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An International Tax System for Emerging Economies, Tax Sparing and Development: It is All About Source

2007; University of Pennsylvania Law School; Volume: 29; Issue: 2 Linguagem: Inglês

1086-7872

William B. Barker,

Fiscal Policy and Economic Growth

This Article proposes a source tax system for emerging economies that promotes development by encouraging the importation of capital and technologies while at the same time providing tax revenue for development. Since freer trade and freer factor mobility have made the traditional territorial notion of source taxation obsolete, emerging economies should recognize that source taxation must instead be based on the economic contribution of the developing economy to the earning of the income. Consequently, the source of the normal return from imported capital in all of its forms (money, tangible assets and intangible assets) is not where it is used but where it was created. Therefore, the appropriate territorial tax base is locational economic rents. This solution can be implemented with an expenditure or cash flow tax that could be imposed in two stages: one on corporate rents and the second when those rents are distributed to shareholders. Developed economies should adopt a tax sparing regime that exempts or allows a deemed foreign tax credit for the portion of their resident taxpayers' foreign income that represents locational economic rents. Though the immediate . William B. Barker, Professor of Law, The Dickinson School of Law of The Pennsylvania State University. A preliminary draft of this paper was presented at the International Conference on Taxation and Development sponsored by the Organization for Economic Cooperation and Development (OECD) International Network for Tax Research held on November 4, 2006, at the University of Michigan Law School. Research for this article on developing economies was first undertaken when the author was a Visiting Professor at the Universities of Cape Town, the Free State, and the Witwatersrand and supported by a teaching/research grant from the J. William Fulbright U.S. Scholars Program. Additional research on transitional economies was undertaken when the author was a Visiting Professor at the Riga Graduate School of Law of the University of Latvia and supported by J. William Fulbright Senior Specialist grants. 1 Barker: An International Tax System for Emerging Economies, Tax Sparing, Published by Penn Law: Legal Scholarship Repository,