Do Tax Experts and Non-Experts Differ in Their Sense of Fairness About a More Even Distribution of "Digital" Profits Across Countries? - Evidence from a Survey in Germany
Abstract
The taxation of multinational enterprises (MNEs) is challenging. The profits of an MNE should be aligned with value creation and taxed accordingly using the arm’s length principle (ALP) to achieve a proper distribution of taxing rights. However, those who are not tax experts, such as tax politicians, often raise concerns that, in a digital economy, arm’s length profits lead to a tax base allocation based on value creation. Therefore, they advocate fair taxation but, on the contrary, don’t describe or explain what can be understood as fair. In this paper, we use a survey to shed light on questions about whether tax experts, such as tax advisors and auditors, and non-experts differ in their senses of fairness with regard to a more even distribution of profits across countries. Our findings indicate that tax experts’ senses of fairness differ from non-experts’ senses of fairness about a more even distribution of profits across countries. Tax experts – to a certain extent – consider the ALP and value contributions, while non-experts do not. As the ALP allocates a vital role to inter-nation equity, it is essential that there is no perceived unfairness in this regard, or the current regime of international taxation is called into question.
References
Aliber, R. Z. (1993). Transfer pricing: A taxonomy of impacts on economic welfare. In P. Robson (Ed.), Transnational Corporations and Regional Economic Integration (The United Library on Transnational Corporations, Vol. 9, pp. 40-52).
Alm, J. (2013). Expanding the theory of tax compliance from individual to group motivations (Tulane Economics Working Paper 1309). New Orleans, LA: Tulane University. Retrieved from http://repec.tulane.edu/RePEc/pdf/tul1309.pdf
Alm, J., Bloomquist, K. M., & McKee, M. (2015). On the external validity of laboratory tax compliance experiments. Economic Inquiry, 53(2), 1170-1186. https://doi.org/10.1111/ecin.12196
Ashlagi, I., Karagözoğlu, E., & Klaus, B. (2012). A non-cooperative support for equal division in estate division problems. Mathematical Social Science, 63(3), 228-233. https://doi.org/10.1016/j.mathsocsci.2012.01.004
Ashton, R. H., & Kramer, S. (1980). Students as surrogates in behavioral accounting research: Some evidence. Journal of Accounting Research, 18(1), 1-15. https://doi.org/10.2307/2490389
Avi-Yonah, R., Clausing, K. A., & Durst, M. C. (2009). Allocating business profits for tax purposes: A proposal to adopt a formulary profit split. Florida Tax Review, 9(5), 497-553. Retrieved from https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1773&context=articles
Bucovetsky, S., & Haufler, A. (2008). Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed? Journal of International Economics, 74(1), 188-201. https://doi.org/10.1016/j.jinteco.2007.06.001
Camerer, C. F. (2003). Behavioral Game Theory: Experiments in Strategic Interaction. Princeton, NJ: Princeton University Press.
