An international tax system for emerging economies, tax sparing, and development: It is all about source!

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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 gains to both emerging and developed economies will be greatest if the countries undertake their concessions as part of bilateral treaties, significant gains can be achieved through unilateral action.

Original languageEnglish (US)
Pages (from-to)349-389
Number of pages41
JournalUniversity of Pennsylvania Journal of International Economic Law
Issue number2
StatePublished - Dec 2007

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance (miscellaneous)
  • Law


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