This paper explores the nature, significance and policy implications of spillovers in international corporate taxation—the effects of one country's rules and practices on others. It complements current initiatives focused on tax avoidance by multinationals, notably the G20-OECD project on Base Erosion and Profit shifting (BEPS). The paper draws on the IMF's experience on international tax issues with its wide membership, including through technical assistance (TA), and on its previous analytical work, to analyze spillovers and how they might be addressed. In doing so, it goes beyond current initiatives to look at a wide set of possible responses. These spillovers can matter for macroeconomic performance. Capital account data are impossible to understand without referring to taxation, and there is considerable evidence that taxation powerfully affects the behavior of multinational enterprises. New results reported here confirm that spillover effects on corporate tax bases and rates are significant and sizable. They reflect not just tax impacts on real decisions but, and apparently no less strongly, tax avoidance. The analysis also finds that spillovers are especially marked and important for developing countries. These countries typically derive a greater proportion of their revenue from corporate tax; TA experience provides many examples in which the sums at stake in international tax issues are large relative to their overall revenues; and the empirics reported here suggest that spillovers are especially strong for them. Limiting adverse spillovers on developing countries requires not just capacity building, but also addressing weaknesses in domestic law and international arrangements. The paper makes specific suggestions in areas that Fund TA has found to be especially problematic for developing countries. Sight must not be lost, however, of the need for capacity building and reform in less high profile but critical tax areas. Wider reforms to the international tax system that have been proposed address some spillovers under current arrangements, but would bring their own difficulties. 'Formula apportionment' for instance, which has been widely canvassed, involves significant risk of distortion, and may not benefit developing countries. The institutional framework for addressing international tax spillovers is weak. As the strength and pervasiveness of tax spillovers become increasingly apparent, the case for an inclusive and less piecemeal approach to international tax cooperation grows.
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