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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

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