Cappelen, A. W., Hole, A. D., Sørensen, E. Ø., & Tungodden, B. (2007). The pluralism of fairness ideals: an experimental approach. American Economic Review, 97(3), 818-827. https://doi.org/10.1257/aer.97.3.818
Cappelen, A. W., Hole, A. D., Sørensen, E. Ø., & Tungodden, B. (2010). Responsibility for what? Fairness and individual responsibility. European Economic Review, 54(3), 429-441. https://doi.org/10.1016/j.euroecorev.2009.08.005
Davies, R. B., Martin, J., Parenti, M., & Toubal, F. (2018). Knocking on tax haven’s door: Multinational firms and transfer pricing. The Review of Economics and Statistics, 100(1), 120-134. https://doi.org/10.1162/REST_a_00673
Depositario, D. P. T., Nayga Jr., R. M., Wu, X., & Laude, T. P. (2009). Should students be used as subjects in experimental auctions? Economics Letters, 102(2), 122-124. https://doi.org/10.1016/j.econlet.2008.11.018
Devereux, M. P., & Keuschnigg, C. (2009). The distorting arm’s length principle in international transfer pricing (CEPR Discussion Paper No DP7375). London, England: Centre for Economic Policy Research. Available at https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7375
Devereux, M. P., & Vella, J. (2017). Implications of digitalization for international corporate tax reform. (Oxford University Centre for Business Taxation Working Papers WP17/07). Oxford, England: Oxford University Centre for Business Taxation. Retrieved from http://eureka.sbs.ox.ac.uk/6809/1/WP1707.pdf
Dischinger, M., & Riedel, N. (2011). Corporate taxes and the location of intangible assets within multinational firms. Journal of Public Economics, 95(7-8), 691-707. https://doi.org/10.1016/j.jpubeco.2010.12.002
Durst, M. C. (2012). OECD Guidelines: Causes and Consequences. In W. Schön & K. A. Konrad (Eds.), Fundamentals of international transfer pricing in law and economics (MPI Studies in Tax Law and Public Finance, Vol. 1, pp. 123-136). Heidelberg, Germany: Springer-Verlag Berlin Heidelberg. https://doi.org/10.1007/978-3-642-25980-7_7
Egger, P., Keuschnigg, C., Merlo, V., & Wamser, G. (2014). Corporate taxes and internal borrowing within multinational firms. American Economic Journal: Economic Policy, 6(2), 54-93. https://doi.org/10.1257/pol.6.2.54
Elliott, W. B., Hodge, F. D., Kennedy, J. J., & Pronk, M. (2007). Are M.B.A. students a good proxy for nonprofessional investors? The Accounting Review, 82(1), 139-168. https://doi.org/10.2308/accr.2007.82.1.139
Elster, J. (1989). The Cement of Society – A Study of Social Order. Cambridge, England: Cambridge University Press.
Engström, P., Nordblom, K., Ohlsson, H., & Persson, A. (2015). Tax compliance and loss aversion. American Economic Journal: Economic Policy, 7(4), 132-164. https://doi.org/10.1257/pol.20130134
European Commission. (2014). Report of the Commission Expert Group on Taxation of the Digital Economy. n.p: European Commission. Retrieved from https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/gen_info/good_governance_matters/digital/report_digital_economy.pdf
European Commission. (2017, September 2017). Communication from the Commission to the European Parliament and the Council: A fair and efficient tax system in the European Union for the digital single market. Brussels: European Commission. Retrieved from https://ec.europa.eu/taxation_customs/sites/taxation/files/communication_taxation_digital_single_market_en.pdf
European Commission. (2018a). Proposal for a council directive laying down rules relating to the corporate taxation of a significant digital presence. Brussels: European Commission. Retrieved from https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A52018PC0147
European Commission. (2018b). Proposal for a council directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services. Brussels: European Commission. Retrieved from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2018%3A148%3AFIN
Fehr, E., Goette, L., & Zehnder, C. (2009). A behavioral account of the labor market: The role of fairness concerns. Annual Review of Economics, 1(1), 355-384. https://doi.org/10.1146/annurev.economics.050708.143217
Fehr, E., & Schmidt, K. M. (2003). Theories of fairness and reciprocity: Evidence and economic applications. In M. Dewatripont, L. P. Hansen, & S. J. Turnovsky (Eds.), Advances in Economics and Econometrics: Theory and Applications (Eighth World Congress, Vol. 1, pp. 208-257). https://doi.org/10.1017/CBO9780511610240.008
Fortin, B., Lacroix, G., & Villeval, M.-C. (2007). Tax evasion and social interactions. Journal of Public Economics, 91(11-12), 2089-2112. https://doi.org/10.1016/j.jpubeco.2007.03.005
Gantner, A., Güth, W., & Königstein, M. (2001). Equitable choices in bargaining games with joint production. Journal of Economic Behavior and Organization, 46(2), 209-225. https://doi.org/10.1016/S0167-2681(01)00190-1
Greil, S. (2019, September 5). The arm’s length principle in the 21st century – Alive and kicking? (Working Paper). https://doi.org/10.2139/ssrn.3379092
Greil, S., Müller, R., & Olbert, M. (2019). Transfer pricing for digital business models: Early evidence of challenges and options for reform. World Tax Journal, 11(4).
