CORPORATE income tax (CIT) reforms have lately come under intense gaze from different quarter across the world. There is near-unanimity among diverse stakeholders that the present CIT system is outdated. It has to be replaced with a new one.

Many consider Base Erosion and Profit Shifting (BEPS) as patchwork solution to the problems caused by existing system. Some are skeptical about the emerging BEPS Version.2.

The entities chipping into the reforms broth include International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), revenue administrations, academics and leading NGOs.

The last group is also operating collectively under The Independent Commission for the Reform of International Corporate Taxation (ICRICT), a group of certain renowned economists formed in 2015.

One can divide reforms into two categories:

1) the reforms within the existing CIT system that have been accelerated by several nations. Apart from rate reductions, expansion of CIT base, such reforms have seen elimination of minimum alternate tax in the United States & Belgium. The countries spearing reforms have also adopted new approaches towards taxation of multinationals.

2) The 2nd set of reforms call for reinventing the entire CIT framework. These seek a new format for taxing corporate income with few alternatives on the agenda.

Start with 2nd category of reforms first. IMF's two working papers (WPs) & an ICRICT report issued during January 2019 deserve focus.

Their significance lies in the fact IMF is expected to issue a policy paper (PP) on CIT in the coming months. It had issued first PP on it in 2014.

In October 2018, IMF started online consultations on CIT reforms & related issues. It is preparing PP on the international corporate taxation system and the possible future directions it will or could take. It stated the Paper was slated for presentation to the IMF Executive Board during February 2019.

In its consultation brief, IMF posed nine questions including some multi-layered ones. A few questions rephrased here are:

1) Identify major successes and/or shortcomings of the OECD Base Erosion and Profit Shifting (BEPS) project.

2) What is your view on problems with the current principles of international taxation (residence and source bases; arm's length pricing…)?

3) Can the unitary/formulary methods help address weaknesses of the current tax architecture?

4) What is your take on proposals that have elements of destination-based taxation?

Before discussing stakeholders' response to such issues, consider IMF's two WPs. Take first the WP titled 'Corporate Tax Reform: From Income to Cash Flow Taxes (CFT)'. It examines the implications of replacing CIT by cash flow taxes. It has used the latest version of IMF's Global Integrated Fiscal and Monetary model (GIMF) to estimate the macroeconomic impact of replacing a CIT with a CFT or a destination-based cash-flow tax (DBCFT).

It shows that this type of reform boosts output in the country undertaking the reform and results in positive long-run spillovers to the rest of the world.

Through model simulations, WP shows the transitional and long-run impact on both macroeconomic and financial variables of such a fiscal policy shift for both the country undertaking the reform and for the rest of the world.

WP explains: "The tax shifting can be decomposed in two components: a shift from a CIT to a CFT and the shift from an origin-based to a destination-based (DB) tax. The first component induces the corporate sector to invest more, which boosts potential output, GDP and consumption in the long run, but which crowds out consumption in the short run as households save to build up the capital stock".

It adds: "The second component is the shift from a case where both domestic and foreign revenues enter the taxable base calculation, to a case where only domestic revenue enter, and the elimination of the deduction for the cost of imported intermediate goods. This leads to an appreciation of the currency to offset the competitiveness boost afforded by the tax and maintain domestic investment-saving equilibrium".

Consider now the 2nd WP captioned 'Revenue Implications of Destination-Based Cash-Flow Taxation'. It estimates the revenue implications of a Destination Based Cash Flow Tax (DBCFT) for 80 countries.

It concludes: "On average, a universally adopted DBCFT surprisingly generates a similar level of revenue as the CIT, but some countries lose while others win. Countries with a large trade surplus would face the largest decline in revenue, at least in the short term. We find no evidence that developing countries lose more revenue than developed countries-if anything, results suggest that the opposite pattern is more likely".

It adds: "Natural resource-rich countries, on average, would generate lower DBCFT revenue than CIT revenue, but would still have additional taxes at their disposal. Other factors such as loss-making firms and revenue volatility could pose revenue risks for some countries".

According to WP, unilateral DBCFT adoption can generate negative spillover effects, which are found to be sizeable if the DBCFT country is large and integrated.

As put by WP's authors, "We find that spillovers could prompt other countries to adopt a DBCFT, too, either as an immediate reaction, or in some cases in a later round, as a rising number of DBCFT countries raises the cost of maintaining source-based CITs. Some countries, however, would never have a revenue incentive for adopting a DBCFT ".

