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2021 World Tax J. 3 (2021)

handle is hein.journals/wldtxjrn2021 and id is 1 raw text is: Wolfram F. Richter* Aligning Profit Taxation with Value Creation The OECD seeks to align transfer pricing and profit taxation with value creation. This article argues that taking this objective seriously requires profit splitting. This is shown by applying Shapley value theory to the problem of allocating a firm's profit tax base to the jurisdictions in which the firm is active. The application of cooperative game theory is justified with the argument that interjurisdictional cooperation on legal issues is a necessary condition for firms earning profit abroad. The profit tax base should therefore be allocated to jurisdictions according to standards generally considered as equitable when distributing the gains of cooperation. At least, this should be the primary objective, which finds its limitations only in the consideration of information and efficiency- related costs. This insight provides the basis for arguing for a two-step approach to profit taxation that has similarities to residual profit allocation but is conceptually and practically different. Contents 1. Introduction 4 2. Aligning Profit Taxation with Value Creation: An Axiomatic Approach 7 2.1. Shapley's theorem 8 2.2. Illustrations 10 3. Profit Splitting in Taxation 11 3.1. Profit splitting when production of quantity is non-rival 14 3.2. Implementing profit splitting when production is non-rival 16 3.3. Too little gain from profit splitting when production is purely rival 18 3.4. Two-step profit taxation when production is mixed 19 4. Summary and Conclusions 20 5. Appendices 22 Appendix A 22 Appendix B 23 * Dr. Dr. h.c. Wolfram F. Richter is professor emeritus at TU Dortmund University and affiliated with CESifo Munich, IWH Halle, and IZA Bonn. He can be contacted at wolfram.richter@tu-dortmund. de. He studied mathematics at the University of Karlsruhe (1968-1972) and later spent an academic year at the London School of Economics, earned a doctorate in 1975 and a habilitation in 1979, both from the economics department of the University of Karlsruhe and worked as a Graduate Assistant at the Universities of Karlsruhe and Bielefeld (1974-1981). He has been a full Professor in Public Economics at the University of Dortmund since 1981 and emeritus since 2016. The author also was co-editor of FinanzArchiv (2000-2005) and Vice-Rector of the University of Dortmund (2006-2008). He has been a member of the Advisory Board to the Federal Ministry of Finance, Germany since 1994 and fellow of the European Economic Association since 2004, in addition to being made an Honorary Doctor of the Faculty of Economics, Otto-von-Guericke-University Magdeburg in 2014. He is affiliated with M.I.Tax Hamburg, IWH Halle, CESifo Munich and IZA Bonn. This article builds on two earlier papers by the same author: Taxing Intellectual Property in the Global Economy: A Plea for Regulated and Internationally Coordinated Profit Splitting, CESifo Working Paper 6564 (2017); Taxing Direct Sales of Digital Services: A Plea for Regulated and Internationally Coordinated Profit Splitting, CESifo Working Paper 7017 (2018). The author wishes to thank Markus Breuer, Jim Hines, Ulrich Schreiber and the anonymous reviewers for their valuable comments and hints. WORLD TAX JOURNAL FEBRUARY 2021 13 © IBFD