Home>Corporate Tax Justice
23.09.2019
Corporate Tax Justice
Cornelia Woll, Full Professor, Political Science, Sciences Po (CEE, MaxPo & LIEPP), assesses the challenges that remain in the pursuit of corporate tax justice.
This article was originally published in the 2019 G7 Global Leaders Report.
Tax cooperation seems to be more difficult to achieve through multilateralism than any other economic issue, despite growing consensus about the detrimental effects of corporate tax competition for both market integration and economic inequalities. Repeated attempts to harmonise corporate taxation have gained momentum since the financial crisis, with important proposals made by the OECD and the European Union. Yet failure to implement or even reach agreement on these proposals shows the need for leadership of the G7 in order to address the concerns of those countries that stand to lose most from corporate tax harmonisation.
Detrimental effects
In the past, proponents of tax competition have underlined its positive effects on government efficiency, which were supposed to improve the provision of public services to respond to fleeting income. This argument generally does not hold for corporate taxation, since companies are much more mobile than citizens. As a result, we can observe a “race to the bottom” of corporate tax rates. Public choices are distorted in favor of the most mobile companies, with an increasingly important part of the tax burden borne by the least mobile parts of a country’s population.
Figure 1: Decrease in corporate tax rates (source: OECD.Stat)
In addition, tax competition places administrative burdens on companies operating in more than one country, where they have to adjust to often changing and diverse tax regimes, without the possibility to consolidate profits and losses at the company level. Initially, the desire to avoid double taxation on companies and thus discrimination against foreign subsidiaries was a principal driver of early calls for European corporate tax harmonisation.
It is instructive to look at the increasing importance of tax havens in the profits of American companies. While profits have barely moved in the major economies where their consumers are located, they have grown more than seven times in only twenty years in seven low-tax nations: the Netherlands, Ireland, Bermuda, Luxembourg, Switzerland, the British Caribbean and Singapore, as Brad Setser showed in a NY Times Op-Ed on 6 February 2019. Today, Ireland alone is as important for US corporate profits as Italy, France, Germany, Japan, India and China combined.
Difficult agreement
The adoption of these schemes in the Council is still pending, but one can expect opposition from the member states that stand to lose an important part of their tax revenue. The tensions were visible this spring, as the Council was unable to reach a consensus on the digital tax proposal that would have allowed taxing corporate giants such as Google, Amazon or Facebook. Fearing effects on other aspects of their digitized economies, Ireland and the Scandinavian countries rejected even a watered-down version of the proposal France and Germany had tried to push for. When it comes to corporate taxation, which goes to the heart of economic development models within Europe, the EU is unable to find a common stance. Not only does it fail to become a global rule marker, the current fragmentation is also bad for European member states, companies and citizens. Moreover, it impedes moving forward on integration in much needed areas, such as banking union or capital market integration, and thus hampers the single market. Without corporate tax harmonisation, the European Union stands to lose on all fronts.
The effectiveness of such coordination is already visible in the area of offshore accounts. Through the Automatic Exchange of Information initiative of the OECD, tax information is now transferred through 4500 bilateral agreements. As a result of this sea-change, bank deposits by individuals and companies in international financial centers has dropped by 34% over the past ten years, which represents 489 billion euros, and led to an additional tax revenue of 95 billion euros worldwide.
G7 leadership needed
This is why G7 leadership is crucial to pave the way for the ambitious G20 objectives. It is paramount that the G7 as well as the EU work in parallel to the OECD recommendations to facilitate cooperation between tax authorities. For all countries involved in the negotiations, the key question will be what will happen in the absence of agreement. If that default position allows the countries that benefit from the current lack of regulation to continue reaping benefits, agreement will be more difficult to come by. Countries most eager to move forward, however, have underlined that they are willing to take unilateral steps. The United Kingdom for example has already announced a 2% levy on sales of digital services starting in April 2020. This is a strong signal that a return to the past is not likely. To avoid a myriad of country-by country solutions that companies could again seek to play against one another, the G7 will need to lock shoulders and move ahead on this important issue together.
The G7 has the opportunity to send a clear message about global inequalities by further strengthening the fight against corporate tax optimisation. It should bolster minimum tax rates jointly, reiterate the central principles that will guide implementation and be pioneers in tax authority cooperation that will make abuse less likely in the world's major economies. Strong support of the G7 will help set a standard for the G20 work plan and facilitate a European agreement on a common and consolidated corporate tax regime. The alternative is a world where multinational companies benefit from global markets and governments fight a losing battle within their much smaller political jurisdictions. In such a setting, the fight against global inequalities would be doomed.
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