Global tax governance

The authors illustrate aggressive tax planning with a case study of a British company that eroded the tax base in its countries of operation, demonstrating how tax base erosion undermines states' revenues and hinders redistribution. This kind of tax avoidance or aggressive tax planning is often legal, taking advantage of differences in national laws and benefits from tax treaties. In contrast, tax evasion means exploiting loopholes in tax control by illegally hiding tax income. So-called tax havens facilitate international tax avoidance and evasion. They thrive, the authors explain, from the loopholes of the international corporate tax system, which relies on bilateral and multilateral tax treaties that determine tax bases and the mechanisms of administrative cooperation. The international corporate tax system rests on the separate entity doctrine and the arm's length principle that allow multinational enterprises to transfer profits to jurisdictions with lowest taxes. In recent years, data leaks from tax havens and the fiscal deficits caused by the 2007-2009 financial crisis have contributed to calls for greater transparency, information exchange, and tackling tax base erosion. The authors conclude their paper by recommending, among other things, that the Organisation for Economic Co-operation and Development (OECD) should intensify its cooperation with non-OECD countries to prevent tax base erosion and to strengthen information exchange.