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Addressing the Transfer-Pricing Problem in an Origin-Basis X Tax

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  • David Bradford

Abstract

In a previous paper I described how the tax design called the X Tax would facilitate an international tax system free of many of the complexities and avoidance opportunities plaguing the existing international tax regime and also have neutrality properties generally deemed desirable. A choice must, however, be made between two basic treatments of transborder business transactions – the origin and destination principles. The destination-principle approach sidesteps the need to identify arm’s length terms of transborder transactions between related business entities – the transfer-pricing problem. This serious problem remains in the origin-principle approach, which, however, presents fewer challenges of monitoring the flow of goods and services across borders, obviates what I call the “tourism problem” whereby people can reduce their taxes by consuming in a low-tax jurisdiction and, arguably most important, avoids transition effects associated with introduction of the tax and subsequent tax rate changes that occur in the destination approach. In this paper I explore possible special rules for transborder transactions between related parties in an origin-based system to eliminate the transferpricing problem.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 997.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_997

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  1. Paul Krugman & Martin Feldstein, 1989. "International Trade Effects of Value Added Taxation," NBER Working Papers 3163, National Bureau of Economic Research, Inc.
  2. Gordon, Roger H. & Hines, James Jr, 2002. "International taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995 Elsevier.
  3. Alan A. Auerbach & David F. Bradford, 2001. "Generalized Cash Flow Taxation," NBER Working Papers 8122, National Bureau of Economic Research, Inc.
  4. David F. Bradford, 1998. "Transition to and Tax-Rate Flexibility in a Cash-Flow-Type Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 12, pages 151-172 National Bureau of Economic Research, Inc.
  5. Feldstein, Martin, 1976. "On the theory of tax reform," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 77-104.
  6. David F. Bradford, 1995. "Consumption Taxes: Some Fundamental Transition Issues," NBER Working Papers 5290, National Bureau of Economic Research, Inc.
  7. Robert E. Hall, 1996. "The Effects of Tax Reform on Prices and Asset Values," NBER Chapters, in: Tax Policy and the Economy, Volume 10, pages 71-88 National Bureau of Economic Research, Inc.
  8. Zodrow, George R., 1995. "Taxation, uncertainty and the choice of a consumption tax base," Journal of Public Economics, Elsevier, vol. 58(2), pages 257-265, October.
  9. Boadway, Robin & Bruce, Neil, 1984. "A general proposition on the design of a neutral business tax," Journal of Public Economics, Elsevier, vol. 24(2), pages 231-239, July.
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Cited by:
  1. Peter Birch Sørensen, 2006. "Can Capital Income Taxes Survive? And Should They?," CESifo Working Paper Series 1793, CESifo Group Munich.
  2. George R. Zodrow, 2007. "Should Capital Income be Subject to Consumption-Based Taxation?," Working Papers 0715, Oxford University Centre for Business Taxation.
  3. Michael Devereux, 2004. "Debating Proposed Reforms of the Taxation of Corporate Income in the European Union," International Tax and Public Finance, Springer, vol. 11(1), pages 71-89, January.
  4. Peter Birch Sørensen, 2006. "Can Capital Income Taxes Survive? And Should They?," EPRU Working Paper Series 06-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  5. David Bradford, 2004. "The X Tax in the World Economy," CESifo Working Paper Series 1264, CESifo Group Munich.
  6. Howell H. Zee, 2006. "A Superior Hybrid Cash-Flow Taxon Corporations," IMF Working Papers 06/117, International Monetary Fund.
  7. George Zodrow, 2006. "Capital Mobility and Source-Based Taxation of Capital Income in Small Open Economies," International Tax and Public Finance, Springer, vol. 13(2), pages 269-294, May.

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