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Corporate Tax Review

By Editorial
August 28, 2013

In this feature, we round up some of the key developments and talking points in the area of corporate tax, including the United States, Europe and Asia.

North America

USA: All Eyes on Tax Reform

We have heard plenty of evidence recently just how unfavourable the tax climate is becoming in the United States. The National Taxpayer Advocate’s annual report to Congress shows that US taxpayers (both individuals and businesses) spend more than 6.1bn hours to complete tax filings, and it was estimated that it cost individual and corporate taxpayers USD168bn to comply with the tax code in 2010.

On the other hand, those who argue that large corporations get out of paying substantial sums of corporate tax far too easily can point to a recent Government Accountability Office analysis of financial data reported by large United States multinational corporations to the Internal Revenue Service, which concluded that they paid an average effective rate of only about 13 percent of the pretax worldwide income that they reported in 2010.

Another facet to this debate is that small businesses in the US typically pay far higher effective rates of income tax than do large corporations, according to a study by the National Federation of Independent Business, which found that S corporations and partnerships will suffer 31.6 percent and 29.4 percent effective tax rates this year (because owners pay tax at individual rates), respectively, while C corporations paying corporate tax will see an effective rate of only 17.8 percent.

Comprehensive tax reform is, however, near the top of Congress’s legislative agenda at long last, and it is hoped that these and other long-standing corporate tax issues will be solved, or at least partly dealt with in the not-too-distant future.

Earlier this month, the two men who are doing more than most to drive tax reform efforts in Congress – Democratic Senator Max Baucus and Republican Representative Dave Camp – stopped off in Silicon Valley during their nationwide tour to carry forward the debate on US tax reform. Both men favour a cut in the top rate of US corporate tax to a more competitive figure in the mid-twenties percent coupled with a cull of the special interest tax expenditures which clutter the tax code.

Inevitably though, despite their down-home pallyness, Baucus and Camp don’t agree on everything. On the fundamental goal of tax reform, Democrats are of the view that it should be used to raise revenue to pay down the deficit, while Republicans insist that it should be revenue-neutral at worst – although this issue is being played down by both men as they seek to put on a united front.

Getting Congress united behind a tax reform bill, which could be introduced within the next 18 months, looks like a formidable task for both men, and perhaps it will be beyond their powers of persuasion. President Obama will of course be a key player in the tax reform talks. But although he is in favour of corporate tax reform which cuts the headline corporate tax rate and slims down the tax code – he recently re-proposed measures for corporate tax reform that he first floated back in early 2012 – many of his ideas on taxation are far apart from those of his Republican opponents, including with regard to international corporate taxation, an area he would use to increase the tax burden on multinationals. By contrast, Republicans are angling towards a territorial system of corporate taxation, rather than the reinforcement of a worldwide system. The President could therefore be more of an obstacle to tax reform than a facilitator of it.

The pros and cons of each approach was recently analysed by the Congressional Budget Office. Curiously, both systems would end up increasing US tax revenues, but a worldwide system would naturally end up generating more.


Election Fever in Australia

Australia's Opposition Coalition has unveiled another headline tax pledge as it sets its eyes on victory in September's general election.

Liberal leader Tony Abbot has said that he will cut the company tax rate by 1.5 percent from July 1, 2015, should the Coalition be successful. Abbot claims that a 28.5 percent rate would "encourage investment in Australian businesses and jobs during a time of economic uncertainty."

He also accuses his Labor rivals of breaking promises and failing to deliver on company tax reform after years of discussion. The Government had intended to lower the company tax rate as a trade-off for the higher taxation of certain mining companies under the controversial Mineral Resources Rent Tax. Under its proposals, the rate would have fallen from 30 to 29 percent for 2013-14, and to 28 percent for 2014-15. However, when unveiling his 2013 Budget last May, the then Treasurer Wayne Swan announced that the idea had been dropped.

At 30%, Australia’s corporate tax rate looks pretty uncompetitive, and a long overdue cut will no doubt be backed by most businesses. Nevertheless, with Abbot also proposing to eliminate two other major taxes, including the carbon tax and the mineral resources rent tax, it remains to be seen how he replaces the revenue without resorting to swingeing cuts in public services, given that Australia recently suffered a large decline in tax revenue.

