UK Government’s corporation tax proposals could damage the UK’s competitiveness

Taxing Foreign Profit: Economic Principles and Feasibility

Michael P. Devereux

This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective. It argues that for systems based on residence or source, nothing less than full harmonisation across countries can achieve global optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. This is consistent with recent proposals by the UK government. However, the government implicitly casts doubt on the feasibility of a source-based system. To the extent that such a system is becoming increasingly infeasible, more fundamental reforms – such as a destination-based tax – require further examination.

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