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OECD Addresses UK Tax Competitiveness

by Robert Lee,, London

05 October 2007

A recently published report from the Organisation for Economic, Co-operation and Development (OECD) has put forward the argument that globalisation increases the importance of raising tax revenues in the most efficient way so as to maintain competitiveness.

In a bid to raise awareness of the intensity of competition between global markets, the report argued that: "Globalisation creates a tension between the need to spend on social safety nets and the need to maintain tax competitiveness, which may reduce revenues."

The OECD report went on to argue that this pressure has encouraged governments to make the corporate income tax system more efficient by cutting statutory corporate tax rates and broadening the base. As the two have offset each other, corporate tax revenue as a share of GDP has been maintained.

The Organisation went on to observe that: "The United Kingdom was ahead in the game of cutting rates, but has lost ground more recently. It will thus be important to continue with the strategy of broadening the tax base, while cutting the rate."

However, it suggested that there are likely to be limits as to how far this can go, because tax competition also plays out on the base.

Pointing to the UK as an example, the OECD observed that the United Kingdom’s system of worldwide taxation creates incentives for headquarters to relocate offshore.

It observed that: "Thus the government should consider the case for moving to a dividend exemption system of corporate income taxation, which exempts foreign source dividend income from domestic tax."

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