Japan Goes Cold On Corporate Tax Cut

Despite previous reports in the media that Prime Minister Shinzo Abe's Government was considering a corporate tax cut as a way to offset the possible economic effect of the planned two-stage increase to Japan's consumption tax rate, two ministers indicated earlier in August that such a cut is unlikely.

Doubts had been expressed whether, with Japan showing weaker than expected economic growth in the second quarter of 2013 of only 0.6 percent against 0.9 percent in the first quarter, Abe would decide to proceed with the programed consumption tax hikes – from the current 5 percent to 8 percent in April next year, and then to 10 percent in October 2015 – in the face of fears that they would stall his plans to boost the country's economy.

Expected to be taken by early October, the nearing decision on whether to go ahead with the consumption tax rate rises led to recent media reports that Abe was looking at a corporate tax rate cut to assuage their possible recessionary effect on consumer spending, despite the fact that the additional revenue is intended to help contain Japan's public debt that has already exceeded JPY1,000 trillion (USD10.2 trillion).

However, during a recent news conference, Finance Minister Taro Aso said that, as only some 30 percent of firms pay corporate taxes, a reduction to Japan's corporate tax rate is not likely to have an immediate impact on the economy.

In its campaign platform for July’s upper house elections, the ruling Liberal Democrat Party (LDP) made known its intention to cut Japan's corporate tax rate over the medium-term. In reinforcing one of Abe's targets of both doubling the growth in Japanese real gross domestic product to 2 percent over the next 10 years and eliminating the country's primary fiscal deficit by 2020, the LDP promised to introduce immediate and "bold" corporate tax breaks to boost competitiveness and encourage investment in the economy. However, given the need to maintain tax revenues, the party fell short of committing to a cut in the Japanese overall corporate tax rate (which, at 38 percent, is the second highest in the world after the United States), and merely intended to create the situation whereby a rate reduction can be made at a later date. Even that vague pledge now looks to have been shelved for the foreseeable future.


France To Improve Corporate Tax Environment?

France is almost becoming synonymous with the word “tax,” and anecdotally it is being said that entrepreneurs and business owners are leaving the country at fairly rapid rate, France now being almost surrounded by jurisdictions with more favourable taxation (Switzerland, Luxembourg, Belgium and the UK in particular). So it might surprise some outsiders to hear that Francois Hollande’s Socialist Government is attempting to improve the corporate tax and regulatory environment for business in France.

In July, the French Finance Ministry published Thierry Mandon's report on plans to simplify tax and regulation. According to Mandon, any envisaged simplifications to the existing system must be a collaborative effort between the Government and stakeholders, based on the expectations of corporations in France and jointly drafted with them. Mandon advocates that objectives should be fixed over a period of three years, aimed at abolishing 80 percent of business costs that result from procedural complexities and delays. Parliament and the Court of Auditors should also be involved in the drafting and evaluation of the tri-annual action plan, Mandon stresses.

As a matter of priority, Mandon highlights the urgent need to reform and to streamline the research tax credit (CIR) provisions. To ensure that the CIR tax break is more in line with economic realities in future, certain expenditure that is currently excluded from the CIR calculation, without any economic reason or legal basis, must be included in the scope of the mechanism, Mandon says. Furthermore, the depreciation of all assets allocated to research and development should be taken into account, Mandon argues. Mandon also recommends notably that the financial year and not the calendar year is used for the CIR calculation and that all patent accounting expenses and all social contributions are taken into consideration.

Other tax measures advocated in the report include plans to reduce administrative procedures for tax audits, by imposing a deadline on the Tax Administration for issuing a response to small- and medium-sized companies in France. Tax instructions are to be published by specific dates to ensure visibility, and a clear point of contact is to be established within the Tax Administration, to liaise with businesses and to keep detailed and accurate records during corporate tax audits.

Finally, Mandon suggests that corporate tax return forms are simplified, that reporting procedures for the levy on the value added by a company are simplified and included in the tax return, that the tax on company cars is included on the tax return, and that a single form is created to enable taxpayers to file a return online for the local tax on external advertising.