Turn now to ICRICT's report titled 'The Fight Against Tax Avoidance -BEPS 2.0 : What the OECD BEPS Process has achieved and what real reform should look like'.

It says: "the fairest and most effective approach is for multinationals to be taxed as single firms doing business across international borders".

The Report contends that if multinationals paid taxes as single, unified companies, the use of transfer prices to shift profits would disappear, because their global income would be consolidated and they would not be able to shift profits through internal transactions.

It believes that all countries would obtain fiscal revenues from the multinational group in proportion to the real economic activities that take place in each territory. This proposal, combined with a global effective minimum tax of 20-25%, would drastically reduce the incentives for multinationals to shift profits between jurisdictions and for countries to cut their tax rates.

OECD has also touched on the issue of profits allocation and taxing rights within the domain of ever-digitalizing economy not for the entire domain of multinational corporations (MNCs)

In a policy note titled 'Addressing the Tax Challenges of the Digitalisation of the Economy' issued during January 2019,OECD says: "A solution would therefore require comprehensive work that covers the overall allocation of taxing rights through revised profit allocation rules and revised nexus rules, as well as anti-BEPS rules".

In a separate response to IMF's consultation submitted in December 2018, ICRICT affirmed MNCs should be taxed as unitary firms. It considers MNCs as unitary businesses making profits in a global marketplace. They earn profit by integrating their activities across the countries. MNCs' value as a whole is bigger than the sum of its individual parts.

IRICT has advocated a simple, formulaic approach for allocation of multinationals' global profits and associated taxes. The allocation could be done on the basis of factors such as the sales, employment, resources used by the company in each country.

The use of the profit split method to allocate profits can be a first step towards formulary apportionment, but only if the allocation factors used to split the profit are standardized and weighted consistently. The absence of standardization would create further opportunities for tax avoidance.

In February 2018, it released a report titled 'A Roadmap to Improve Rules for Taxing Multinationals -A Fairer Future for Global Taxation'. In this report, ICRICT evaluated formulary apportionment against two other options – worldwide, residence-based taxation and DBCFT.

The Report observed: "While each has advantage and drawbacks, in our view the fairest and most effective approach would be unitary taxation with formulary apportionment".

Oxfam agrees with this view. In its response to IMF, Oxfam says: "Yes, a unitary system and formulary apportionment method would end most current practices of corporate tax avoidance. Such an approach would also benefit from simultaneous agreements on global or regional minimum effective corporate tax rates to limit corporate tax competition".

It believes that the present principles of international taxation, left intact by the BEPS project, are "extremely outdated". Two major changes have largely contributed to obsolescence. These are:

1) The role of multinationals and intra-group transactions has increased significantly.

2) Global economy is shifting from tangible to intangible assets. The policy response to these changes has always been transfer pricing.

It says: "Although transfer pricing guidelines have increased drastically, they have only become more complicated to respect for both companies and administrations while the problems are far from being solved".

European Network on Debt and Development (Euro dad) has echoed in a similar fashion. It contends: "BEPS was, at best, only a partial solution. While some loopholes were closed (for example, some of the loopholes relating to the permanent establishment standards), and others were limited (for example, the interest deduct ability standards)".

Euro dad continues: "BEPS also endorsed and kept open certain major loopholes. This includes the use of patent boxes. Despite the BEPS decision to introduce the so-called 'modified nexus' approach, many patent boxes are still harmful tax practices that can be abused for tax avoidance purposes, and furthermore do little to promote research and development".

Euro dad has backed unitary approach with formulary apportionment. It considers it as a potential, important step towards ensuring that multinational corporations pay taxes where economic activities occur and where value is created.

It has, however, pointed out that such a system should be complemented with a minimum effective corporate tax rate.

Like other OECD & G20 watchers, The Tax Justice Network (TJN) has voiced its concern over BEPS. TJN says: "The failure of the BEPS process is not only widely acknowledged now, but also evident in the policy actions of most countries. The US, having played a key role in limiting the OECD's scope to consider more comprehensive alternatives to arm's length pricing, has introduced a major tax reform that goes well beyond BEPS".

As for new reform initiatives, TJN has recalled that as early as 2005, it had pitched for "a new basis for taxing corporations is also required. A national basis for corporate taxation makes no sense when companies can operate in 150 or more states simultaneously. It is inevitable that taxation problems will arise in circumstances where the company acts globally but taxation is imposed locally… Trading profits will need to be taxed on a unitary basis."

