Long downward trend in corporate tax is reversed

FOR WORLD peace, the League of Nations was a bitter failure. For businesses, this has proven to be a great success. In the 1920s he established a base for corporate taxation that has endured ever since. Recognizing that taxing profits in different places can be detrimental to business and growth, taxing rights have been allocated first where profits are generated and then only where a company is headquartered.

This principle is now enshrined in bilateral tax treaties, with unexpected consequences. Governments understood that they could attract investment with lower tax rates. Between 1985 and 2018, the average corporate tax rate fell from 49% to 24%. Many tax havens charge zero. The idea has spread that collecting taxes from efficient, fast-growing businesses is “really hot.”

Companies have also learned to pay less tax by shifting reported profits, which is easier with the increase in intangibles such as brands. Although only 5% of the foreign staff of US multinationals work in tax havens, they make almost two-thirds of foreign profits there, twice as many as in 2000. In 2016, around 1 billion trillion of global profits were made there. registered in “investment hubs” such as the Cayman Islands, Ireland and Singapore, where the average effective tax rate on profits is 5%. According to a OECD study in 2015, it robbed public coffers of $ 100-240 billion per year, or the equivalent of 4-10% of global corporate tax revenues.

Some measures to improve and simplify corporate taxation were long overdue. But with businesses rapidly shifting from the holy ox to the whipped boy, governments have become less concerned with creating a better system and more with just making companies pay more taxes. Britain has decided to raise its corporate tax rate from 19% to 25%, becoming the second OECD country to do so since 2000 (the first, Chile, reversed its decision). In America, moderate Democrats have blocked Joe Biden from overturning his predecessor’s tax reform, which cut the corporate tax rate from 35% to 21%. But his Build Back Better bill introduced a tax on stock buybacks and a 95% excise tax on the sales of drugs for which drug companies have refused to negotiate prices with the Medicare system.

The bill would also have raised the minimum rate that US multinationals pay on global profits from 10.5% to 15%. It could have brought in an additional $ 30 billion per year. It would also have aligned America with a new fiscal pact negotiated through the OECD. A total of 136 countries have adhered to an overall minimum rate of 15% and have allocated more taxing rights from where companies make profits to where they make sales. the OECD hopes the deal comes into effect in 2023. Mr Furman, Barack Obama’s former economic adviser, calls it “a real radical change” in the way businesses are taxed. Others use terms like “once a century” and “revolution”.

The reallocation of taxing rights will only apply to companies with global turnover exceeding 20 billion euros ($ 24 billion), and only to pre-tax profits above 10% of income. He is likely to raise a “small amount”, thinks Michael Devereux of Said Business School at the University of Oxford. Some estimates put it at a trifle of 5 to 12 billion dollars per year worldwide. Mr Devereux estimates that the global minimum can rise 4 to 5% on top of what companies are already paying, or about $ 100 billion a year.

Yet this downplays the importance of the change. The reallocation affects some 110 multinational groups, says David Bradbury of OECD. Most are Americans. These are probably the usual suspects like Apple and Amazon, who have perfected the art of tax optimization. These companies are faced with a costly and time-consuming unwinding of their tax arrangements and a higher overall bill. As for the overall minimum, Bradbury expects countries and businesses to change their behavior. Switzerland, which supports the pact, murmurs new tax incentives to remain attractive. “It will be a mess,” sums up an executive of an American multinational.

Companies may have already made noise about the OECD OK. They thought about it better, given the heightened anti-business sentiment. Some even praised the harmonization effort. In private, however, executives complain that the OECD is “a practical vehicle” for raising taxes on the home. That’s what Mr. Biden does, says a tech boss. Neil Bradley from we The Chamber of Commerce warns against moving from a race to the bottom to “a race to the top”. If the tax authorities think they will prevent the leaks, he says, they can conclude “We can tax as much as we want”. Mr. Devereux wouldn’t be surprised if corporate taxes go up.

There may be more unintended consequences. A mysterious feature of the 40-year decline in corporate tax rates is that corporate contributions to public funds have remained stable in rich countries, at around one-tenth of tax revenue, or 2-3 percent of tax revenue. GDP. In the poorest, the figures are slightly higher but just as stable. Analysts attribute this to more businesses paying taxes, growing corporate profits, and high net worth individuals using businesses to reclassify heavily taxed personal income as less taxed business income.

The payor base appears unlikely to decline. Once known to taxpayers, companies rarely get out of their grip. It is more difficult to judge the impact of changes on profits. Experts don’t expect the overhaul to dampen pre-tax profits, although it could happen if higher rates discourage investment. Some signatories to the agreement may retain their advantage with offsetting sweeteners such as lower personal or property taxes.

There are also unknown unknowns that can become clearer only after companies adjust. Two things can be predicted. A godsend awaits tax lawyers and accountants. And the new balance will be less favorable to businesses. A boss of a large multinational corporation suggests that the tax system is the ultimate test of what matters to countries. The implication is that they care less than before about keeping business happy.

This article appeared in the Special Feature section of the print edition under the title “To Tax or Not to Tax”

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