Importance of Destination-Based Cash Flow Tax
Destination-based cash flow tax is associated with two main characteristics where one of them is the destination basis. According to Auerbach at al. (2017), destination basis is mostly important when it comes to dealing with different tax basis. The second characteristic of this kind of a taxation approach is the cash-flow tax base which results from a domestic setting. However, economists have found it important to combine both the cash-flow tax base and the destination basis. In addition, the cash flow deals with capital expenditure. Tax revenues and conveys urgent relief to all expenditures. Looking at the "destination-based", it mostly has to do with the taxing the imports while not taxing the exports. This comes from the main key element that is border tax adjustment. In most of the cases, this type of approach operates under the value added tax. In understanding the aspect of destination-based cash flow tax, it is very crucial to look at the importance, how it is expected to work, impacts of the destination- base tax on level of trade and subsequent trade deficit, budget deficit, US and Canadian dollar, behavior of multinationals companies and the overall economic activity that is GDP and GDP growth.
According to Fuest et al. (2013), one of the importance of the destination-based cash flow tax is the improvement in economic efficiency. This comes to be of help since only the final buyer of goods and services are the one to be taxed. Simply it goes ahead in taxing the income from different businesses that are immobile regarding location. One aspect that is done away with is the tax bias that is often directed towards the debt finance. When using the destination based cash flow tax, there is no either distracting the business investment location or even the scale of the business. In addition, the equity and the neutral dealing of the debt marking them as contributors of finance.
The second importance lies through the robust aspect that is avoided when dealing with intercompany investments (Fuest et al., 2013). This kind of approach is very crucial since other methods avoiding tax such as locating intangible property in low-tax jurisdictions and also the practice whereby the inter-company transactions are mispriced. The third importance of the destination-based cash flow taxation is the long term stability. This is easily achievable since the countries involved do have a ready incentive to cope with. There exist two options for the same: one country can do away with the competitive demerit that is present with the countries that have already adopted this approach. Second, the country adopting this kind of an approach has an added advantage over those that are fond of using the conventional origin based tax.
How Destination-Based Tax Is Expected To Work
According to Petutschnig (2012), destination-based cash flow tax in order for it to work will be fully based on the goods and services in a country. Not only will be based on the goods and services but mainly deals with sales of the same goods and services. This situation will call for only taxing the imports and exempting the exports hence they will not be included in the category of taxable revenues. The tax outflows and the tax inflows under this approach will be taxed asymmetrically because any income from sales has to be taxed accordingly specifically where the transaction has been carried out. On the other hand, it involves the received tax reliefs, labor, and expenses from the country of origin. Hence from this, we can fully conclude that both the origin elements and the destination are taken into place.
When calculating tax specifically dealing with the "destination" the location of the immediate purchaser is the one mostly taken into consideration (Petutschnig, 2012). At this juncture, the final consumer in not taken into account. A good example to illustrate the same will be on the steel purchase between America and France. A steel manufacturer in the United States may sell steel to a friend in France who produces automobiles. Later the automobiles happen to be sold to the United States. According to Petutschnig (2012), in regard to the destination-based tax, only the automobiles will be taxed and not the sale of steel. At the end, it is now clear that the effect of destination-based cash flow tax is directed to the location of the final consumer. Considering other business, the destination-based cash flow tax has nothing to do with them. Hence from this, we can be able to deduce that destination-based cash flow taxation mostly has to do with the immobile of which the taxing companies puts a big emphasis on. Finally, other forms of taxes such as the rent tax is also an example of destination-based (Petutschnig, 2012). Over the past few years, this has been used to make the proper arrangement from the border adjustments of which has aired more considerations.
According to Devereux & de la Feria (2014), the impact of destination-based cash tax on the level of trade and trade deficits is the free money bit. This has earlier being seen that the foreign exchange rate has been responding immediately and accordingly when importers are taxed while the exporters are subsidized. Although the tax burden on the importers tends to raise up, the burden is driven down by the US dollar by a symmetrical conveniently figure. The importer tax is said to go up although they do pose the post-tax profitability. When it comes to the exporters, the tax burden is said to reduce having nothing to do with the post-tax profitability (Devereux & de la Feria, 2014). At the need, we find that the total tax being raised by the government does go up because of the high number of the existence of importer and exporters in the country since the country has been undergoing a consistent trade deficit. This also makes the post-tax profitability to reduce drastically.
The destination-based cash flow tax is much related to the budget deficit. This has been justified when investigating the rate of employment as well as the output in a country. According to Fox et al. (2014), when the destination-based cash flow tax is in place, the budget deficit is said to exert recessionary impacts from the various level of outputs and the home employment level. This also has a lot to do with the level of employment and output in other countries. However, such levels have been said to reverse in the coming future period. Most of the cases are when the budget deficit has been seen bring the aspect of recession outside the country's boundaries and a contemporaneous expansion effect to the home country. When such tax reforms are put into place, both during the medium run and the short run has been associated with a negative budget deficit (Fox et al., 2014). In addition, situations have been experienced when the consumption in the foreign consumption is said to decrease while that in the home country increases.
According to Fox et al. (2014), the destination-based cash flow tax is said to have adverse effects on the both the US and Canada dollar. Canada imports are said to be affected in terms of the tax increase by 20 Percent which will end up evaluating the value of the dollar. On the other hand, the value of the US dollar is supposed to appreciate because the US companies are said to be selling more and more every day. This will make those buyers from the foreign countries such as the Canadians to use more of their dollars in the purchase of goods from the United States. At the end, this will end up bolstering the exchange rate of the dollar. According to Fox et al. (2014), as more and more goods are being purchased from the United States, less and less demand for the goods from abroad will be demanded the day after another hence this will be the main cause of which will make the US dollar to appreciate in a great way.
