2015: A Watershed Year in Corporate Tax?
Multinational companies have enjoyed a sustained period of falling corporate tax rates around the world. However, with the conclusion of the OECD’s base erosion and profit shifting project earlier this year marking the start of fundamental changes to the international tax system, and with governments more determined than ever to crack down on aggressive tax avoidance, could 2015 turn out to be the year when corporate tax bills began to rise once more?
Corporate Tax Revenue Set To Bounce?
It has long been acknowledged that there is a shift taking place in the world of taxation as governments seek to reduce the burden of tax on incomes and switch it to consumption. According to the OECD, corporate tax revenues have been falling across OECD countries since the global economic crisis. Average revenues from corporate incomes and gains fell from 3.6 percent to 2.8 percent of gross domestic product over the 2007-14 period. Over the same period, revenues from individual income tax grew from 8.8 percent to 8.9 percent and VAT revenues grew from 6.5 percent to 6.8 percent.
Accompanying this, the financial crisis ensured that countries had to compete harder with one another for investment, which put additional downward pressure on corporate tax rates; according to the Tax Foundation, the US-based non-partisan tax think tank, the average global corporate tax rate fell from approximately 30 percent in 2003 to 23 percent in 2015.
However, the OECD has a different take on the trend towards ever decreasing corporate tax revenue: tax avoidance.
“Corporate taxpayers continue finding ways to pay less, while individuals end up footing the bill,” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration upon the release of the OECD’s Revenue Statistics publication on December 3, 2015. “The great majority of all tax rises seen since the crisis have fallen on individuals through higher social security contributions, value-added taxes, and income taxes. This underlines the urgency of efforts to ensure that corporations pay their fair share.”
Underlining just how seriously the OECD takes the issue of falling corporate tax revenues and tax avoidance, in 2013 it embarked on a highly ambitious project designed to throw out decades-old corporate tax codes and replace them with a new set of rules tailored to the reality of business in a 21st century, globalized world – and, of course, tailored to the financing needs of governments in a debt-ridden, post crisis economic and fiscal landscape.
The base erosion and profit shifting project (BEPS) kicked off in July 2013 with the publication of the BEPS Action Plan. This contained 15 specific actions designed to give governments the domestic and international mechanisms to prevent corporations from paying little or no taxes.
An extensive consultative exercise then followed, involving governments, regional tax organizations, NGOs and business associations, generating some 12,000 pages of comments on 23 discussion drafts. Finally, on October 5, 2015, the OECD released its much anticipated final set of recommendations for “a comprehensive, coherent, and co-ordinated reform of international tax rules,” to close loopholes said to cost nations up to USD240bn in corporate tax revenues each year.
In essence, the OECD’s work centers on the taxation of profits where economic activities take place, to close gaps in existing international tax rules that allow corporate profits to “disappear” or to be artificially shifted to low or no tax territories.
The package, says the OECD, will repaint the tax landscape globally and, according to Saint-Amans, such fundamental changes would have not been possible before the financial crisis and the advent of tax information exchange. He said recent international cooperation on tax matters has opened the door to extensive reforms previously thought impossible, such as during the work it attempted ten years ago to close the door on aggressive tax planning.
Corporate Tax – They’re Still Cutting It!
According to Saint-Amans, there is consensus among countries on the BEPS package as a whole. However, looking back over the past year, most of the evidence suggests that governments are just as keen to cut corporate tax as they ever were as they continue to compete aggressively for FDI dollars. We highlight several examples below.
In his 2015 Budget speech, India’s Finance Minister, Arun Jaitley, set out his roadmap for accelerating growth and enhancing prospects for investment, including plans for a five percent cut to the corporate income tax rate over a four-year period. Later, in November, Indian Revenue Secretary Hasmukh Adhia revealed that the Government is considering bringing forward its plans to reduce corporate tax and repeal some tax exemptions.
As part of Prime Minister Shinzo Abe’s promised growth strategies, the Japanese Government plans to reduce the country’s corporate income tax rate from its current level of more than 35 percent to below 30 percent over the next few years. In a first step, the corporate tax rate was lowered to 32.11 percent on April 1, 2015. From fiscal year 2016, it will be cut again, to 31.33 percent. Then, in December, the Government decided that the corporate income tax rate should fall below 30 percent next year.
In April, Switzerland’s Federal Council announced plans for a package of federal and cantonal corporate tax reforms, with the aim of bolstering the country’s international standing and competitiveness.
In May, Indonesian President Joko Widodo reportedly approved the plan to reduce the current 25 percent corporate tax rate to as low as 17.5 percent on a gradual basis, although there remains some uncertainty about the exact scope and timing of the proposed move.
Delivering the first Conservative-only Budget in 18 years, UK Chancellor George Osborne announced a surprise corporation tax cut in a speech to the House of Commons on July 8, a measure which will reduce UK corporate tax to just 18 percent by 2020.
During his speech to the Ambassadors’ Conference at the Italian Ministry of Foreign Affairs on July 27, Premier Matteo Renzi disclosed that one of his objectives is to reduce Italy’s headline corporate tax rate to 24 percent in 2017, well below the level in most European countries. Proposals to reduce both individual and corporate tax were approved by the Cabinet on October 15.
On October 7, 2015, Norway’s Ministry of Finance delivered its 2016 National Budget, including proposals to revise the thin capitalization regime and cut the corporate tax rate, among other things.
In November, the Northern Ireland Executive and the UK and Irish governments agreed a set of actions to secure the full implementation of the Stormont House Agreement, paving the way for the devolution of corporate tax powers to the Northern Ireland Assembly from 2018. As part of the new settlement, the Executive has committed to cut Northern Ireland’s corporate tax rate to 12.5 percent, in line with that applied by the neighboring Republic of Ireland.
