Falling Tax Rates Only One Part of Incentivising Business Investment
"For us it is less of a driver than for other businesses, but it is an important consideration," said the tax head of a European-based media company. "We would look at double tax treaties and anti-abuse rules before making a decision to expand operations."
"[The OECD BEPS project] and related changes in policy and tax administration practices, as well as corporate attitudes to risk, mean that the headline rate of tax is probably less important than it was," said Giles Parsons, a retired head of tax policy from Caterpillar.
The average rate fall from 28.6% in 2000 to 21.4% in 2018 across 94 jurisdictions was reflected in the OECD’s January report on corporate tax rates. OECD officials associate this drop with countries wanting to improve the competitiveness of their corporate tax system through tax reform.
"Among the countries that introduced significant corporate tax reforms were a number with high corporate tax rates, where tax reform was long overdue," said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration.
The 2017 US Tax Cuts and Jobs Act (TCJA) is a clear example, and it has given businesses incentives to invest further, including the full expensing of short assets.
Tax policies that are favourable to multinational corporations have become central to economic stimulus packages in many countries with traditionally high corporate tax rates, including the US and France, which show the largest rate decreases between 2017 and 2018.
"Corporate tax rates are one of the reasons businesses would consider in the decision to invest," said Jose Luis Olvera Salcedo, EMEA head of tax at Hitachi Europe. "Other factors we would look at are how tax authorities operate and the jurisdiction’s tax incentives such as R&D; and patent boxes. Tax exemptions or reductions are among the factors we would think of," he said.
The race to attract more multinational operations has led to a two-decade long trend of cutting corporate tax rates to incentivise business investment and boost market activity.
Factors that impact business investment
"While investment decisions can be driven by a whole range of considerations, such as the skills of the workforce, proximity to the market, the abundance of natural resources and the overall investment environment, clearly tax will also be an important consideration," said David Bradbury, head of the tax policy and statistics division of the centre for tax policy and administration at the OECD.
Tax incentives are important when it comes to businesses considering factors such as capital costs, according to Daniel Bunn, director of global projects at the Tax Foundation. "For example, if they are able to deduct the cost for expenses like machinery then they are able to have a more appropriate after-tax return on that investment," he said.
Vieje Piauwasdy, head of tax advisory at Secfi, a US firm which specialises in pre-IPO advice, told International Tax Review: "The cost of capital is very important, but the administrative and back-office functions are important to consider too. How do you interact with your finance team? How do you apply the tax laws associated with the new country? There are a lot more factors to consider when moving to a new region."
There are targeted tax breaks that companies can receive in various jurisdictions to reduce the corporate tax burden on certain activities. For example, companies can write off certain industry expenses such as the cost of machinery in goods manufacturing in the US and Canada. However, businesses need to consider asset mobility and operational expenses along with a jurisdiction’s tax incentives to make wise cross-border investment decisions.
"We have considered being a multinational company, but even the reporting requirements for hiring people can get insanely heavy and very expensive from a back office standpoint," said Piauwasdy.
Bunn said: "If you have some sort of a mobile tax base then you can look at the tax impacts of setting up a new office or locating your intangible assets in a jurisdiction and over a relatively short horizon take advantage of that tax policy in one country or another."
"In manufacturing and heavy industries, these changes can have much longer horizon impacts in making business decisions, especially about location," he added.
Parsons, who worked in this sector, agreed. "Manufacturing investments are long-term projects and predictability of future tax outcomes is a definite asset," he said. "A tax director is expected to be able to advise on what is likely to happen in a jurisdiction with a reasonable level of certainty. That means that a significant factor will be the stability of a country’s tax regime, including the ability to have a useful dialogue with the tax administration and a predictable working relationship with them."
There has been a string of "unexpected changes in tax policy and tax administration attitudes to working with businesses", according to Parsons. However, there has also been a convergence of tax incentives due to the BEPS Actions. "Base broadening and rate lowering, together with other international trends, are leading to less variation in tax regimes and tax incentives are becoming standardised, influenced by BEPS and similar trends," said Parsons.
How countries are protecting their national tax bases
The OECD’s database on corporate statistics is a data-driven method to monitor the effectiveness of the BEPS project and advance Action 11 (measuring and monitoring base erosion and profit shifting) through open access to better data on corporate and effective tax rates. Transparency is a key aspect of the database, especially in monitoring fair activity in how countries collect corporate tax revenue.
"Corporate tax is very significant in the context of developing countries, where it often accounts for a relatively large share of total tax revenues. On the other hand, most OECD countries are less dependent on the corporate tax," said Bradbury. As countries comply with the BEPS Actions while pursuing a competitive edge through cutting corporate tax rates, other forms of tax will likely be pursued to make up for lost revenue.
Salcedo explained: "I think that [the tax burden] will fall both on VAT and payroll taxes (PAYE) because when you reduce your corporate tax rate to a certain level, you expect more investment from companies that will have to employ more people who will have to pay taxes via payroll. Ideally, the government is reducing the intake from corporate tax, but increasing the amount of money it takes from people."
"VAT revenue is becoming more important for tax bases in the OECD countries," said Bunn. "Economists are seeing countries move from taxing more mobile factors in the economy to less mobile factors such as property," he said. Bunn warns that it is important to keep tax revenue close to the budget constraint without creating international conflict, which includes going against treaty obligations and creating double tax scenarios for businesses.
"Continued international cooperation will be important to the fight against international corporate tax avoidance, in line with the commitments made by countries to implement the OECD BEPS project," said Saint-Amans.
Company balance sheets, which form a part of where the data comes from to make up the report, help estimate how much effective tax is being paid by businesses. Annual updates to the OECD corporate tax report and database will include data collected from Country-by-Country Reports (CbCR) to offer clearer and more comparable insights into the effective tax rates paid by businesses across 94 jurisdictions.
The OECD’s corporate tax database is useful to get a clearer view on how effective the BEPS project has been and to keep corporate tax collection activity in check, but it still misses important nuances. There are many tax rates across jurisdictions that vary depending on the characteristics of a corporation, which are not captured in the database. This keeps the door open for further rate competition between countries in a post-BEPS environment.
The above article was published on www.internationaltaxreview.com on February 6 2019 and has been republished with the approval of the Publisher.