Fundamental Corporate Tax Reform: Exploring a New Corporate Tax System with Destination-Based Cash Flow Taxation and Residual Profit Allocation

Efforts have been made to address issues such as tax avoidance and tax competition arising from economic globalization and digitalization, and agreements have been reached on “Pillar I” and “Pillar II” as solutions to tax challenges arising from the digitalization of the economy, and preparations for their introduction are underway in various countries. Meanwhile, the Destination-Based Cash Flow Taxation (DBCFT) and Residual Profit Allocation by Income (RPAI) plans, etc., have been proposed to fundamentally reform the problems of corporate taxation. Although DBCFT has advantages with regard to efficiency, suppression of tax avoidance, suppression of tax competition, and reduction of tax compliance cost, the deviation from current corporate taxation is significant and there are many issues to be addressed in terms of conforming to the World Trade Organization (WTO) Agreement and other similar agreements. RPAI does not solve all of the current taxation system’s problems, but it has advantages when considering efficiency, suppression of tax avoidance, and reduction of tax competition, and its deviation from the current corporate taxation system is small.This deviation from the current corporate taxation is not as large as that of the DBCFT. As for the direction of international taxation in the future, drastic corporate tax reform will not be implemented immediately, but rather, practical issues and the resolution status of current corporate taxation issues will be sorted out after first waiting for the introduction and establishment of digital taxation. If drastic corporate tax reform is deemed necessary, the scope of Residual Profit Allocation (RPA) introduction may be expanded in the form of an extension of the Pillar I mechanism, and in the future, the introduction of RPAI could be considered. Subsequently, if further reforms are required, it is assumed that the introduction of DBCFT will be discussed under an international agreement.