RESTRAINING HARMFUL TAX COMPETITION: AN ANALYSIS OF AMERICAN CFC LEGISLATION
Capital and labor mobility facilitates cross-border activities of enterprises. In the era of globalization the optimal choice of investment location gives enterprises an opportunity to profit maximization. As a result the governments competing for foreign direct investment offer to enterprises preferential tax treatment. In order to minimize the loss of tax revenue countries imposing high effective tax rates on enterprises implement diversified anti-tax-avoidance measures. One of these measures is controlled foreign corporation. The article examines the application of the controlled foreign corporation rules in the United States of America to combat harmful tax competition. It has to be underlined, that the American controlled foreign corporation legislation was a prototype for other countries that use this institution to prevent tax avoidance. The aim of this article is to review the controlled foreign corporation legislation in the USA, analyze the structure of CFCs and the structure of their subpart F income in this country and evaluate the efficiency of this anti-tax-avoidance measure. The author describes inter alia, implications of harmful tax competition and the CFC rules. As the provisions of controlled foreign corporation are also planned to be introduced in Poland, the American legislation might be a good example of its successful implementation.
REFORMING CONTROLLED FOREIGN CORPORATIONS IN INDONESIA: LESSONS LEARNED FROM BEPS ACTION PLAN AND GERMANY
Abstrak: Meningkatnya aktivitas ekonomi antar negara memberikan ruang bagi perusahaan untuk membentuk perusahaan terkendali yang berada di luar negeri (Controlled Foreign Corporations) sehingga menyebabkan naiknya risiko penggelapan pajak. OECD dan G20 merekomendasikan Base Erosion and Profit Shifting (BEPS) Action Plan agar negara-negara dapat mengadopsi peraturan yang ideal terkait CFC. Oleh karena itu, Indonesia merilis Peraturan Menteri Keuangan no. 93/PMK.03/2019, dimana Jerman juga mengadaptasi peraturan CFC ini melalui German Foreign Transaction Act 1972. Namun, Jerman dinilai lebih berhasil dalam melindungi basis pajk negaranya dalam ruang lingkup CFC. Maka, riset ini dilakukan untuk membandingkan antara peraturan CFC di Indonesia dengan Jerman serta OECD BEPS Action Plan dalam aspek control, kualifikasi pendapatan, serta keringanan beban pajak. Melalui penelitian yuridis-normatif dan pendekatan kualitatif, telah dikemukakan bahwa perbedaan utama tertera dalam lingkup pengendali tidak langsung, kewajiban keterbukaan pemegang saham, spesifikasi yurisdiksi pajak, dan metode keringanan pajak, yang selanjutnya akan diolah sebagai rekomendasi kebijakan untuk memperkuat regulasi CFC di Indonesia. Abstract: The rise of cross-border multinational companies allows the occurrence of Controlled Foreign Corporation (CFC), which consequently gives rise to the risk of tax evasion. The OECD and G20 enacted the Base Erosion and Profit Shifting (BEPS) Action Plan to recommend nations in adopting an ideal policy for CFC. In response, Indonesia promulgated Ministry of Finance Regulation No.93/PMK.03/2019, whereas Germany adopted the German Foreign Transaction Tax Act 1972. However, Germany was deemed more successful in maintaining the tax base of the nation from the conduct of CFC. Hence, this research was conducted to compare the CFC regulation in Indonesia and Germany as well as the OECD BEPS Action Plan, especially in pertaining to the aspect of control, income qualification, and tax relief. Through juridical-normative research and qualitative approach, it is found that the main differences are prevalent in the scope of indirect controller, mandatory disclosure, tax jurisdiction, and method of tax relief, which are incorporated as policy recommendations to further strengthen the CFC regulation in Indonesia
Trade Agreements and Income Taxation: Interactions, Conflicts, and Resolutions
This paper builds on prior short pieces I have done on trade and taxation. I drew three conclusions from that prior work: 1. A normative income tax structure and free trade principles do not conflict with each other. 2. The tax provisions that are part of a normative tax structure should be outside the scope of trade agreements and procedures. 3. Subsidies run through the tax system (tax expenditures) should be subject to scrutiny under trade agreements just as are direct subsidies. A country cannot insulate a subsidy from challenge under trade agreements simply by placing it in a tax system. In Part I of the paper, I first review the history of the Domestic International Sales Corporation (DISC) provisions. commencing with the challenge by the European Communities (EC) and Canada under the then-existing GATT procedure. The DISC regime was found to violate U.S. obligations under GATT. Congress responded by enacting the Foreign Sales Corporation (FSC) system. The EC challenged this program and a WTO Dispute Panel found that the FSC regime violated U.S. WTO obligations. The decision was affirmed by a WTO Appellate Body. Congress tried again by enacting the Extraterritorial Income Exclusion Act (ETI) but this system too was stricken down by a WTO Dispute Panel and an Appellate Body affirmed the decision. I examine the arguments put forth by the EC and the U.S. in both the FSC and ETI cases as well as the basis for the decisions by the WTO bodies. I briefly examine the standard by which the WTO body approved some $4 billion in countermeasures against the U.S. Those sanctions are scheduled to go into effect March 1, 2004 if the U.S. has not terminated the ETI regime. I then turn to an assessment of the FSC and ETI decisions from three perspectives: legal/structural, economic, and sovereignty/political. From the legal/structural perspective, I conclude that the WTO decisions were correct under applicable WTO provisions and focus particularly on the methodology employed to determine whether a particular regime constitutes a "subsidy" or not. Assessing the decisions from an economic perspective, I begin by sketching briefly the case for free trade and then examine whether the FSC and ETI regimes likely increased or decreased both U.S. and global welfare. Economic theory suggests that the welfare of each was decreased by the subsidies. Unfortunately, there is little empirical work available to test the theory. What little there is suggests that U.S. exports may have increased as a result of the subsidies, but the studies do not address whether this increase was achieved at an acceptable revenue cost or the welfare effects of the subsidies. I conclude this part of the paper by noting the impact of currency exchange rates on the effectiveness of the subsidies. The final part of the paper examines the WTO decisions from what I call a sovereignty/political perspective. I first test out whether the U.S. sacrifices an acceptable level of sovereignty on entering into the WTO agreements in the first place and whether the WTO decisions represent a further and unacceptable invasion of U.S. sovereignty. Building on work by Professor Michael Schaefer, I conclude that the U.S. has sufficient built-in processes to protect it from intrusive invasion of its sovereignty by virtue of the WTO agreement and FSC/ETI decisions. From a political perspective, I assess the arguments that the FSC/ETI provisions are needed to put U.S. multinationals on a competitive level with multinationals from exemption countries. I show that this argument has no economic or factual basis and should be rejected.