And, while various proposals to reform the United States tax code remain firmly stuck in Congress, there is widespread support for a reduction in America’s federal corporate tax rate, which at 35 percent is currently the highest in the OECD. A European-style “patent box” regime, which would introduce a lower effective rate of corporate income tax on income derived from intellectual property, also has bipartisan backing.
The European Union
Not all governments are in such a mood to compete, however. And the European Union – by which we mean its executive body the European Commission, the European Parliament and the pro-EU member states – has long been suspicious of aggressive tax competition, and wary of a so-called “race to the bottom” in terms of corporate tax rates.
It can be said then, that the EU is the counterweight to the corporate tax rate downtrend. And while EU corporate tax rates aren’t rising – some Eurozone members cut corporate tax during the debt crisis – the EU itself certainly isn’t encouraging corporate tax cuts. Indeed, the BEPS project seems to have emboldened the European Commission in its quest to harmonize aspects of the EU’s corporate tax rules, notably through the common consolidated corporate tax base (CCCTB), which was re-proposed in September 2015 as part of Brussels’s “fair tax” agenda.
The Commission has insisted ever since it first mooted the CCCTB that corporate tax harmonization won’t lead to the harmonization of tax rates, or the setting of a minimum corporate tax rate, as is the case with value-added tax in the EU. Nevertheless, certain member states are mistrustful of the Commission’s intentions in the area of corporate tax, and fear that Brussel’s corporate tax agenda will inexorably lead to across-the-board corporate tax harmonization. One of them is Ireland, which attributes its remarkable economic recovery to its low rate of corporate tax. And, unsurprisingly, generally speaking, the UK also views tax harmonization as an economic disaster in the making.
The Commission is also being egged on by the European Parliament, which passed various resolutions towards the end of 2015 calling for Europe’s corporate tax regime to be made fairer, more transparent, and more coordinated. The latest of these occurred on December 16, when the EP voted 500 to 122 (with 81 abstentions) to the Commission to table proposals for country-by-country reporting and a “fair taxpayer” label, introduce a common tax base, and provide legal protection for so-called whistle blowers.
Of course, the problem with the EU’s legislative machine is that new measures usually need to be approved by all 28 member states before they can be implemented. It is unlikely therefore, that a consensus will emerge any time soon on such far reaching and divisive proposals. However, this isn’t preventing the Commission from using other legal avenues to advance its corporate tax agenda, as its response to the “Lux leaks” affair exemplifies.
A Game Of Give And Take
Of course, there are many other aspects to corporate tax besides tax rates. And as a result, there are many other ways for governments to claw back revenue they have given away to companies in the form of lower tax rates.
The OECD’s work in the area of BEPS has encouraged many countries to close “loopholes” and enact ever more anti-avoidance legislation. In fact, this process was already well underway by the time 2015 rolled around, according to a survey by EY.
The report, The outlook for global tax policy in 2015, points to striking national policy shifts on BEPS matters, with 40 percent of respondents to a new survey noting “significant” tax reform activity from their nation’s government. Interestingly, the survey shows a continuing trend towards broad-based, low-rate business tax regimes. Nevertheless, nearly a third of respondents expect the overall corporate income tax burden in their country to increase in 2015.
The results of another survey, published by Taxand in February 2015, revealed how multinational corporations’ corporate tax planning arrangements, and in particular their transfer prices, are facing increased scrutiny as a result of ongoing international work to reform global tax rules.
Notable examples where countries seem to be ignoring the calls of the OECD and businesses for a multilateral approach to BEPS and taking matters into their own hands include Australia and the United Kingdom. In the former’s case, legislation was enacted in December 2015 that will introduce certain recommendations of the BEPS reports, and require companies that “avoid” taxes to pay back double what they owe, plus interest. For its part, the UK introduced the Diverted Profits Tax earlier this year, which imposes a 25 percent special tax on profits artificially shifted from the UK to low- and no-tax jurisdictions.
Other European nations have implemented various BEPS-inspired measures, including introducing strict interest limitation rules and legislating to close opportunities for the use of hybrid mismatch arrangements that lead to double non-taxation. At least four EU member states – the Czech Republic, Spain, Poland, and Slovakia – have made considerable improvements to their transfer pricing rules, in particular by extending reporting requirements. Several member states have introduced or strengthened general or specific anti-avoidance provisions. In addition, some member states have also taken action to ensure that specific tax regimes are less vulnerable to tax avoidance, and have addressed mismatches that arose as a result of the interaction between different countries’ tax rules.
Looking Ahead to 2016 And Beyond
So what does the future hold for corporate tax payers? Based on ongoing and emerging trends, we will probably continue to see corporate tax rates fall, especially in those countries where corporate tax remains relatively high, such as Japan, and – depending on the result of next year’s elections – perhaps the United States. However, governments are also likely to offset the revenue effect of corporate tax rate cuts with additional anti-avoidance legislation and more aggressive auditing of multinational companies’ tax affairs, as they try to combat profit shifting from high to low-tax jurisdictions.
However, while corporate tax rates are the lowest they’ve been for a number of decades, the global corporate tax environment itself is probably the most uncertain it’s ever been, as governments set about the task of implementing the OECD’s recommendations on BEPS, often in their own unique ways. Therefore, 2015 could indeed turn out to be a major turning point in international tax, the year which marked the end of a golden age for corporate tax planning, and the beginning of a much more challenging and altogether riskier era for multinational businesses.