Minimum Rate May Stop Corporate Tax ‘Race to Bottom': Report
Bloomberg BNA International Tax Monitor
February 09, 2018
By Joe Kirwin
A new global tax apportionment system backed up by minimum rates is needed to stop a corporate tax rate “race to the bottom” in the wake of the U.S. corporate tax reform, a report from a tax reform lobby group has said.
The Independent Commission for Reform of International Corporate Tax is calling for a new“unitary” approach to corporate taxation, saying this is needed because the arm's length principle and transfer pricing rules have failed and the OECD's Base Erosion and Profit Shifting (BEPS) reforms are inadequate.
“Unfortunately we are of the view that until now the OECD's proposals provide only patch-up of existing failed approaches and have failed to address the more fundamental issue of profit shifting that part of the mandate for reform,” the report,released Feb. 6, said. The ICRICT is a coalition of organizations including the Global Alliance for Tax Justice.
ICRICT was set up in 2015 as a way to act as a counterweight to the OECD's global reform process, especially when it comes to representing the interests of developing countries. Board members include former U.S. Council of Economic Advisers Chairman Joseph Stiglitz and Thomas Pikkety, author and professor of economics at the Paris School of Economics.
The report also says that along with the U.S corporate tax reform, other recent unilateral corporate tax moves—such as web taxes in Italy and India as well as the U.K. diverted profits tax—are quickly making the BEPS reforms a moot point.
“Global formulary apportionment, coupled with a minimum corporate tax rate, is the only effective way for all countries to collect a fair share of tax revenue from multinational enterprises and avert a race to the bottom,” the report said.
A unitary approach, as outlined in the report, should apportion a multinational company's “global profits to the different countries through a simple allocation formula based on objectively verifiable factors.”
The report adds that factors such as employment, sales, resources used, and fixed assets should be chosen in a balanced way reflecting both supply and demand. “Neither can create value without the other,” the report said.
Other approaches to multinational corporate tax reform that involve unitary taxation were considered including a residence-based worldwide taxation and a destination-based cash flow tax. “However we concluded that they are both inadequate,” the report said.
EU Corporate Tax Reform
Noting that ICRICT's global apportionment formula has characteristics similar to the pending European Union Common Corporate Consolidated Tax Base (CCCTB) plan, designed to ensure that profits are properly taxed where they are earned, Asa Gunnarsson, a tax professor at the University of Umea in Sweden, said the report could give an “important context.”
“The holistic approach shows the consequences of the lack of revenue from corporate profits, which is that the tax burden increasingly is carried by non-mobile assets, income and basic consumption,” Gunnarson told Bloomberg Tax in a Feb. 7 email.
European Parliament Green member Molly-Scott Cato told Bloomberg Tax that there was an “urgent” need for a global apportionment formula and minimum corporate tax rates.
“We see the EU proposal for a CCCTB as a step towards this but it needs to be backed up by full transparency and withholding taxes when there is a risk that global corporations may be avoiding their share,” Scott-Cato said via a Feb. 7 email.
“If the EU takes a strong stand on this because of the power of our market we can increase global pressure for a race to the top in contrast to the current race to the bottom,” Scott-Cato said.
Both Scott Cato and the commission note that the “race to the bottom” when it comes to corporate tax rates will accelerate because of the recent reduction of U.S. corporate income tax rates to 21 percent from 35 .
Johannes Becker, a tax professor at the University of Muenster in Germany, told Bloomberg Tax that he agrees the current global tax system, based on the arm's length principle and transfer pricing, is broken. He also noted that the recent unilateral moves by the U.S. and others are a vote of no-confidence in the OECD process. But he said the ICRICT global formulary apportionment “would be great but it is politically utopian.”
“We can not even get Ireland to give up its right to set low corporate tax rates,” Becker said in a Feb. 8 email. He added that trying to get the U.S., China, and Russia to commit to a strict formula “in times when all three countries do not get tired to demonstrate that they do not care about international policy coordination” makes the ICRICT proposals all the more unrealistic.
“What is needed is a system that makes everybody happy in the long term and that minimizes the efficiency cost, that is, to avoid double taxation and double non-taxation,” Becker said.