Research On The Application Of Value Creation Principle In Global Tax Distribution

Since the age of economic globalization,the world economy has entered a period of profound transformation.Since the outbreak of the global financial crisis,the reduction of government income(including atrophy of tax sources as a result of economy recession,and tax base erosion caused by the more aggressive international tax planning),along with a worse issue,unfair tax burden brought about by radical of tax planning of transnational corporations(mainly by profit transfer),have brought unprecedented attention to the double non-taxation issue of international society,and even become the most significant topic in the field of international tax practice.During the G20 Summit in 2013 held in St.Petersburg,the Organization for Economic Cooperation and Development(OECD),entrusted by the G20,carried out relevant research on "analysis and action plan on tax base erosion and profit transfer",which is the most important international tax reform project in the world in recent years.As the rapid development of the economic globalization,digital economy is booming,which puts forward new challenges to the organization form and tax management of the global value creation.The emergence of various new value creation models under the digital economy has also brought great challenges to the tax management.As OECD puts it,the rules of the international tax rules system has failed to keep pace with changes in cross-border business practice,especially in the field of digital economy and intangible assets.In response to the changing global economic situation,the consensus of tax jurisdictions on international tax collection and management has increased,and international tax cooperation has been strengthened as never before.At the same time,the study in this paper also notes that as the economic power balance among countries has changed and the international rule demands of developing countries and emerging economies are being transformed into new rule-making mechanism,China is precisely one of the crucial rule-makers.Based on the understanding of the above research,this paper concentrates on the deviation between value creation and tax attribution,how to improve the existing international tax rules by using the concept of value creation and perfect the relative settings China's domestic law,aiming to promote developing countries and emerging economies represented by China to achieve their due interests in the new round of international communication and support the development of global economy and improvement of people's welfare.The concept of value creation used in this paper refers to all value-creating activities that are conducted to form a product or service,which starts from production activities to successful product sales,ends in providing value or utility to customers.The pattern of this production and management activity combination is not invariable.The value creation process of traditional economic is mainly presented in a chain mode,yet with the change of production organization form and the auxiliary support of the development of information and communication technology,the traditional sense of the value chain is no longer in a chain model,but shows a trend of network development and ring development.In this way,the value created is no longer limited to the final product in the market,but may be in the whole process of value creation with the continuous emergence of by-products.Whether value creation is consistent with international distribution of taxation and whether it is possible to guide and improve international tax distribution based on the principle of value creation is the ultimate question to be discussed in this paper.By studying empirical data,this paper finds that tax base erosion and profit transfer do exist to some extent,that is to say,at least a series of traditional rules,including the current taxation system,accounting system and trade system that international economic exchanges rely on have the possibility to accommodate the implementation of profit transfer by multinational corporations.To be specific,to some extent,American multinational corporations tend to adjust and control the global overall tax burden through the artificial allocation of global assets layout.For every 1% increase in long-term assets layout in the United States,their pre-tax profits only increase by 0.44% correspondingly.Under the current situation of global allocation of internal resources,for every 1% share of sales revenue accounted in the United States,the pre-tax income distributed in the United States will increase by about 0.89% of its global share.To some extent,it shows a tendency to regulate the global overall tax burden by adjusting sales revenue artificially.The impact of overseas tax rate on the local actual rates is positively related to the proportion of US multinationals that account for profits in the United States: For every 1% of local tax rate change caused by overseas tax rate(the statutory rate is of 21%,35%),the profit rate will increase or decrease 1.21% when accounting at home,that is to say,comparing with the local tax,overseas tax rate is more flexible,therefore multinationals will adjust global profit accounting allocation according to the tax rate situation.On the basis of discussing the possibility of deviation between value creation and tax distribution,this paper further discusses how to choose a new principle to guide international tax distribution.Value creation principle maintain the fairness and neutrality of the taxation system,also inherite and develop the good connection and transitionality of the current international tax allocation principles.As for digital economy,the principle of "value creation" has obvious advantage in comparison to "territorial" principle and “independent transaction” principle,for its semantic connotation is richer than territorial principle,while independent transaction principle is expected to be improved and completed under the guidance of value creation principle.However,it should be objectively acknowledged that there are still execution risks in the application of the value creation principle,such as the risk of turning idea into practice,the possibility of triggering a new round of double taxation,and the possible negative impact on the construction of a country's domestic tax system.However,on the basis of comprehensive consideration of interests,this paper believes that the value creation principle has a good adaptability to lead or assist the adjustment and improvement of some prominent problems in the current international tax rules.It can better solve the issue of deviation between tax attribution and value creation.Under the guidance of the principle of value creation,some traditional international tax concepts should be updated accordingly,some traditional operating methods and technical means represented by transfer pricing should be changed under its guidance and some previously ignored regional advantages and other value creation factors will be re-emphasis.On the specific combination of value creation and international tax rules,this paper