Gribnau, H., & Jallai, A.-G. (2017). Good tax governance: A matter of moral responsibility and transparency. Nordic Tax Journal, 1(1), 70–88. https://doi.org/10.1515/ntaxj-2017-0005
Griffith, R., Miller, H., & O'Connell, M. (2014). Ownership of intellectual property and corporate taxation. Journal of Public Economics, 112, 12-23. https://doi.org/10.1016/j.jpubeco.2014.01.009
Güth, W., Schmittberger, R., & Schwarze, B. (1982). An experimental analysis of ultimatum bargaining. Journal of Economic Behavior and Organization, 3(4), 367-388. https://doi.org/10.1016/0167-2681(82)90011-7
Güth, W., & Tietz, R. (1990). Ultimatum bargaining behavior: A survey and comparison of experimental results. Journal of Economic Psychology, 11(3), 417-449. https://doi.org/10.1016/0167-4870(90)90021-Z
Holzmann, C. M. (2017, July). Transfer pricing as tax avoidance under different legislative schemes. https://doi.org/10.2139/ssrn.3164103
International Monetary Fund. (2019). Corporate taxation in the global economy (IMF Policy Paper No. 19/007). Washington, D.C.: International Monetary Fund. Retrieved from https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/03/08/Corporate-Taxation-in-the-Global-Economy-46650
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-292. https://doi.org/10.2307/1914185
Kahneman, D., Knetsch, J. L., & Thaler, R. (1986a). Fairness as a constraint on profit seeking: Entitlements in the market. American Economic Review, 76(4), 728-741. Retrieved from https://www.researchgate.net/publication/4900848_Fairness_As_a_Constraint_on_Profit_Seeking_Entitlements_In_The_Market
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1986b). Fairness and the assumptions of economics. The Journal of Business, 59(4), 285-300. https://doi.org/10.1086/296367
Karagözoğlu, E. (2012). Bargaining games with joint production. In G. E. Bolton & R. Croson (Eds.), The Oxford Handbook of Economic Conflict Resolution (pp. 359-371). New York, NY: Oxford University Press. https://doi.org/10.1093/oxfordhb/9780199730858.013.0024
Karkinsky, T., & Riedel, N. (2012). Corporate taxation and the choice of patent location within multinational firms. Journal of International Economics, 88(1), 176-185. https://doi.org/10.1016/j.jinteco.2012.04.002
Kirchler, E., Maciejovsky, B., & Schneider, F. (2003). Everyday representations of tax avoidance, tax evasion, and tax flight: Do legal differences matter? Journal of Economic Psychology. 24(4), 535-553. https://doi.org/10.1016/S0167-4870(02)00164-2
Konow, J. (2000). Fair shares: accountability and cognitive dissonance in allocation decisions. American Economic Review, 90(4), 1072-1091. https://doi.org/10.1257/aer.90.4.1072
Kornhauser, M. E. (2005). Doing the full monty: Will publicizing tax information increase tax compliance? Canadian Journal of Law and Jurisprudence, 18(1), 95-117. https://doi.org/10.1017/S0841820900005518
Langbein, S. I., & Fuss, M. R. (2018). The OECD/G20-BEPS-project and the value creation paradigm: Economic reality disemboguing into the interpretation of the ‘arm’s length’ standard. The International Lawyer, 51(2), 259-409.
Liyanarachchi, G.A. (2007). Feasibility of using student subjects in accounting experiments: A review. Pacific Accounting Review, 19(1), 47-67. https://doi.org/10.1108/01140580710754647
Luckhaupt, H., Overesch, M., & Schreiber, U. (2012). The OECD approach to transfer pricing: A critical assessment and proposal. In W. Schön & K. A. Konrad (Eds.), Fundamentals of international transfer pricing in law and economics (MPI Studies in Tax Law and Public Finance, Vol. 1, pp. 91-121). Heidelberg, Germany: Springer-Verlag Berlin Heidelberg.
