Are we on the road to Destination based taxation?

I’ve been quite sick with a flu while the tariff crisis has been underway - so haven’t been in any shape to add value to the debate. Fortunately, I had no value to add anyway.

But as I recovered Lachlan Vass sent me this tweet:

What is going on here? Well tariffs leading to a destination-based cash flow tax was the first of my predictions for 2025, and potentially a better way of dealing with concerns around multinational tax.

This would involve having an import tariff (done), a relief of taxes on exports (discussed), and a change in corporate taxes within the country to be on a cash flow basis (who knows!).

Now this is probably too generous - I don’t believe that the US administration is playing 4d chess, and doing such a thing ad hoc is not ensuring that double-taxation is avoided and the tax is imposed consistently cross-borders. Specifically:

• The 104% tariffs are insanity, not just because there are inconsistent tariffs (between 10% and 100%) but also because it will directly generate significant economic harm.

• The US could legislate a DBCFT immediately - given something as insane as deporting US citizens and legal migrants to essentially concentration camps has support of all tranches of government, I’m sure the administration could actually just change corporate tax if they wanted to. They just need to make the DBCFT sound “masculine” and the child like US public and media will simply agree with it at this stage.

But a believable eventual outcome of all of this is a shift in the direction of the tax base to a destination basis - a final direction many economists support, even if it isn’t worth the US imploding its own economy for.

If you’re a New Zealander reading there is nothing to stress about - except for the messy global transition and likely recession due to current “US policy induced uncertainty”. I would recommend that NZ Treasury and IRD does give some advice regarding corporate tax reform in this new world though - as understanding how to work under different types of rule-based orders, and how to support them, will matter..

However, this would also leave a $62bn hole in the Australian tax base. Australia would lose taxing rights on “rents” associated with mineral products and financial services - reducing tax capacity substantially. This is a bit of a deeper concern.

The double-whammy of uncertainty and a switch to a destination basis is going to tear a hole in the Australian tax base - the first in the short-term, the second in the long-term.

Maybe it is even more important to discuss tax reform now.