The European Commission contracted a study on cash flow taxes (CFT) that culminated in a 250+ page Final Report published in May of 2015. Here are five things we learned from the report:

  1. Some countries ignore simplification as a goal and apply CFT systems in parallel with corporate income tax systems.  Many countries have adopted “mixed systems” that include CFT elements, or sector-specific CFTs.
  1. No country has adopted a destination-based CFT, despite its theoretical appeal.
  1. Existing CFT systems do not show evidence of having been based on the CFT models discussed in the academic literature, but they do seem to have the desired effects of encouraging investment and eliminating the tax incentive to finance with debt rather than equity.
  1. Most important reasons countries that have considered a CFT have not adopted one:
    1. Fear of the unknown
    2. Difficult transition issues
    3. Incompatibility with the U.S. foreign tax credit regime
    4. Political gridlock (U.S.)
  1. Key design/implementation issues for CFT generally, and border-adjusted destination-based CFT in particular:
    1. Application to the financial sector/financial transactions/financial intermediation services
    2. Transition generally, and transition for existing investment and debt
    3. Coordination with existing tax treaties, which are based on the source/residence approach
    4. Development of rules to determine to which jurisdiction a good or service is destined
    5. Ensuring that treaty partners recognize the CFT as an “income tax” for treaty purposes (but seek to have it treated as a VAT for WTO purposes)