Cash Flow Taxation Anti Money Laundering Measure?

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Cash Flow TaxationAnti Money Laundering Measure?

• Prof. Dr. Geerten M.M. Michielse
• Center for Taxation and Public Governance,
  Utrecht (NL)
• International Monetary Fund, Washington DC

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International Tax Issues

• Place of Residence
• Source
• Profit Determination
• Transfer Pricing

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Place of Residence

• Effective Place of Management
• Place of shareholders residence
• Place where decisions take place
• Day-to-day management
• Place of administration
• Place of main business activities
• Incorporation Principle

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Source Criterions

• Administrative simplicity
• Taxpayers
• Tax Administration
• Substantial economic linkage to geographical area
• Neutral (i.e. acceptable in both States)
• Intention to tax
• Control should remain with legislator

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Flaws of Source Principle

• Multiple linkages exists
• Income is just a calculus (YCS-I) and doesnt
  have source
• Only instrument through which income is derived
  does have a source
• Source reflects or neglects certain policy,
  legal, administrative and/or economic relations

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Interim Conclusion

• Residence can be relocated
• Change of circumstances resulting in shift of
  effective place of management
• Cross-border legal merger (incorporation
  principle)
• Arbitrage
• Geographical source doesnt exist
• Multiple linkages
• Services (managerial, teaching, etc.)
• Intangible assets (trade marks, etc.)
• Arbitrage

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International Profit Allocation

• Profit determination relies on accounting rules
• Transfer pricing method
• Associated enterprises
• Conditions made or imposed in their commercial or
  financial relations
• Dealing at arms length
• Profit correction
• Comparable Uncontrolled Price Delusion

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Cash Flow Taxation

• Taxable Base Incomings Outgoings
• R(eal transactions)-variant
• R F(inancial transactions)-variant
• S(hareholders)-variant

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Advantages of CFT

• Only corporate tax on economic rent (i.e. after
  normal rate of return has been received on
  equity)
• No need for
• Complex accounting provisions
• International profit allocation rules
• Origin or destination principle replaces
  residence and source rules

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The Choice Between R- and S-variant

• R-variant
• Re-introduction debt/equity issues
• Mixed character of financial transactions by
  financial institutions
• Prone to tax avoidance (even in non-related
  situations)
• S-variant
• No internal issues if based on destination
  principle (i.e. export and import transactions
  eliminated)