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Granting Market Countries the Right to Tax Profit without Physical Nexus

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  • Wolfram F. Richter

Abstract

More than 130 countries have accepted the OECD invitation to reform the taxation of multinational enterprises (MNEs). One of two reform pillars aims at granting market countries the right to tax supernormal (“residual”) profit without requiring physical nexus. This paper examines the method of implementation proposed by the OECD and compares it with various discarded options. It concludes that intercountry tax equity, allocative efficiency, and practicality of negotiation speak against the OECD proposal to use a sales-based formula for allocating an MNE’s group profit. Simply splitting each market country’s residual profit contribution by an MNE-independent key is to be preferred.

Suggested Citation

  • Wolfram F. Richter, 2022. "Granting Market Countries the Right to Tax Profit without Physical Nexus," CESifo Working Paper Series 9556, CESifo.
    • Handle: RePEc:ces:ceswps:_9556
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    References listed on IDEAS

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    Cited by:

    1. Wolfram F. Richter, 2022. "Taxing Multinational Enterprises: A Theory-Based Approach to Reform," CESifo Working Paper Series 10119, CESifo.

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    More about this item

    Keywords

    BEPS Project; Pillar One; residual profit allocation/splitting; tax withholding; destination-based cash flow taxation;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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