Addressing Aggressive Tax Planning through Unitary Tax or Self-Regulation- A Study on the Possible Need for an International Tax Reform

Abstract: Domestic and international regulations aiming to facilitate international trade and investment today enable multinational corporations (MNCs) to operate transnationally through the use of branches or subsidiary companies. Within the field of corporate taxation, the lack of a global and universal tax system regulating international tax matters however allows MNCs to exploit gaps and loopholes within such regulations to lower or even eradicate their tax burden. Regulations on national and international levels have been somewhat effective in counteracting the prevalence of such corporate tax avoidance, often referred to as ‘aggressive tax planning’ (ATP), foremost through the OECD’s ‘Action Plan on Base Erosion and Profit Shifting’. However, international tax rules based on the separate entity principle and the arm’s length principle continue to facilitate aggressive tax planning and corporate tax avoidance remains a vast and global issue. The effects of corporate tax avoidance demonstrate the pressing need for a reformation of current international tax rules. Although a unitary tax approach similar to the ‘Common Consolidated Corporate Tax Base’ proposal issued by the European Union could be effective in combatting ATP, the implementation of such a solution may prove difficult and would require the harmonization of national and international tax rules. The prospects of such an international reform being implemented on a global scale in the near future are therefore slim. A more plausible yet still effective alternative is self-regulation by MNCs. As public and investor pressure on MNCs to act responsibly in regard to their tax management is rapidly increasing, and soft law standards are placing higher demands on corporations to act in accordance with both the letter and the spirit of relevant tax laws, corporations are increasingly incentivized to act as “good tax citizens”. Although self-regulation alone may not eradicate ATP, it is clearly a crucial complement to existing international anti-avoidance regulations.