At the same time however, France seems to be working at cross purposes, for another recently published report commissioned by the Government advocates that the amount of financial aid and tax breaks currently benefiting businesses in France be reduced by around EUR3bn. Led by the French Socialist Jean-Jack Queyranne, the report recommends that two thirds of the proposed fiscal effort is realized by planing corporate tax breaks, while the remaining third is achieved by lowering public expenditure.

Germany Puts Stability First

Things have been pretty staid in Germany recently as regards taxation, with no major changes to report on the corporate tax front. However, with an election due on September 22, there is at least a degree of uncertainty over the future direction of fiscal policy. None of the main contenders have proposed changes to corporate tax rates, although with the two largest parties – Angel Merkel’s Christian Democrat Union and the Social Democrats, led by former Finance Minister Peer Steinbruck – being quite vague about their tax plans, future changes cannot be completely ruled out.

It was interesting to note however, that last year, the thirty largest companies listed on the German stock market index, the DAX 30, paid a total of EUR24.2bn (USD32.16bn) in profit tax, marking a slight increase compared to the previous year despite higher profits, due to an on-year decline in the actual rate of taxation.

Drawing on data compiled by Ernst and Young, Les Echos revealed that although the total taxable profits of the DAX 30 giants rose by 7 percent, from EUR91.2bn in 2011 to EUR97.5bn in 2012, the total tax paid by the largest equities increased by just 2 percent over the same period. This is due to a recorded fall in the actual rate of corporate taxation in Germany, from 26.1 percent in 2011 to 24.8 percent last year.

The figures suggest that the actual amount of corporate tax paid by the largest DAX 30 corporations varies tremendously, as groups are able to benefit from the various tax credits, tax shelters, and fiscal optimization schemes available. In 2012, the largest corporate tax contributor, Volkswagen, paid around EUR3.6bn in corporation tax to the German tax authorities, and last year, the car group benefited from an effective corporate tax rate of 14.2 percent, significantly lower than the theoretical tax rate of 29.5 percent, effectively halving the company's tax bill.

Nonetheless, finance ministry data published in August 2013 shows that the amount of money foregone (or “spent” in fiscal parlance) has actually declined considerably in the past few years.

Ireland Reaps Benefits Of Low Tax

Since Prime Minister Enda Kenny re-emphasized in 2012 that Ireland’s corporate tax rate is not up for negotiation, things have gone quite quiet on the corporate tax front, and the country has continued its modest recovery from the crisis, while drawing in impressive volumes of FDI from the United States.

Unsurprisingly, a recent survey revealed that the overwhelming majority (86%) of businesses in Ireland think that an increasing tax burden is their biggest threat by far. 42 percent of the 225 participating CEOs said that the two factors most critical to the maintenance of Ireland's attractiveness as a location for foreign direct investment (FDI) are the retention of a 12.5 percent corporate tax rate and improvements in cost competitiveness. This compares with the 82 percent of CEOs who cited the corporate tax rate and the 49 percent who pointed to cost competitiveness as key determinants in last year's survey.

Nonetheless, the tax predators continue to circle, and OECD’s tax chief recently urged Ireland to ensure that businesses at least pay the full 12.5 percent corporate tax rate, even if the Government is unwilling to raise the rate itself. Pascal Saint-Amans, Director of the OECD's Center for Tax Policy, made the comments at a Dublin conference organized by the Irish Finance Ministry. Although he described the rate as "low and attractive," Saint-Amans also warned that failure to levy the tax at its proper rate could have repercussions. He stressed that "what puts Ireland is in jeopardy is the perception that Ireland charges 2 percent," rather than the full 12.5 percent.

Speaking afterwards to the Irish Times, Saint-Amans stressed that this was however "a false perception and was not based on a good analysis of the facts."

Portugal Prioritises Corporate Tax Cut

Portugal's Prime Minister Pedro Passos Coelho has indicated that the Government's main priority now is to lower corporation tax, to boost both domestic and foreign investment in Portugal, thereby creating growth and scope for further tax reform. Underlining the fact that it is worth being "ambitious," Coelho explained that the Government could reduce the corporate tax rate to 17 percent by 2018, as proposed by the reform committee, or could go further, placing Portugal more at the center of global flows of foreign investment.