selects some important elements(PE,CFC,etc.)that cause the mismatch between value creation and tax distribution,as well as the core of international tax rules,transfer pricing system,for further in-depth discussion.The application of value creation principle has a positive effect on updating the concept of failure in international tax terminology.Economic digitalization has gradually developed into the dominant form in the current world economic system,where the mobility of elements and subjects has been enhanced,dependency on data collection and analysis has been spread and the interactive effects on economic life is no longer ignorable.The virtualization of this economic development mode poses challenges to many terms in the international tax rules system that need to keep pace with the times.First,Internet companies cannot be represented as MNE in form,but in fact they can deliver services to the world through the network,making them MNE in the real sense.However,according to the current international tax rules,the establishment of the PE concept has become a barrier to countries' taxation of international Internet companies' economic activities in their own countries,while the purchasing power of consumers is an important component of the regional advantages of these countries,thus the source countries should receive international tax allocation rights to achieve fairness in the sense of international taxation.On the basis of this concept,the technical problem to be solved is how to quantitatively confirm the degree of tax distribution of digital services between source countries.This entails the need to innovate the concept of a digital permanent establishment that should remain consistent with existing international tax rules and address the issue of digitization under existing rules so that income taxes on the revenue generated by digital products and services are properly attributed by the countries of origin and countries of residence.It is necessary to improve the current concept of PE by both eliminating and adding some expressions.The main consideration is to eliminate the relevant expressions of "fixed residence" and "permanent residence" in the OECD model,and to formally include the term "significant economic presence" into the expressions of the model taxation agreement.On this basis,revising domestic law and international law shall promote the realization of the reconstruction of the concept of permanent institutions.Secondly,this paper believes that many tax avoidance methods are realized by the establishment of overseas companies,most of which are largely constructed as CFC in the sense of tax.In fact,CFC has become the geographical support of tax base transfer.In the current international economic exchanges,Internet enterprises use the dual corporate structure to transfer highly mobile assets to achieve tax avoidance;manufacturing multinationals erode their home tax base by transferring intangible assets to the CFC;the mismatching of CFC and hybrid financial instrument management exaggerates the risk of "cash box" to realize tax base transfer;the combination of CFC and tax treaty abuse transfers capital to low-tax areas.Therefore,this paper proposes to enrich the specific connotation of the CFC control type and increase the test conditions;continuously improve the CFC rules to adapt to the development of corporate governance structure.Concerning the specific practice,this paper thinks that it is not suitable to settle by international public law,but should focus on the improvement of each resident country's domestic law.This objective requirement on implementation determines that if the CFC rules want to play a greater positive guiding role in international economic exchanges,countries should transfer part of their tax sovereignty,draw on the governance principles recommended by OECD and other international organizations to seek the relative unification of domestic and international laws and regulations.Third,the obscure definition of the nature of intangible assets‘ value creation directly leads to the uncertainty when determining which article of the international tax agreement should be applied to the income generated by intangible assets.Sales of goods and services,franchise granting have distinct business connotations,the former refers to the behavior of the legal person have all of the final products or services sold to customers,making the customers obtain the information or service,the production process or service,while the latter is a contractual relationship between franchisor and franchisee and the franchisor will own the intangible assets such as trademarks,product management,business secrets,patent technology,operation and management mode and grant the franchisee to use and charge fees from the franchisee,the franchisee use the granted intangible assets to carry out business activities.This paper argues that if the essence of the transaction is that the customer purchases the product with the goal of transferring it digitally rather than obtaining the copyright for commercial use,then there is no essential difference between the international transfer transaction of the digital product or service and the delivery of the goods in the physical trade,so the operating profit clause shall be applied first.If the customer purchases digital content for the purpose of resolving copyright issues for further commercial use of the digital product,the royalty terms shall prevail.The transfer pricing system is the most important part of the international tax system in the past 100 years.In the practice of international tax distribution,transfer pricing has made a great contribution to solving the tax erosion issue and making a fair and reasonable distribution of all taxes generated in the value chain in individual tax jurisdictions.However,with the weakening of the foundation of the original transfer pricing system,it is necessary to improve the system guided by the principle of value creation.First,the cornerstone of the transfer pricing system is being challenged.The global independence of a single company is further weakened.In the context of economic globalization,the vigorous development of MNEs has made them the most important implementer in international exchanges,which is exactly the proof that the principle of independent transaction is just a hypothesis in most transactions,and the substantive relevance of contractual arrangements can hardly be examined.The value chain analysis and comparability analysis in connected transaction choices,and transfer pricing method in non-associative transaction choices are based on formal analysis of intra-group transaction terms and conditions of MNEs,which makes it far from the essence of the economic transaction.Especially in the case of a contract regard IP as the subject of transaction,there is a lot of room for human manipulation of the contract text,and the analysis based on this may further distort the essence of economic transaction.Some profit-oriented overseas companies have never participated in important value creation activities,such as IP R&D and promotion,and they do not bear the risk of value realization