Territorial tax systems require clear rules to distinguish between taxable domestic and exempt foreign-source income. Defining the source of a multinational company’s profits is difficult, however, especially for profits that are attributable to intangible assets. Shifting of reported profits to low-tax countries with little economic activity is eroding territorial systems around the world. The OECD Base Erosion and Profit Shifting report would limit these abusive transactions, while attempting to maintain territorial systems that tax foreign affiliates of multinational companies as independent entities. Alternatives would abandon territorial systems altogether and seek different ways of taxing profits of multinational companies.
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