It has also drawn IMF's attention to "a more powerful alternative, broadly within the spirit of BEPS". It requires common commitment to three broad principles. These are:

1) a common tax base to ensure that there is no incentive for arbitrage on the base;

2) minimum tax rates; and

3) elimination of preferential regimes such as the patent box.

As put TJN, "While an anonymous official at a major ministry of finance suggested such an approach could eliminate as much as 90% of profit shifting, in practice the BEPS process was unable to deliver even agreement on the elimination of preferential regimes –instead formalising and actually increasing the use of the patent box, for example".

Action Aid International has struck a similar chord. It notes that Post-BEPS, the state of the international corporate tax system has only marginally advanced. It has pointed out that developing countries continue to deal with the challenge of claiming and enforcing their taxing rights and their efforts have been undermined by the failure of BEPS and other processes to address the weaknesses of the principles of international taxation that are fundamentally skewed in favor of developed countries.

As for new reforms, Action Aid says: "We strongly believe that the ineffective arm's length principle must be replaced with unitary taxation using formulary apportionment, which is likely to be more effective in ensuring fair and effective international corporate taxation, if properly designed".

In their submission to IMF, two British Professors, Richard Murphy & Andrew Baker, have taken a different stand on unitary/formulary method of taxation.

They say: "We do not think that universal adoption of a unitary method is a pre-condition of its use: it can be rolled out using more and more commonplace alternative minimum taxation methods".

Prof. Murphy & Prof. Baker say: "A residual profit split method is not in any way an acceptable alternative method to unitary apportionment. This is because a residual profit plot method assumes that the corporate structure in use was created for commercial purpose".

They add: "This will be an inappropriate assumption in many, if not most, cases. As such, the method is bound to seek to apportion profit on a basis that does not reflect the economic substance of transactions that have taken place and that means it is inappropriate for use".

As reforms within the current system, they have been aptly collated in the OECD's tax policy reforms report (TPRR) released during September 2018.

The average reduction in CIT has accelerated by 2.1% in 2018 over previous year in countries undertaking reforms. In 2017, eight countries implemented CIT rate cuts, averaging 2.7%. In 2018, eight countries effected CIT rate cuts, averaging decrease of 4.8%.

According to TPRR, "The US tax reform has shifted corporate taxation from a worldwide to a hybrid territorial system. More specifically, the reform has introduced a 100% deduction for dividends received by US domestic corporations from foreign corporations when they have an ownership stake of at least 10%".

TPRR recalls the fact that many OECD countries have shifted away from residence-based or worldwide systems to territorial tax system for the taxation of foreign corporate profits over the years. The United Kingdom, Japan and New Zealand, for instance, changed their worldwide systems to a territorial one in 2009.

It notes that a territorial system increases the competitiveness of domestically headquartered MNC which will face the same tax burden as other competitors in a foreign market and therefore reduces the incentive to relocate the headquarters to a lower taxed jurisdiction. Moreover, the territorial system does not discourage companies from repatriating foreign earnings.

The US also introduced a minimum tax on the global intangible low-taxed income (GILTI) earned by its foreign subsidiaries, which is the amount of income of a foreign subsidiary that exceeds an implied 10% rate of return on its tangible business assets.

Yet another reform unleashed by US is imposition of a minimum base anti-abuse tax. It would be increased in phased from 5% in 2018 to 12.5% in 2026.

Amidst such broad canvass of ongoing and proposed reforms, what are the prospects of international cooperation for rebooting the entire CIT system. The chances appear dim if responses to IMF consultation are taken as an indicator.

According to Euro dad, For years, the Group of 77, which represents over 130 developing countries, has been calling for the establishment of an intergovernmental tax body under the UN to lead the setting of global tax standards. This request has repeatedly been rejected by OECD countries, which have instead insisted on keeping the standard setting under the auspices of the OECD and G20.

Euro dad observes: "if intergovernmental tax cooperation continues to fail, the area of corporate tax system will most likely continue to be very politically unstable, corporate tax payments will remain very low, and public scandals will remain frequent".

It estimates that if the current race to bottom of CIT continues, the global average corporate tax rate will hit zero in 2052.

Oxfam has voiced a similar concern. It says: "International tax cooperation remains thin and dominated by rich countries. The OECD remains an exclusive forum which is structured around the economic interests of developed countries and multinational corporations".

Oxfam says the world need an intergovernmental tax body with universal representation on an equal footing.

As a leveled and all-inclusive platform for cooperation does not exist, the prospects for reinventing universally acceptable CIT remain a distant dream.