According to Prime Minister Coelho, the "high tax burden" in Portugal is not only a "disincentive for businesses to invest," but also currently adversely impacts upon families in Portugal, affecting both savings and consumption.

Defending Government plans to focus tax relief efforts on companies in the first instance, Prime Minister Coelho insisted that without improving the business and investment environment, corporations will remain unable to expand, to invest, and to create jobs, thereby generating wealth. The Government intends to ensure that Portugal's tax competitiveness "compares well with other European countries," he emphasized.

Italian Central Bank Bemoans Corporate Tax Burden

In July 2013, a study from eight of the Italian central bank's economists pointed to the country's high corporate tax burden as one of the major reasons for the loss in production, productivity and competitiveness of Italian industrial companies during the current economic recession.

The fall in Italian industrial production since April 2008 has been much worse than that experienced, for example, by Italy's neighbours France and Germany. There emerges from Bankitalia's analysis a picture of Italian industrial weakness, with every sector showing productive activity that is very much slower than before the latest economic recession, with the exception of food and pharmaceuticals.

However, the economists stress that, to increase competitiveness, the priority should not be a reduction in labour costs, but that action should be taken on the comparatively high tax levels and energy costs in Italy. In fact, the wage cost for an individual unmarried Italian employee was found to be 15 percent less than in Belgium and France and just over 30 percent less than in Germany, in 2011.

Back in May, Giorgio Squinzi, the President of Confindustria (the Italian industrial federation), has insisted that tax policies to encourage economic growth and job creation should be the priority of the new Italian Government. In doing so, he reinforced the view of the OECD, which has recommended that Italian fiscal policy could "become more pro-growth and equity-friendly."

There is little sign that the Italian Government, run by a fractious coalition, is going to take the bull by the horns, however. 

Netherlands Provides Tax Break

Some good news from the Netherlands however, with the Dutch Council of Ministers having adopted a proposal, submitted by Dutch Financial State Secretary Frans Weekers and Economic Affairs Minister Henk Kamp, to allow entrepreneurs to immediately deduct from tax half of corporate investments made between July 1, 2013 and the end of the year.

According to the Dutch Finance Ministry, the measure will enable business owners to reduce their tax payments over the course of the next few years, thereby creating extra scope for investment totalling around EUR400m (USD522m).

Both companies subject to corporation tax and firms currently paying income tax in the Netherlands will be able to benefit from the accelerated depreciation provision, provided that the investment, for example a machine, is used by January 1, 2016.

Base Erosion and Profit Shifting

Finally, given its likely impact on the taxation of cross-border corporate income, mention of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan is unavoidable.

The Plan has been produced at the request of the G20 group of nations, and was unveiled in time for a meeting of Finance Ministers in Moscow in July 2013. The G20 asked that the Plan "provide countries with domestic and international instruments that will better align rights to tax with economic activity."

The OECD contends that the process of globalization, while beneficial to domestic economies, has opened up a number of opportunities for multinational enterprises (MNEs) to "greatly minimize their tax burden." 

BEPS in particular is seen as having undermined the integrity of the tax system, and the OECD recognizes the additional pressure placed on governments by the portrayal in the media and by the public of low corporate taxes as unfair. 

The OECD is therefore clear that "fundamental changes are needed to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it." 

The Plan therefore identifies 15 specific actions that should give governments the domestic and international mechanisms to prevent corporations from paying little or no taxes.

However, there is no shying away from the fact that deals with some extremely complex areas of international taxation, including transfer pricing, the treatment of intangibles and the rise of the digital economy among others. So the OECD has given itself something of a mountain to climb to complete the project inside two years, as stated in the Action Plan. Time will tell if this is achievable, but many tax experts believe it isn’t.


Tags: tax | business | France | tax reform | Japan | Ireland | investment | Portugal | Germany | Australia | Finance | Netherlands | United States | G20 | tax breaks | corporation tax | Europe | Italy | environment | interest | Belgium



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