after IP is put into the market.However,according to various documents signed by MNE,IP revenue is confirmed in this overseas company.The absence of comparable transactions is the biggest challenge to the future applicability of the transfer pricing system.The customization of multinational companies products,as well as the customization of customers' demands,makes comparable transactions more difficult to find.In the digital economy and intangible assets,the virtualization of transaction content also poses challenges to the determination of comparable transactions.However,this paper also supports that at present,there is no evidence showing that the transfer pricing method can exit the stage of history,and the transfer pricing guide based on the principle of independent transaction will be more clear and strengthened,while the best choice to improve the long-term tested method by using the concept of value creation is to improve the international tax system.Secondly,in order to revitalize the traditional transfer pricing system,it is necessary to inject the principle of value creation into it,and improve the existing institutional arrangements.The measures to improve the above includes: accurately identifying the business and financial relationship between related enterprises,transaction conditions and related economic characteristics as the primary link of comparability analysis;the operation calibre of defining trade arrangement accurately is expressed from "comparability factor" to "economic feature + comparability factor";strengthen the comparison between the content of the contract terms and the actual execution of the contract;especially in the field of intangible assets trading,functional analysis should be applied more extensively;introducing value chain analysis method in the stage of economic substance analysis.Thirdly,the construction of a new transfer pricing system should pay special attention to the interests of developing countries and emerging economies,and give more consideration to the factors of regional advantages in the confirmation of transfer prices.The special advantage value contribution of location is obviously insufficient,especially in developing countries and emerging economies.Therefore,some technical problems of transfer pricing should also be paid attention to,such as the continuous improvement of the profit division method at the technical level.This paper puts forward suggestions on how to apply the value creation principle to guide the developing countries and emerging economies represented by China to actively participate in the formulation of new international tax rules,as well as the improvement of relevant domestic law systems.Although China is an active advocate of paying taxes in the jurisdiction of value creation,it is also faced with the arduous task of continuing to speak out in the international community and promoting the application of the principle of value creation.At the same time,to practice the principle of value creation,there is still a long way to go in the revision of China's domestic law,especially in some best practices proposed by BEPS.This paper proposes three basic principles to promote the formulation of policies related to the creation of territorial value and the sharing of tax benefits.Firstly,make good use of the international communication platform;secondly,pay attention to the sensitivity of tax sovereignty;thirdly,we represent the interests of developing countries.In specific implementation,from how to participate in the formulation of international tax rules,how to revise the relevant domestic laws and regulations,how to do a good job in the actual tax collection and management as well as other aspects of the issue.Firstly,it is suggested that China should actively participate in and lead the formulation of new international tax rules consistent with value creation.Identify the best time to participate in international rule-making and match dominant value creation with tax distribution.Establish international tax laws and regulations and theoretical system in line with China's national conditions as soon as possible.Secondly,to further improve China's transfer pricing related system design.Strengthen the management of related transaction basic data;strengthen value chain risk management;strengthen intangible assets value contribution transfer pricing management;strengthen the management of transfer pricing and further strengthen the application of APA mechanism.Especially it should be noted that this paper believes that the persistence on the principle of value creation is flexible,when it comes to the claims that involves China's taxation fairness and cannot be supported by value creation principle,alternative paths should be actively searched for and appropriatly give up the principle of "value creation",such as the establishment of a "safe haven" and other special applicable rules.Lastly,practice BEPS best practices as soon as possible in areas where problems are prominent.For instance,act actively in the formulation of domestic laws,systematically improve China's relevant laws and regulations on CFC rules;further clarify the relevant laws and regulations of the intangible assets income attributes.There are three innovations in this paper.First,we should use the market platform provided by the new market finance to observe why international economic exchanges cannot use separate administrative regulation to conduct international tax distribution.This paper discusses that government and its public power in international market no longer plays the role of administratorand regulator,but competiters and cooperaters.The realization of the tax distribution right advocated by the governments of various tax jurisdictions should also achieve the matching tax benefits with the source of value creation through consultation and cooperation with enterprises,the traditional market subject,on the international market platform in a new way.It shows that one of the reasonableness of value creation principle lies in the coordination with market mechanism.Second,it puts forward the index of relative factors of value creation in the sense of international tax distribution,whicih includes four categories: capital and resources;technology;human resources and labour;market.Capital and resources include natural resources,infrastructure and machinery,vehicles,land(or related rights to control or use land).Technology includes technological know-how,patent and other intellectual property rights,network platform and user resources under its control.Human resources and labor include knowledge and experience,managerial talent,skilled labor,and labor force.Market includes cost saving,market premium.Thirdly,based on the guidance of the value creation principle to the international tax distribution,this paper proposes some practical solutions to the current situation that there are many academic achievements in the theoretical principle of "paying tax in the jurisdiction of value creation".For example,how to allocate the sources of value creation of extraodinary profits,and how to revise and implementation of location advantage in transfer pricing.