by Stuart Gibson
The public is growing increasingly frustrated at reports that large corporations pay little or no tax in the countries where they do business -- or use gimmicks to avoid paying their "fair share." In response, experts in finance and tax policy from government, private industry, and nongovernmental organizations have worked to address that frustration, while identifying ways to minimize opportunities for tax avoidance and boost government coffers still reeling from the 2007 global financial meltdown.
As a result, countries around the world are engaged in an unprecedented level of cooperation on both substantive and procedural levels, all designed to reduce unfair tax competition. While the most prominent of these efforts is the OECD's project to limit base erosion and profit shifting, they also include automatic exchanges of information, registries of beneficial ownership, the EU's adoption of antiavoidance measures, and the European Commission's state aid cases.
Allison Christians suggests that these efforts to stifle tax competition through international coordination may be a double-edged sword. She notes that while all countries may stand to lose from tax competition, "it is equally true that all countries may stand to lose by curbing tax competition" (p. 831).
Recent events suggest that the policymaking elites may have overestimated the level of support for projects like BEPS and information exchange. The European Commission's long-standing goal to harmonize corporate income taxation by adopting a common consolidated corporate tax base hit a snag when France and Germany objected to key components of the plan (p. 790). Speaking for the business community, BusinessEurope has also expressed concerns over the latest approach (p. 791). And some EU members have begun to express concerns that the EU's early adoption of the BEPS recommendations will place its members at a competitive disadvantage (p. 789).
Despite the OECD's best efforts to stem base erosion, a recent OECD working paper concludes that antiavoidance measures may have a far greater impact than corporate tax rates on multinationals' investment decisions. That paper posits that while a 5 percentage point increase in corporate tax rates leads to a 5 percent reduction in investment across all industries, that effect is only half as great for companies in industries facing strong profit-shifting incentives (p. 795).
Stung by defeat at the ballot box, where Swiss voters overwhelmingly rejected a government tax reform proposal to do away with preferential cantonal corporate tax regimes, the Swiss government is not giving up. The Swiss Federal Council has directed the Federal Department of Finance to draft new reform measures by midyear (p. 801).
Mindy Herzfeld reviews the Swiss special cantonal tax regimes and the campaign by the Swiss Social Democrats that led to the defeat of the government's tax reform proposal. That campaign hammered on the theme that the proposed reforms represented a giveaway to large corporations, leaving ordinary people to foot the bill. She notes the similarity between that campaign and the populist waves that led to the U.K.'s Brexit vote and the election of Donald Trump. One problem she highlights is that as economists' opinions differ on whether lower corporate taxes lead to economic growth, it becomes more difficult to persuade the public to support tax cuts for corporations (p. 779).
This same argument is beginning to play out in the United States, as Congress considers proposals to lower corporate taxes in the context of enacting comprehensive tax reform. Opponents of the border adjustment tax have already begun to sound populist themes to defeat the proposal (p. 804). As they are well aware, politicians ignore populist sentiment at their peril.
Stuart Gibson is editor of Tax Notes International.