Title

Harnessing the Costs of International Tax Arbitrage

Abstract

The issue of international tax arbitrage has proven a difficult and at times intractable one. Rather than try to minimize costs of the arbitrage or prevent “abuse” of the laws of a particular regime, the United States should also consider affirmatively bearing some of the costs of international tax arbitrage to further the policy of international vertical equity and transform the incentives that led to the current worldwide non-cooperative equilibrium, and thus the rise of international tax arbitrage, in the first place.

Harnessing the costs of international tax arbitrage transactions will not always be the appropriate response to each particular arbitrage transaction. Harnessing the costs of the international tax arbitrage should be considered, however, when such responses prove inadequate. At a minimum, in adopting such an approach the United States would provide some level of subsidy for investment in developing countries at little to no cost to the current international tax regime. At best, however, harnessing the costs of international tax arbitrage could place of the issue of international tax arbitrage back on the international scene, restart stalled international tax discussions and potentially move towards a greater worldwide consensus, not only on the international tax arbitrage itself but on the larger issue of the role of international vertical equity in the worldwide tax regime. In a second-best world, United States unilateral action in harnessing the costs of international tax arbitrage may be the first step towards a first-best solution.

Disciplines

Taxation-Transnational | Tax Law

Date of this Version

August 2006