That is probably necessary in any case to take account of taxes paid by permanent establishments and withholding taxes. However, there may be circumstances in which a country would not want to apply the DPR charge, even if the profits in question are not being taxed elsewhere, or only at a very low rate.

# Not my tax base? – DPR as a rebuttable presumption

Some cash-rich and lowly taxed entities exist that have little, or nothing to do with base erosion in developing economies. A highly simplified reading of the current dispute between Apple and the EU can serve to illustrate the point.<sup>62</sup> The EU’s complaint is that the Irish Revenue accepted an allocation of taxable profits to the Irish branch of Apple’s dual resident IrishBermudan subsidiary that was far too low. Not so says Apple. The profits were generated elsewhere but, prior to the 2017 reforms, the US did not tax those profits until they are repatriated. As a result, Apple and several other US MNEs held cash and marketable securities outside the US in lowly taxed entities as a direct consequence of the way the US taxed, or rather did not tax, foreign source profits.<sup>63</sup> A mechanical DPR charge of the kind just described would still catch part of the earnings of these cash-rich entities. That might be regarded as a good thing by some, but it could also act as a deterrent to foreign investors, unwilling to accept a potentially large tax exposure that is unrelated to their activities in the country that imposes the charge. Consequently, a country contemplating a DPR charge might want to provide a let-out. Doing so makes it much easier to defend the otherwise deliberately mechanical approach of the DPR.

The difficulty with a let-out clause is that it reintroduces a degree of discretion and judgement into the operation of the DPR charge, both of which the mechanical approach was designed to avoid. Unfortunately, any tax charge that is sensitive to the specific circumstances of a large business taxpayer will involve some degree of professional judgement. However, the risks involved can be mitigated if the DPR charge is structured on the basis that it is payable unless the taxpayer can successfully demonstrate that the profits earned by the lowly taxed entity are unrelated to any activities undertaken in the country. The fungibility of money makes attribution of profits from financial activity particularly difficult. Therefore, the exclusion of finance would simplify the discussion of whether profits are related to activities undertaken in a country.

Making the DPR charge payable but subject to rebuttal helps address one of the central problems that face tax administrations in developing economies, namely the asymmetry of information; generally, MNEs know much more about the operation of their business than the tax authorities they deal with. Requiring the taxpayer to make a case why the DPR should not apply allows the tax administration to require a much greater degree of transparency about the taxpayer’s value chain than would otherwise be the case. It would have the incidental benefit of greatly improving the tax administration’s understanding of operations in the industry concerned.

There are further steps that could be taken to improve the rigor and propriety of the process for dealing with claims that lowly taxed profits are unrelated to a country’s tax base. As these decisions will involve the largest taxpayers, they should be subject to a discrete governance process involving senior managers in the tax administration. They should not be taken by a single individual acting alone. The tax administration could publish an explanation of how it

> 62 See: http://europa.eu/rapid/press-release_IP-17-3702_en.htm. 63 The American Bar Association report cited in footnote 29 explains why this was the case.

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