Concerns about a global corporate tax race to the bottom spurred by recent reforms may be unfounded, according to one OECD official.
Several countries that recently introduced significant corporate tax reforms historically had high corporate tax rates and reform was long overdue, Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, said September 5. While the tax cuts have created concerns about a race to the bottom, the reality looks more like a race to the average, he said in conjunction with the introduction of the OECD’s third annual Tax Policy Reforms report.
The report addresses policy reforms in all OECD countries, as well as Argentina, Indonesia, and South Africa, and draws from a detailed questionnaire. “The aim is to include more and more G-20 countries,” David Bradbury, head of the Tax Policy and Statistics Division at the OECD Centre for Tax Policy and Administration, told Tax Notes. A couple trends stood out this year, including less of a focus on austerity, Bradbury said, adding that fiscal policy has been a bit more expansionary, with tax policy being an important part of that. “Spending is playing less of a role than it had been, and tax is playing more of a role,” he said.
Corporate income tax is a key focus of the publication, given the number of countries undertaking aggressive cuts, Bradbury said. The average corporate income tax rate across the OECD dropped from 32.5 percent to 23.9 percent between 2000 and 2018, though rate reductions are less pronounced now than before the fiscal crisis, according to a September 5 OECD release. Argentina, France, Latvia, and the United States have all introduced significant tax reform packages focused on supporting investment, it says.
Countries that cut corporate taxes in 2018 included some with the highest rates in 2017, Saint-Amans said. The cuts moved those countries to the middle of the pack, he said, adding that the OECD “will be closely watching how other countries respond to this trend.”
While some countries introduced tax measures in a piecemeal fashion, broad tax reform packages like those in Argentina and the United States “are consistent with the view that tax systems should be considered as a whole,” with a focus on efficiency and equity, the report says. It recommends that fiscal policy focus on mediumterm challenges, given that global economic growth is close to longer-term norms. Global GDP growth is estimated to have been 3.7 percent in 2017, the fastest pace since 2011, according to the report. The need for short-term fiscal stimulus has decreased, it says.
Efforts to protect the corporate tax base against international tax avoidance through the implementation of the base erosion and profitshifting program and other measures have continued, but they have varied across countries, the report acknowledges. Disparities among views on taxing highly digitalized businesses have prevented the adoption of a common approach and “spurred the introduction of heterogeneous measures, creating a risk of increased complexity and uncertainty,” it says.
Changes to business models ushered in by digitalization have put pressure on key principles underlying the international tax system — namely, nexus and profit allocation — the report says. Countries have agreed to undertake a coherent and concurrent review of rules governing those principles that will consider the effect of digitalization on the economy, it says. “It is anticipated that the Inclusive Framework [on BEPS] will work toward a consensus-based solution by 2020,” it adds.
When it comes to personal income tax reform, a common strategy has been to increase earned income tax credits, which both improves labor market participation and enhances tax system progressivity, according to the report. The OECD supports this strategy because it’s good at lowering barriers to entry of low-income workers, “so that’s a positive development,” Bradbury said. Personal income tax cuts on labor income have continued, as has the trend toward higher rates on personal capital income, it says.
The tax mix in the OECD is dominated by social security contributions, personal income tax, and VAT, according to the report. Social security contributions and payroll taxes accounted for 27 percent of total tax revenues across the OECD in 2015, it says. Personal income tax was the secondlargest source of tax revenue at 24.4 percent. Corporate and property taxes are much less significant revenue sources, accounting for 8.9 percent and 5.8 percent, respectively, of the average tax mix in 2015.
VAT made up one-fifth of the OECD’s average tax mix in 2015, with other consumption taxes accounting for about 12.4 percent, the report says. While VAT rates have stabilized — only South Africa raised its standard VAT rate in 2018 — increased VAT revenue is being sought through improved tax administration and antifraud measures, the report says. Immediately after the financial crisis, VAT and GST rates increased considerably. “We’ve actually now seen that trend taper off,” Bradbury said. Across the OECD, there was no increase in the standard VAT rate this year, which is quite a large departure from what was observed immediately after the crisis, he said.
The report notes that a new collection of socalled sin taxes has been introduced to curb harmful consumption. These include new taxes on sugar-sweetened beverages in Ireland, South Africa, and the United Kingdom, and a new tax on cannabis in Canada. Existing health taxes in Belgium and Norway have been raised, and Turkey extended its special consumption tax to fruit juices and all sodas, rather than just cola, the report says.
Saint-Amans said that despite progress on the taxation of energy use, tax increases have not been enough to encourage significant carbon abatement outside of road transport. “Aligning energy prices with the costs of climate change and air pollution is a central element of a cost-effective environmental policy,” he said.
By Amanda Athanasiou and Stephanie Soong Johnston
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