IFC Forum believes that income should be taxed where it’s earned – and those taxes should be paid in full. IFC Forum unreservedly condemns the use of foreign jurisdictions to evade domestic taxation, and applauds efforts to make tax information available to tax authorities in other countries, including through Tax Information Exchange Agreements and now the OECD Common Reporting Standard.
IFCs generally have little or no direct taxes domestically. However, tax is paid – in full – in the source jurisdiction where income is generated and in the home jurisdiction of the investor. This means that IFCs are what’s called tax neutral; the IFC itself does not add an additional tax burden, nor does it reduce the tax burden otherwise owed onshore. This makes IFCs attractive as conduits for global capital flows, but very unattractive as places to evade taxation.
Tax-neutrality means that funds can be pooled from investors in multiple countries, and then invested in a wide range of countries, too. Such funds are taxed in accordance with the law in the countries where the funds are invested and again in the home jurisdiction where the funds are received by the investor. Tax-neutrality in IFCs eliminates a third layer of taxation – in the IFC – that would otherwise make international capital flows uneconomical.
This is important. The flow of capital across borders is hugely important both to improving efficiency and employment at home and to promoting development around the world. Without tax neutrality, many investments would not take place, and we would all be worse off.