov.uk/statbase/TSDSeries1.asp

11. Figure 8: R&D by UK plc compared to R&D in the UK R&D by UK PLC conducted anywhere in the world R&D in the UK by UK and foreign firms Source: Abramovsky, Griffith and Harrison (2005) values have been deflated by the GDP deflator and re-based to equal 100 in 1996.

13. Figure 9: share of BERD undertaken in the UK financed from abroad Source: Authors’ calculations using OECD MSTI.

14. Figure 10: share of BERD undertaken in the UK financed from abroad Source: OECD Main Science and Technology Indicators, 2004

15. Incidence and efficiency of capital taxes in open economies. • Distinguishing taxes on saving from taxes on investment. • What are the effects of source-based taxation of investment income in open economies? How open must the economy be in order to apply the analysis of small open economies? • Residence v. source basis for taxing business and personal income. • Who bears the burden of source-based and residence-based taxation in open economies?

16. Evidence of behavioral responses to international taxation • Effects of taxation on the magnitude and location of foreign direct investment. • Effects of taxation on various forms of tax avoidance. Effectiveness of anti-avoidance rules. • Effects of taxation on factor prices. • Are FDI and tax avoidance likely to become even more responsive to tax differences in the future?

17. Tax reform proposals in open economies • Which reform proposals fare best in open economy environments? Consumption v. income taxation. How much of a concern is revenue erosion through avoidance? • What are the effects of tax asymmetries in open economies? For example: • Favorable treatment of startup firms. • Treatment of tax losses. • Subsidies for R&D. • Transaction-based taxes such as capital gains taxes and stamp duties.

18. International choices embedded in the UK tax system • What aspects of the post-1977 evolution of UK taxes are attributable to international pressures? • Statutory tax rates • Abolition of the ACT • Treatment of R&D • Double tax relief • What costs and tradeoffs are implicit in various international features of the tax system? • Tax asymmetries from an international perspective • Tax revenues v. tax distortions

19. The tax treatment of foreign income • The UK taxes on a worldwide basis, allowing foreign tax credits. • Taxation largely on the basis of repatriation, with foreign tax credit limits. • Restrictions on cross-crediting. • Controlled foreign corporation regime. • What are the costs are associated with this system? What would be the revenue implications of major reform?

20. Domestic-Foreign Interactions • Closely related to the taxation of foreign income is the tax treatment of domestic activities that contribute to foreign profitability. • For example: • Deductibility of domestic interest expense. • General administrative and overhead expense. • Domestic R&D. • Transactions with related parties. • What are the costs of tax reforms that do not quite get these right?

21. International cooperation and international agreements • UK has a large network of bilateral tax treaties. • Are current treaty provisions sensible in light of other aspects of the UK tax system? • Are there reform proposals that would require renegotiation of these treaties? • The UK is also an EU member, and therefore also subject to ECJ rulings. • How would the UK be affected by EU tax coordination and/or tax harmonization? • What are the international implications of continued ECJ activism?

22. Implications for future tax reforms • Do open economy considerations create their own pressure for UK tax reform? Is there a model toward which the system needs to move? • What are the international ramifications of proposed reforms? To what extent do they depend on what other countries do? • What is the revenue picture going forward? To what extent will it be necessary to find alternatives to the taxation of business profits and other forms of capital income?