The future of corporate tax a hot topic

NEWS Published

TAXES A recent seminar brought together 175 leading international experts from academics, business, and government to discuss the best way to tax international companies. The gathering highlighted the extensive current debate on how and where companies with international operations should be taxed. Companies are criticised for utilising the taxation system for their own gain, while countries introduce new tax regulations designed to attract investment.


Alan Auerbach

Foto: Claudio Bresciani / TT

Krister Andersson

Foto: Claudio Bresciani / TT
Foto: Claudio Bresciani / TT

Jeffrey Owens and Mike Williams

Foto: Claudio Bresciani / TT

Porus F Kaka

Foto: Claudio Bresciani / TT

• What really is good or bad tax competition?

• Will large countries restrict smaller countries’ ability to compete on taxation?

• Will we move towards greater taxation of consumption instead of complicated corporate taxation?

• Will the broad international taxation project BEPS from the G20/OECD resolve these problems or merely increase companies' administrative burden?

These were questions raised by Krister Andersson, Head of Tax Policy at the Confederation of Swedish Enterprise, and current Chair of the BUSINESSEUROPE Tax Policy Group, to open an international tax conference in Stockholm last week.

Within the framework of G20/OECD the largest countries are running  the extensive BEPS (Base Erosion and Profit Shifting) project, aiming to change the rules on how much tax a country such as Sweden can take from internationally operating companies. Over time, the localisation of main offices, research, and production may also be affected.

”Everyone agrees that taxes should be paid where companies operate, but agreeing on exactly where profits arise and should be taxed is harder to find consensus on. We will see significant changes to the map of taxation in coming years, now is not the time to think of retiring if you are an expert on international taxation,” said Porus F Kaka, president of the international Fiscal Association (IFA).

Consumption taxes rather than corporate taxation – a possible future resolution?

Alan J. Auerbach from the University of California, Berkeley, one of the world's foremost experts on corporate taxation, was sceptical to the BEPS project's ability to create a long-term solution. ”BEPS will halt the collapse of the current corporate tax system. In the 1950s corporate taxation was a given. There was no question about where US Steel should be taxed. We knew where the steel mills where. In some ways we still apply the same thinking to companies like Apple as we did with US Steel, but I don't think that will work.”

</div><p><em>Above is a four part recording of the conference.</em></p><p>According to Auerbach BEPS will limit tax avoidance and tax competition, but increase administrative costs, thereby risking to reduce investments and employment rates. The principles for international taxation, however, will change.</p> <p>Auerbach pointed out how recent attempts in America to introduce new regulations to limit companies' ability to change tax residence has resulted in companies leaving the US entirely, which can hardly have been the intended outcome. Instead, the goal should have been  to make the tax system more stable and to stimulate growth.</p> <p>”We should increase the share of consumption based taxation. Economists are in agreement that taxing returns on capital is not a good solution. More consumption based taxation would create leeway to reduce double taxation of capital which reduces investments. Increasing revenues from VAT and lower corporate taxes can be designed under current regulations within WTO agreements.”</p> <p>Mike Williams, Director of Business &amp; International Tax, HM Treasury, stated that in the OECD, increasing VAT has become a greater necessity. However, he argued that the demands for greater transparency in BEPS can be an important force for change.</p> <p>Jeffrey Owens, professor and Head of the Global Tax Policy Center at Wirtschaftsuniversität in Vienna and previous head of tax policy at OECD, raised the issue of different countries’ incentives for attracting companies, such as lower taxes on FOU or patents. ”Tax incentives are like sinning. Everyone does it, but no one talks about it. Countries simply adapt their incentives around the rules so they are not considered ‘unacceptable’ in terms of tax competitiveness,” he noted.</p> <p>Will Morris, Chair of the BIAC Tax Committee for the OECD, called for more Anglo-American pragmatism and flexibility in the tax debate instead of trying to generate ultimate solutions with new abstract models. ”We should focus on existing problems instead of trying to solve all possible future ones. It is easier to formulate one regulation aimed at three percent of companies than one meant to encompass all of them.”</p> <p><strong>Morals or tax revenues?</strong></p> <p>Professor Stephen E. Shay at Harvard Law School provided an American perspective on the debate. Corporate taxation represents a limited share of tax revenue in most countries. The debate is mostly about moral aspects in relation to other tax payers. According to Shay, the debate on corporate taxation doesn't have any noticeable impact on American politics.</p> <p>Chas Roy-Chowdhury, Head of Taxation at the international auditor organisation ACCA, predicted that politicians will call BEPS a success while in reality it will increase the amount of double taxation on companies. For companies, taxation is a cost and higher taxation results in higher prices or lower salaries.</p> <p>”Politicians create their own problems by being too hard on companies. We cannot create a world that is difficult to handle for companies, citizens, and politicians.”</p> <p>Professor Hugh Ault from Boston College Law School argued that the situation regarding taxation of international companies is reminiscent of the prisoner's dilemma. All countries would gain from cooperating more but any single country breaking the agreement would gain even more but at the expense of the others.</p> <p><strong>Would CCCTB be a solution for the EU?</strong></p> <p>Within the EU, the proposal for a common consolidated corporate tax base, CCCTB, could be a solution. Tom Neale, Unit Head at the European Commission, clarified the status on the CCCTB. The commission first proposed the initiative as early as 2001, for the purpose of removing obstacles to cross-border trade within the EU. In light of  BEPS the view on the CCCTB has changed and a new initiative from the commission will be presented before the summer.</p> <p>Businesses want the CCCTB to be voluntary, consolidated from the start, and that international companies should only have to submit auditing information to the tax agency in the country where their main offices are located, a so called one-stop-shop. Currently, indications are that the commission will re-launch a proposal but for a mandatory CCCTB. ”Consolidationis the big issue. It will be difficult to convince the EU's members to accept a new way to allocate corporate taxes. It is also extremely unlikely that the commission will propose a minimum level of corporate taxation.”</p> <p>Philip Baker, a well-known British tax lawyer, emphasised the importance of countries opening up to arbitration to settle tax disputes between them. Most observers consider it likely that double taxation of companies will constitute a major problem as countries begin to introduce their own interpretations of the measures implementing BEPS.</p> <p>The conference was wrapped up by Charlotte Svensson, State Secretary to the Swedish Minister for Finance Magdalena Andersson, who argued that for a small country with an open economy such as Sweden it is important to be on equal competitive terms with other countries. When it comes to CCCTB, Svensson is in favour of developing the internal market but considers the proposal to be far-reaching and complex.</p> <p>”Sweden supports a better functioning internal market but corporate taxation is a national instrument to create good economic development.</p>

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