Taxing Capital In The Age Of Intangibles

The challenges of taxing capital are hardly new. Historically, given the differences in corporate profit tax rates across jurisdictions, companies have manipulated pricing to reduce their total tax burden. With advanced economies shifting to the innovation-intensive knowledge-based mode in the post-1980 period, taxing returns to capital became even more challenging since intangible capital assets can be parked in a low tax jurisdiction of choice. Furthermore, this rise of the intangibles economy has posed numerous governance problems, including how we measure economic activity, how we classify products, and importantly how and where economic returns are booked – and thus where and how they are taxed. The rise of the intangibles economies has led to a significant erosion of corporate tax revenue in the innovation-intensive advanced economies, even as the share of national income flowing to capital rose. For developing countries, the erosion is worse and comes on top of substantial erosion of corporate tax revenues from the tangibles economy due to weak tax administration and corruption. However, addressing the erosion would likely have significant redistributive impacts across economies, thereby creating political economy problems for designing and implementing reforms. The intangibles economy thus clearly poses a taxing problem that has been exacerbated by the COVID-19 pandemic, which accelerated the digital transformation, thereby escalating the problems facing governments in taxing intangibles, while at the same time blowing large holes in public finances thereby making it all the more urgent to stop the erosion. In this paper, we take up the following questions: how big is the taxing problem, whose problem is it, and the prospects for success of the various approaches to addressing, including inter alia the various digital services taxes that have been proposed or implemented and the proposed OECD/G20 Inclusive Framework. We conclude that the importance of tax reform in the modern digitalizing economy goes beyond preventing base erosion and profit shifting for it is about sustainable development and future prosperity. And whether we are there yet is a matter of wait and see.