The current European approach to tackle tax avoidance by multinational firms focuses too much on treating the symptoms instead of the causes of Base Erosion and Profit Shifting. Under the current rules, business profits should ultimately be taxed once somewhere.
But in which country, that doesn’t always really seem to matter. This is not in line with the principle embraced by the EU and the OECD that companies should be taxed in the country where the profit-generating activities take place. In the author’s opinion, a different approach should be developed. A more fundamental approach to the root causes of corporate tax avoidance is needed. In taxing multinationals, there should be more focus on economic reality in which multinationals operate. To that end, one would need to determine in which place the activities take place and which value one should attribute to them, based on the arm’s length standard.
Such an approach would do more justice to the principle that profit should be taxed where it is generated.
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