Defense of Primary Taxing Rights

Abstract

The OECD’s Global Anti-Tax Erosion (GloBE) proposal develops rules providing that countries can tax income where other countries do not exercise their primary taxing rights over that income. What can affected countries with primary taxing rights do in response? One option is to let other countries receive the taxes they choose not to collect. This means that they will suffer the economic harms of taxation without receiving the tax revenues. Another option is to increase their taxes so the primary taxing rights will be ‘fully’ exercised. However, this option might not be desirable or feasible for various reasons, including the broader implications for domestic taxpayers. This Article proposes a third option: introducing a new defensive tax which would apply where income subject to the relevant country’s primary taxing rights would be taxed in another country in the absence of this defensive tax. The result would be that the country with the primary taxing rights would collect the tax revenues. This tax would not materially affect the multinational enterprise’s overall tax liability and incentives or create much additional complexity. This tax is fair at the international level as it allocates the tax revenues to the country with the primary taxing rights. Countries that may be adversely affected by the recent international tax developments should consider adopting this tax to defend their primary taxing rights.