Today’s corporate tax rules are fiendishly complicated and both governments and businesses alike would benefit from a simpler, more transparent system.
For decades, governments globally have aggressively courted foreign investment for its benefits in terms of future job creation and economic growth. Tax incentives are one of the main instruments to attract investment from global companies and as economies increasingly compete for higher value-added activities, tax incentives have been extended from manufacturing to technology investment. That is why part of the political debate centres on so-called patent boxes, which offer lower corporate taxation on profits from patented inventions and other forms of intellectual property.
Unsurprisingly companies are responding to these different incentives and for governments it is tempting to call their own tax breaks “incentives for innovation” while complaining that other countries are creating “tax havens” or “sweeteners”. But these schemes all share a common goal, namely to attract inward investment and generate growth.
EU Member States’ tax ruling practices have been subject to similar political scrutiny, and have drawn criticism for enabling artificial profit shifting and base erosion by corporates. However, tax rulings are needed to bring a degree of certainty to corporate tax planning -and management, provided that these are aligned with the substance of commercial and economic activities.
Therefore the political focus is on re-establishing the rules for “fair tax competition”, including through the launch of EU State aid investigations into Member States’ tax practices and new tax transparency measures including the automatic exchange of cross-border corporate tax rulings between EU tax authorities.
Big companies’ tax affairs in Europe will be opened to greater public scrutiny, with the EU still working on a Directive compelling them to reveal corporate profits and taxes on a country-by-country basis. The idea is that this would pile up public pressure on corporates using low-tax bases as a revenue hub for their European operations
Fair tax competition also rests on making tax systems more simple and efficient. A broad taxable base with lower rates is easier to manage and understand than a higher general rate with many complex incentives.However, the outstanding proposal for a common consolidated corporate tax base (CCCTB) does not muster the same political support as newly proposed tax transparency measures. As countries seek to maintain their ability to develop competitive tax regimes, they are keen that the system is flexible enough to allow for opportunities to attract companies.
Therefore, EU tax transparency measures may be seen as a means to an end, namely a fairer tax system. It is however questionable whether this will suffice to level the playing field, even more as tax competition does not stop at EU borders.
Tax transparency is only a first step towards tax fairness. Ultimately it is the responsibility of governments to determine what an appropriate level of tax is and to determine their tax policies accordingly. And when they do, companies will respond.
Roeland Van der Stappen is a Senior Director in FTI Consulting’s Financial Services practice