Morse, S. C. (2013). The transfer pricing regs need a good edit. Pepperdine Law Review, 40(5), 1415-1440. Retrieved from https://digitalcommons.pepperdine.edu/plr/vol40/iss5/13/
Mutti, J., & Grubert, H. (2004). Empirical asymmetries in foreign direct investment and taxation. Journal of International Economics, 62(2), 337-358. https://doi.org/10.1016/S0022-1996(03)00016-3
Navarro, A. (2018). The arm’s length standard and tax justice: Reflections on the present and the future of transfer pricing. World Tax Journal, 10(3), 351-379.
Organisation for Economic Co-operation and Development. (2015). OECD/G20 Base erosion and profit shifting project: Addressing the tax challenges of the digital economy – Action 1: Final report. Paris, France: OECD Publishing. https://doi.org/10.1787/9789264241046-en
Organisation for Economic Co-operation and Development. (2019). Base erosion and profit shifting project: Public consultation document - Addressing the tax challenges of the digitalisation of the economy, 13 February – 6 March 2019. Paris, France: OECD Publishing. Retrieved from https://www.oecd.org/tax/beps/public-consultation-document-addressing-the-tax-challenges-of-the-digitalisation-of-the-economy.pdf
Rectenwald, G. (2012). A proposed framework for resolving the transfer pricing problem: Allocating the tax base of multinational entities based on real economic indicators of benefit and burden. Duke Journal of Comparative & International Law, 22(3), 425-449. Retrieved from https://scholarship.law.duke.edu/djcil/vol22/iss3/6
Remus, W. (1996). Will behavioral research on managerial decision making generalize to managers? Managerial and Decision Economics, 17(1), 93-101. https://doi.org/10.1002/(SICI)1099-1468(199601)17:1<93::AID-MDE744>3.0.CO;2-H
Robben, H. S. J., Webley, P., Weigel, R. H., Wärneryd, K.-E., Kinsey, K. A., Hessing, D. J., Martin, F. A., Elffers, H., Wahlund, R., Van Langenhove, L., Long, S. B., & Scholz, J. T. (1990). Decision frame and opportunity as determinants of tax cheating: An international experimental study. Journal of Economic Psychology, 11(3), 341-364. https://doi.org/10.1016/0167-4870(90)90017-4
Roth, A. E. (1995). Introduction to experimental economics. In J. H. Hagel & A. E. Roth (Eds.), The Handbook of Experimental Economics (pp. 3-109). Princeton, NJ: Princeton University Press.
Ruf, M., & Weichenrieder, A. J. (2012). The taxation of passive foreign investment: lessons from German experience. Canadian Journal of Economics, 45(4), 1504-1528. https://doi.org/10.1111/j.1540-5982.2012.01737.x
Seldon, J. R., & Tsigaris, P. (2010). The ultimatum game, distribution of income and re-distributive policy. American Journal of Business Education, 3(5), 39-50. https://doi.org/10.19030/ajbe.v3i5.426
Spicer, M. W., & Becker, L. A. (1980). Fiscal inequity and tax evasion: An experimental approach. National Tax Journal, 33(2), 171-175. https://www.jstor.org/stable/41862299
Trottier, K., & Gordon, I. M. (2018). Students as surrogates for managers: Evidence from a replicated experiment. Canadian Journal of Administrative Sciences, 35(1), 146-161. https://doi.org/10.1002/cjas.1377
Vann, R. J. (2010). Taxing international business income: Hard-boiled wonderland and the end of the world. World Tax Journal, 2(3), 291-346.
Voget, J. (2011). Relocation of headquarters and international taxation. Journal of Public Economics, 95(9-10), 1067-1081. https://doi.org/10.1016/j.jpubeco.2010.11.019
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2020 Stefan Greil, Christian Schwarz, Stefan Stein
This work is licensed under a Creative Commons Attribution 4.0 International License.
Our open access status means that authors retain the copyright of their work. However, all papers published in JOTA are done so under a Creative Commons Attribution 4.0 International license (CC BY). This means that others can share and/or adapt your work without your permission as long as they follow certain rules, including attributing your work correctly.
You can learn more about this on our Open Access, Licensing, and Copyright Policies page.
