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Source Rules, Trade and Income Taxes, and Electronic Commerce: Designing Rules for the Taxation of Cross-Border Income

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  • Grubert, Harry

    (US Treasury Department)

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    Abstract

    Several issues in the design of international tax rules are examined. One is whether the income from intangible assets such as royalties should be taxed by the host country in which the intangibles are used or the home country in which they were developed. Another is whether local sales should be a basis for taxing foreign companies even if they have no local physical presence. A third related issue is whether a destination basis income tax is a valid policy option. The introduction develops a general framework to evaluate tax regimes, based on efficiency along various behavioral margins such as the choice of where to exploit an intangible asset. The analysis concludes that the income from intangible assets should be taxed by the home country, not the country where it is used. Also, any attempt to tax foreign companies based on their local sales is simply the equivalent of a tariff. The paper shows that there are some extreme circumstances which would justify a tariff to offset the distortions created by an income tax, but electronic commerce does not seem to qualify for this departure from the benefits of free trade. Finally, a destination basis income tax creates an incentive to invest abroad rather than at home. It is an improper attempt to graft a consumption tax concept onto an income tax.

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    File URL: http://www.eap-journal.com/archive/v33_i2_5.pdf
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    Bibliographic Info

    Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

    Volume (Year): 33 (2003)
    Issue (Month): 2 (September)
    Pages: 237-249

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    Handle: RePEc:eap:articl:v:33:y:2003:i:2:p:237-249

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    Web page: http://www.journals.elsevier.com/economic-analysis-and-policy/
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    1. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
    2. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
    3. Charles McLure Jr., 2000. "Alternatives to the concept of permanent establishment : e-commerce and taxation," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 1(3), pages 10-16, October.
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