This paper discusses tax policy measures to reduce corporate tax avoidance by extending
taxation in the source country without imposing double taxation. We focus on four
options: Bilaterally restricting interest and royalty deductibility, introducing an inverted tax
credit system, levying withholding taxes on all interest and royalty payments and levying
withholding taxes as an anti-avoidance regulation. We calculate the tax revenue effects of
introducing a minimum withholding tax on royalty payments and an inverted tax credit. For
the withholding tax we find that the US would suffer the greatest tax revenue losses, while
some other countries would increase their tax revenue. In general, gains and losses depend not
only on net balances in royalty income flows but also on withholding tax and credit rules under
the status quo. The inverted tax credit would increase tax revenue in particular in high-tax
countries. Revenue redistribution would only arise if withholding taxes were replaced by the
inverted credit.
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