European approach to tax avoidance by multinationals only addresses symptoms

The existing approach is mainly about making sure that multinationals at least pay tax somewhere, but it is considered less relevant exactly in what country. This was argued by Daniel Smit, Professor of Corporate Taxation and Corporate Finance, on Friday, December 16, 2016, in his inaugural address at Tilburg University.

Under the current approach, the question of where a multinational firm must pay tax is not relevant. This is not in line with the principle embraced by the EU and the OECD that companies should be taxed in the country where the profit-generating activities take place. In Smit’s opinion, a different approach should therefore be developed.

From legal to economic reality

According to Smit, a more fundamental approach to the root causes of corporate tax avoidance is needed. In taxing multinationals, countries currently take the legal reality as a point of departure. However, in Smit’s opinion, the economic reality should be taken as a starting point. That should form the basis for deciding in what country what part of the total corporate profit can be taxed. Such a scheme would do more justice to the principle that profit should be taxed where it is generated.

Daniël Smit has been a Professor of Corporate Taxation and Corporate Finance by special appointment since April 1, 2016. This chair was created as part of the EY Fund Corporate Taxation and Corporate Finance: The Taxation of Multinational Enterprises in a Global Economy and Corporate Finance. Smit has worked for the Fiscal Institute Tilburg at Tilburg University since 2007. In addition, he has been affiliated to EY since 2002.