STRATEGIC TAX POLICY DESIGNIN THE FACE OF THE CHANGING BUSINESS

ENVIRONMENT & ENHANCED INFORMATION

SHARING & TAX COOPERATION

OECD Parliamentary Group on Tax

19 October 2015

David Bradbury

Head of the Tax Policy and Statistics Division

OECD’s Centre for Tax Policy and Administration

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Business environment is changing

Increased globalisation

Growth of intangibles & services

Importance of finance

Infrastructure needs

Ageing populations

Fiscal consolidation

• Corporate income tax (CIT) rates - least growth friendly

• CIT rates have fallen

• While average OECD CIT rate has declined, differences in CIT rates have increased, especially on more mobile income

• Countries have been competing with other incentives –e.g., R&D tax incentives and patent boxes

Countries are competing against each other to attract jobs, investment and revenue

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Increasing competition among nations

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Differences in tax rates

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5

10

15

0

5

10

15

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Corporate income tax rate variation within OECD countries Corporate income tax rate on patent income variation within OECD countries

While average statutory CIT rates have been declining in the OECD, tax rate differentials between countries have been increasing

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Impact of the BEPS Project

Towards a greater alignment

What are the implications for tax policy?

OECD-G20 BEPS Project will contribute to the changing business environment

Achieving a greater alignment between the location that taxable income is reported and the economic activity generating that income will reduce the mobility of taxable income

This is likely to make investment decisions – having real economic impacts -more sensitive to tax rates

• Potentially leading to downward pressure on CIT rates

• Introduction of other incentives to attract investment

Likely to lead to increased government competition for real investment

Overall investment climate will continue to be important

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A world with less BEPS

What tax policy challenges does this create?

• European Commission study showed that patent boxes, without “substantial activity” requirements encouraged the shifting of taxable income without any meaningful shifting of real economic activity

• Under “nexus approach” (Action 5), lower rates on patent income can only be provided where there is real R&D economic activity occurring in the country

• Still an open question whether patent boxes are an effective tax policy tool

• Need to consider innovation policies in their totality

Take the example of patent income

• Striking the right balance between revenue collection to fund services and infrastructure and attracting economic investment

• Distortions from the large differences in the CIT rate and the top PIT rate

Potential reductions in CIT rates

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A world with less BEPS (2)

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Difference between the CIT & top PIT rate

The difference between CIT rate & top PIT rate is increasing in many OECD countries

BEPS country-by-country reporting will assist in reducing tax avoidance through greater transparency

Automatic exchange of information will be a significant factor in reducing individual tax evasion

• AEOI will make it more difficult for individuals to keep their wealth hidden from the view of tax administrations, who will now have greater capacity to enforce their personal income tax laws

• While there have been growing concerns about the impact of tax systems on inequality, in helping strengthen the PIT system, these measures will be likely to help tackle inequality, as the PIT systems are generally progressive

• Will give rise to questions about whether capital income should be taxed at lower rates

States will continue to be sovereign on tax matters, but the focus should be on cooperation, boosting transparency and eliminating harmful tax practices

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Information sharing and tax cooperation

BEPS Action 11 focused on measuring and monitoring BEPS

• Much evidence of the existence of BEPS, but the currently available data has significant limitations

• Country-by country reporting will be a rich source of new data

Action 11 has made a number of recommendations

• A new Corporate Tax Statistics publication

• Refined and updated BEPS indicators

• Improved cooperation between governments, academics and researchers

Governments should consider best practices

• Better collection of data on MNEs

• Providing access to tax return data under strict confidentiality rules

• Collaboration with researchers

• Making available tabulations of aggregate country-by country reports

• Make available estimates of the revenue impacts of BEPS countermeasures

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Importance of improved data

Business environment has been changing and will continue to change

• These changes present both challenges and opportunities from a tax policy perspective

• Important business tax issues require more tax policy analysis

The BEPS Project & AEOI are underpinned by global cooperation

• As MNEs and the owners of capital conduct their affairs across national borders, global cooperation is essential

• Both projects are global but will have an impact on domestic tax policy

Increased transparency and better data will improve tax policy analysis, enabling more strategic tax policy design

• OECD needs continued cooperation from governments to assist with the quantitative monitoring of the effects of implemented policies, such as the BEPS measures.

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Conclusion

Contact details

David Bradbury

Head of the Tax Policy and Statistics DivisionCentre for Tax Policy and Administration

2, rue André Pascal - 75775 Paris Cedex 16 Tel: +33 1 45 24 15 97 – Fax: +33 1 44 30 63 51

David.Bradbury@oecd.org || www.oecd.org/tax

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