Global Tax Policy | Tax Harmonization - TheAdviserMagazine.com

Around the world, aging populations, infrastructure needs, and defense spending are all driving policymakers to look for additional taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenues. Some are responding to this issue by pointing policymakers toward big picture ideas while ignoring the necessary details and problematic effects. Standard reforms to existing domestic taxes on income, consumption, or property are apparently not good enough.

Instead, the goal is to do things that require the rest of the world to play along. In this piece, I identify three ideas that need more scrutiny (though this is not an exhaustive list).

The Definition of Income Matters

The first idea that has recently been revisited by the EU Tax Observatory is global formulary apportionment. Global formulary apportionment is a plan to divvy up income among countries, with an unfortunate and fatal flaw: there is no politically or economically coherent global definition of income.

The basic idea has been around for decades. It drew attention during discussions in 2019 in the context of a proposal from the G24, and, at the EU-level, has been part of the discussion on the consolidated corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates..

While the authors of the EU Tax Observatory report note some of the challenges for measurement, policy implementation, and coordination, they ignore the most basic barrier to a formulary apportionment system—the definition of taxable income.

Tax systems around the world use a variety of standards for measuring income. Differences in the treatment of inventory, capital investments, and research are common. It is possible to use a common definition of income for purposes of illustrating formulary apportionment, but those illustrations would need to meet reality before policymakers seriously consider it.

The Tax Foundation regularly points policymakers to a cash flow base for income taxation. Policies like immediate expensing for capital investment, which is now permanent law in the US and UK, fit with this approach. More pure cash flow taxes exist in Latvia and Estonia.

Another reality for formulary apportionment comes from the experience of US states.

US states operate a rather imperfect system of formulary apportionment. While the definition of corporate income is often tethered to the federal tax code, differences between states’ definitions remain, and not all states have a corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax..

Separately, not all states use the same apportionment formula. A major trend has been the movement to use sales as the only factor for apportioning income. In 2026, 37 of the 45 US states with corporate taxes only use sales to apportion the tax base.

Policymakers should recognize the underlying desire to tax in the location where consumption occurs to avoid putting a (relatively) higher tax burden on where companies have their physical investment or workers.

Harmonization Should Not Be the Goal

The second reality check is this: too many individuals who work in tax policy are aiming for a sort of tax utopia (or, really, dystopia) that eliminates all differences in tax policy across countries. They often highlight the revenue lost due to differences in tax codes.

The latest form of this argument comes from the Tax Justice Network in a piece lamenting the approval that the US has received to operate its own set of anti-avoidance rules alongside the global minimum tax that dozens of other countries have chosen to implement. The report suggests that EU countries are losing, “5 times Greenland’s GDP to Trump’s tax conquest.”

There are two points worth raising here. First, let’s give the Tax Justice Network’s number a sense of scale. In 2023, Greenland’s GDP was $3.33 billion, so “5 times Greenland’s GDP” is roughly $16.6 billion. In 2024, the US foreign direct investment position in Europe was nearly $4 trillion, an increase of nearly $1 trillion from the previous year. Certainly, “Europe” and the EU are not perfect substitutes. However, the point stands that advocates for tax harmonization are concerned about pennies.

Second, compromising with the US is not a disaster when it is clear the US and other countries have common goals in addressing gaps in cross-border tax rules. The US and EU countries do not need the same set of rules to achieve their overall goals.

If EU countries need more revenue, the European Commission is happy to remind them that the annual VAT compliance gaps are 33 times the size of Greenland’s GDP, and actionable VAT policy gaps leave more than 250 times Greenland’s GDP in tax revenue on the table annually.

Avoid Taxing Gross IncomeFor individuals, gross income is the total of all income received from any source before taxes or deductions. It includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income.
For businesses, gross income (or gross profit) is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods

This brings us to a third necessary reality check. Countries dissatisfied with their corporate income tax revenues have begun a dangerous experiment: ignoring costs of revenue in their calculations. This is economically dubious at best and truly harmful at worst.

Above, I talked about definitions of corporate income. This is a key pillar of any tax on profits. However, some governments have chosen to build their tax policies without that pillar, resulting in a shaky structure.

Policymakers have noted the global rise in cross-border services, and they are determined to tax those flows, often with a withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount the employee requests. tax on the gross amount of the transactions. When taxing income, governments allow businesses to take their revenue and subtract their costs. This avoids companies being taxed on money that does not go to corporate profits. For cross-border services, though, some countries have experimented with taxing the revenues from services.

A recent paper from economists Li Liu, Alexander Klemm, and Parijat Lal of the IMF sheds light on the problems with this approach. They find that a 1 percent increase in withholding taxes for earnings from intellectual property (royalties) reduces those royalties by 4 percent. They find a one-to-one relationship for technical fees and for total services imports.

Evidently, not all taxes are created equal, and taxes on gross revenues are particularly harmful policy tools.

Ignoring the basic economics of tax policy, members of the United Nations Tax Committee have added an extreme provision to the UN model tax treaty that would facilitate more gross-basis taxation of cross-border services. Article 12AA, which was included in the model treaty in 2025, would allow withholding taxes on a broad set of cross-border services.

Thankfully, new provisions in the UN model tax treaty do not automatically become law across the globe. Individual countries would need to renegotiate their treaty provisions with their partners to include this new Article 12AA.

But, frankly, they should leave 12AA out.

A study sponsored by the International Chamber of Commerce (ICC) and produced by Oxford Economics shows major negative effects if the policy is widely adopted. The Oxford Economics study relies on the parameters estimated by the IMF researchers to examine the potential widespread adoption of Article 12AA among developing countries. The results suggest that any additional revenue raised would be offset by diverting services flows or reduced income in the countries that adopt the policy.

This sort of extreme result is worth examining for two reasons. First, adoption would likely not happen in one fell swoop, so the economic and revenue consequences would be slow to appear. Second, the IMF parameters are focused on historical bilateral services trade patterns. This means those parameters might not hold true in a scenario for broad adoption, potentially leaving the result from the Oxford Economics study inflated.

Still, this is risky policy territory. The clear nature of a gross-based withholding tax and the IMF results suggest that companies are very sensitive to this type of taxation, and for good reason. The old adage, “If you tax something, you get less of it,” clearly applies here.

Conclusion

So, whether policymakers are exploring new global approaches to taxation, feeling frustrated by the lack of conformity, or simply venturing out to tax companies with disregard for their costs, it’s helpful to have a dose of reality.

Policymakers should get the basics right: focus on what works, what supports growth, and what is administratively feasible. Tax Foundation’s principles of sound tax policy should play a key role. If a government focuses on simplicity, neutrality, stability, and transparency, it’s tough to go wrong.