The pandemic has seen governments around the world take action to support businesses of all sizes and protect their economies. This is one of the core roles of any government, supporting citizens in times of critical need, and the pandemic required a quick and far reaching response. However, this support needs to be paid for, and while no one is questioning the necessity of government action, conversations have already started about how the increased expenditure will be funded. This will focus on two major questions—What is the role of corporate tax, and how do we tax the digital economy.
What is the role of corporate tax?
The overall direction of the tax debate seems to be for an increase in corporation tax as a percentage of total tax revenues. This makes sense but bucks the historical trends that we have seen over recent decades. For the period 2000-2020 a total of 88 countries lowered their corporate tax rate, 15 remained the same, and only 6 raised their base rate. Looking at the OECD’s 2020 data, of the 109 countries examined, only 21 had a rate higher than 30%, and only India had a rate higher than 40%. At the opposite end of the scale, 14 countries had a rate below 10%, 28 had rates between 10% and 20%, and the remaining 48 fell between 20% and 30%. Overall, the trend points towards the mid-range of between 10-30%, but a significant drop in the mean from 28% to 20.7%.
What this data shows is that an increasing number of governments were not equating higher rates of tax with higher rates of revenue. Ireland is the perfect example of a country which lowered its corporate tax rate, while restructuring its broader tax mix to account for the value that multi-national corporations could bring to their economy. Low tax rates combined with additional incentives targeted at intellectual property and research and development meant that multi-nationals were willing to headquarter themselves there for tax purposes and pass on the economic benefits of their presence to the economy. Looking at their economic growth over the last decade, it is a move that certainly paid off.
The issue is that governments have long viewed corporate taxes as “safe income,” as it is relatively easy to forecast and it grows in line with the economy. But with taxable profits slumping the world over, as a result of lockdown, many governments are looking to increase corporate tax rates to help make up the shortfall. It is tempting to raise taxes, and think that as the global economy recovers the job is done, but that ignores a huge opportunity that governments now have: To structurally reform corporate tax.
Corporate tax can and should be viewed as a way to shape businesses decisions. The countries that do this best will look at how their tax policies can be used as a “carrot” to encourage the business investment and activities that they want to see. There is already a precedent for this and again looking at this year’s OECD data, we can see that 57 of the 74 countries tracked were willing to offer tax breaks if they led to long-term value. What this means, is that incentives such as R&D tax credits have been recognised as a price worth paying for longer term economic growth.
Yes, the investment by governments worldwide to bolster their economies needs to be accounted for, but they can be paid for in economic growth generated by a rejuvenated private sector. Governments can play an active role in the stewardship of this investment if they can resist the urge to provide simple solutions to complex problems. Foregoing tax rises may be viewed as a gamble, giving up income now for longer term rewards, but in reality it is about creating a global tax system which supports economic growth and reflects the reality of what citizens expect their governments to be able to deliver.
How do we tax the digital economy?
Another major challenge facing governments who are looking to change their tax structures is finding a meaningful way to tax global, digital companies. This requires governments—nationally focused entities—to think globally.
Digital services taxes have been viewed as something of a silver bullet for tax policy setters, a way of accessing a portion of income that had previously evaded traditional tax measures, a way of taxing the businesses that have thrived through lockdown thanks to our increasing reliance on tech to keep us connected and up to date. However, that thinking misses two more important points. Firstly, intangible assets are increasingly valuable to the economic recovery, and secondly, it is not a zero-sum game, an increase in global tax paid in one country will mean a reduction in tax paid in another.
While some countries have already introduced digital services taxes, and others are planning to do so, the OECD’s efforts to find a global solution has been delayed once again. It is right that governments want to restructure their taxes to reflect a shift in where value is created, but introducing a flat tax on local revenues has already seen costs passed on to consumers, a prime example being Amazon charging sellers an additional 2% to use the platform, and has ignited trade friction between the U.S. and Europe. A more effective long-term solution is for governments to continue to work together to create a new system of taxation that aligns with the global digital age we live in.
A way forward
Following the global recession in 2008, the recovery relied heavily on taxation increases and spending cuts. However, the government response to pandemic has required much higher levels of spending that will require far greater changes to the tax system than the increases we saw in 2009. Governments must also resist the urge to simply raise rates and assume revenues and economic recovery will come.
The pandemic has demonstrated the crucial role that tax plays in our society. Without an effective tax system, governments cannot fund healthcare, or support society generally through the host of measures we have seen, from furlough schemes to business loans. When there is a sudden shock, it is taxes that allow governments to respond to them in the best interests of society.
Global solutions are needed, especially when we start to ask questions about how to tax companies who operate on a global scale. In many ways it is a foreign concept for national tax legislators to start thinking globally, but it will be necessary. It is also crucial that any tax changes recognise the global nature of their own economies.
The pandemic has been a time of global hardship, but we can use this moment to recognise what we value, and reshape our tax systems to better reflect and support the societies we want to live in.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Rob Mander is head of international tax at RSM International in London. You can find more insight on the impact of Covid-19 on businesses at RSM’s Global Resource Centre.