The destination-based cash flow tax seems to tend to favor the US so much more than the Canadian dollar. According to Devereux & de la Feria (2014), since the amount of which the corporate tax is said to improve is by 20 percent, this, in turn, is said to increase the value of the US dollar by 25 percent. With the Canadian dollar devaluating, this means that the cost of living in Canada that mostly depends on the imported goods would decrease. As a result, the standards of living of such country is predicted to go down since more of its currency is used to purchase fewer goods that indeed are not equitable with the amount that has been paid out. This will, in turn, lower the gross domestic product of the Canada while at the same time raising the gross domestic product of the US. The US economic growth will be boosted since less will always be paid out to accumulate more and more goods altogether (Fox et al., 2014).
Behavior of the multinational companies
The destination-based tax is implemented, the multinational companies have two options to weigh out. According to Fox et al. (2014), one of the options available for the multinational companies is doing away with various possibilities which will be an attempt to lower the overlapping tax liabilities. Second, if their income is based in a high tax country, they will opt to transfer it to low tax country where they will be able to minimize the operating expenses. However, there still remains another alternative where the companies will just remain where they are and pass the cost of production to the final consumers through raising the prices. According to Fox et al. (2014), the repatriation of the profits is all essential to the multinational companies only if there is active use of the earnings that are at their disposal. There exists also other passive strategies that can be utilized of which will be based on the relationship between their income and the foreign taxing system. Since most of the multinational companyts deals with intangible items, stripping of the income will be easily done (Fox et al., 2014). The multinational companies tend to oppose this as the tax often concentrates on where the consumption is taking place rather on where the profit is originating. In addition, the multinational companies have found the tax reform to bring some administrative challenges more so targeting on the virtual services while the providers are in different countries. Both the tax administrator and the multinational companies find it costly when it comes to transferring pricing falling in the income tax.
Overall economic activity, that is GDP and GDP growth
With the destination-based cash flow tax, it has much to do with the fiscal spending, deregulation and tax cuts altogether (Devereux & de la Feria, 2014). All this are believed to drive the economic growth as the gross domestic product of the country is said to increase with time. Some of the changes include fiscal spending, deregulation and tax cuts are said to take place only in the short term. The reason as to why such changes in the gross domestic product are predicted not to take place in the long term is due to the existence of some of the headwinds that are more concerned with the materializing more than how the process analysis should take place. In addition, the revenue to be collected by the US government is said to increase where the treasury will mark a positive mark on his side. According to Devereux & de la Feria (2014), with the current information given, the export and the imports represent 15 percent and 12 percent respectively of the gross domestic product of the United States. With the expected increase in the exports by 20 percent and the imports by 20 percent also is said to have a positive contribution towards the gross domestic product of the United States economy by 0.6 percent altogether.
According to Fox et al. (2014), translating 0.6 percent percent into figures is approximate $20 billion in one fiscal year. On the other hand, the gross domestic product of the United States is also said to increase by 0.45 percent where the exports will have been subsidized by 15 percent while the imports will also attract the same subsidy. The 0.45 percent of the gross domestic product that is to be collected is approximate $90 billion in one full fiscal year (Devereux & de la Feria, 2014). The gross domestic product of the United States is also said to increase since the dollar is also expected to appreciate by a recommendable amount. This will result from paying less for more goods and also getting more income when fewer goods are purchased by the neighboring countries from the United States. With this, the economy of the United States is said to improve while the aspects such as unemployment rates are said to decrease as time goes by. This will, in turn, make most of the individuals in the United States to be more independent and as a result, more and more jobs will be created day after another. The economy of the United States is also expected to grow as there will be less taxation on the income which will, in turn, attract many investors to the country (Fox et al., 2014).
In summation, the proposal of the destination based cash flow tax has fully to do with the tax corporate income. Having two characteristics that are the destination basis which is mostly important when it comes to dealing with different tax basis. The second characteristic of this kind of a taxation approach is the cash-flow tax base which results from a domestic setting is expected to work from the better in expanding the United States economy. As well illustrated in the paper, the destination-based tax advantages need to be taken into consideration instead of criticism the tax reform. Some of the importance to be given full concern include the improvement in economic efficiency. The second importance lies in the robust aspect that has to do with the intercompany investments. This just among the many advantages that the tax reform will bring with itself about, other importance at large need to be appreciated as the tax reform is being introduced for the better. The destination-based tax has come out clearly through the good illustration of the same by looking at the impacts it has on the level of trade and subsequent trade deficit, budget deficit, US and Canadian dollars, the behavior of multinationals companies and the overall economic activity, that is GDP and GDP growth.
Auerbach, A. J., Devereux, M. P., Keen, M., & Vella, J. (2017). Destination-Based Cash Flow Taxation.
Devereux, M., & de la Feria, R. (2014). Defining and implementing a destination-based corporate tax.
Fox, W. F., Luna, L., & Schaur, G. (2014). Destination taxation and evasion: Evidence from US inter-state commodity flows. Journal of Accounting and Economics, 57(1), 43-57.
Fuest, C., Spengel, C., Finke, K., Heckemeyer, J., & Nusser, H. (2013). Profit shifting and'aggressive'tax planning by multinational firms: Issues and options for reform.
Petutschnig, M. (2012). Common Consolidated Corporate Tax Base: Effects of Formulary Apportionment on Corporate Group Entities.
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