Reforming Business Taxation by Introducing a Resident Owner-Based Business Income Tax (ROBIT)

Abstract

Fighting corporate tax avoidance is not a suitable method to save the integrity of the corporate tax. Rather, more fundamental reform is needed focusing on taxing the individual shareholders at residence. For this purpose, this Article proposes a resident owner-based business income tax (ROBIT).

The ROBIT retains taxation at the entity level but provides for reduced flat tax rates for all business enterprises, taxation only of the rent by introducing an ACE regime, and exemption of inter-company dividends. At the level of the individual shareholder, dividends and capital gains are taxed as ordinary income. Integration takes place via an imputation system for domestic taxes and (short of reciprocity) deduction of foreign taxes or alternatively through a withholding tax on dividends and capital gains. To curtail deferral, capital gains are taxed by charging interest for the holding period until realization for nontraded assets and for traded assets by taxing them on a mark-to-market basis. Some additional measures are also proposed especially referring to the residence taxation of individuals. By earmarking the revenue from the enactment of the ROBIT to redistributive purposes, reform can happen and will be sustainable. Support can also come from corporate managers if windfalls for existing shareholders are avoided through phased-in reform.

The ROBIT will attract and boost investment and all the positive externalities that it brings. Some emigration of individuals as a reaction is possible, but it can be addressed by regional cooperation which is easier as regards individual taxation. Finally, the ROBIT is
superior compared to other proposals for corporate tax reform, especially destination-based corporate tax proposals.