Figure 2.1 shows the evolution over time of corporate income tax receipts as a percentage of GDP in OECD countries (Annex A contains a country-by-country comparison over the period 1990-2011). The think-tank says it should be noted that, although they may provide useful indications, these trends in the relationship of corporate income tax to GDP do not necessarily imply either the existence or non-existence of BEPS (Base Erosion and Profit Shifting) practices. One reason why corporate tax revenues have been maintained, before the impact of the financial crisis, despite cuts in tax rates, has been base-broadening measures such as aligning depreciation for tax purposes more closely with actual depreciation, reductions in “tax expenditures” (i.e. tax reliefs for particular activities or groups of taxpayers that are in effect equivalent to public expenditure and thus have to be financed through higher taxes elsewhere). Another reason has been an increasing share of corporate income in GDP in many countries, reflecting increased business profits and, in some countries, increased incorporation (i.e. more business activity being undertaken in corporate form, with its income being taxed under the corporate income tax). |
The OECD (Organisation of Economic Cooperation and Development) has called for
reform of international corporate tax rules, accusing big multinational
companies of being overly resourceful in reducing their tax burden. It says
global solutions are needed to ensure that tax systems do not unduly favour
multinational enterprises, leaving citizens and small businesses with bigger tax
According to the US government, Ireland has the highest level of US foreign
direct investment (FDI) of advanced countries, excluding tax haven statelets.
profit per employee at non-bank majority-owned overseas American firms grew from
$144,400 in 2000 to $616,700 in 2009 while the rise in The Netherlands was
from $102,440 to $520,360. Comparable data for the UK shows a rise from $22,950
to $56,018 and in Germany an increase from $13,558 to $19,721.
In recent years, tax avoidance accelerated as traditional profit-shifting in
manufacturing was matched by services companies such as Google and Microsoft
booking end-user transactions in Ireland. Google became Ireland's biggest
'exporter' because it booked almost half its end-user revenues
Microsoft told a US Senate panel that its effective rate of tax in Ireland in
fiscal year 2011, was 5.69%.
The Financial Times reports today that Bank of New York Mellon has been
prevented from claiming millions of dollars of foreign tax credits
arranged by British bank Barclays in a complex deal tax shelter known as Stars,
after a decision from a US tax court.
The FT says the government’s lawsuit against BNY Mellon is the first Stars case
to go trial, and Monday’s decision by the tax court could lead to similar
charges at other US banks, if upheld.
The US Internal Revenue Service has sought to revoke the tax benefits claimed by
six US financial institutions through the Barclays-arranged deals, Stars, or
structured trust advantage repackaged securities.
BNY Mellon said it expected to take an $850m charge after the tax court ruling,
even though it intends to appeal against the court’s decision.
The OECD, the Paris-based think-tank for 34 mainly developed country governments, says
in its report,'Addressing
Base Erosion and Profit Shifting,' that
some multinationals use strategies that allow them to pay as little as 5% in
corporate taxes when smaller businesses are paying up to 30%. OECD research also
shows that some small jurisdictions act as conduits, receiving
disproportionately large amounts of FDI compared to large
industrialised countries and investing disproportionately large amounts in major
developed and emerging economies.
The survey commissioned by the G-20 group of industrialised and emerging
economies also said that existing rules which
protected multinational companies from double taxation sometimes even
allowed them to pay no taxes at all.
“These strategies, though technically legal, erode the tax base of many
countries and threaten the stability of the international tax system,” said
Angel Gurría, OECD secretary general. “As governments and their citizens are
struggling to make ends meet, it is critical that all tax payers - - private
and corporate - -- pay their fair amount of taxes and trust the
international tax system is transparent. This report is an important step
towards ensuring that global tax rules are equitable, and responds to the
call that the G-20 has made for the OECD to help provide solutions to the
global economic crisis.”
The organization said multinationals were
allowed to gain an unfair advantage over smaller businesses, investment,
growth and employment were bound to suffer in the final analysis.
British and French politicians considering overhauling the
tax system after reports that companies such as Starbucks, Apple or
Google had used complex inter-company transactions to cut their annual tax
bills. The OECD said it hoped for a multilateral convention that could
replace the 3,000 bilateral systems in place right now.
"If there's political report to go in this direction, the two years would be
good, but it shouldn't take more time," the OECD's director of tax policy,
Pascal Saint Amans told reporters, according to the Reuters news agency.
Kenny in Davos: Ireland's tax regime is "very clear, very transparent"
Irish Economy: Economic fairytales of Ireland,
exports, FDI and the IMF
Swiss tiring of foreign tax dodgers
Dutch tax haven has 20,000 letter-box companies
Company cash hoards rise to $8tn; Taxes, squeezed labour and 'trapped' cash
- - companies pile up profits and cash while wages in teh US have been
stagnant for decades.
Corporate profits have
skyrocketed to all-time highs -- but for more than a decade, wages and
incomes have barely budged. It is our generation’s task, then, to reignite
the true engine of America’s economic growth -- a rising, thriving middle
Dodging taxes worldwide
Multinational enterprises (MNEs) are being
accused of dodging taxes worldwide, and in
particular in developing countries, where tax revenue is critical to foster
Business leaders often argue that they have a responsibility towards their
shareholders to legally reduce the taxes their companies pay. Some of them
might consider most of the accusations unjustified, in some cases deeming
governments responsible for incoherent tax policies and for designing tax
systems that provide incentives for Base Erosion and Profit Shifting (BEPS).
They also point out that MNEs (multinational enterprises) are still sometimes faced with double
taxation on their profits from cross-border activities, with mutual agreement
procedures sometimes unable to resolve disputes among governments in a
timely manner or at all
Across the OECD, the report says corporate income tax raises, on average, revenues
equivalent to around 3% of GDP or about 10% of total tax revenues. Although
their relative importance varies from country to country, corporate income
tax receipts constitute an important component of government revenues.
While the scale of revenue losses through BEPS may not be extremely large in
relation to tax revenues as a whole, the issue is still relevant in monetary
and may also be of wider relevance because of its effects on the perceived
integrity of the tax system. In terms of trends, the unweighted average of taxes
on corporate income as a percentage of total taxation in OECD countries was
8.8% in 1965, dropped to 7.6% in 1975, and then consistently increased over
the years until 2007, when the reported average ratio was 10.6%. Starting from
2008, likely due to the economic downturn, the ratio declined to 10% in 2008
and 8.4% in 2009; subsequently it increased to 8.6% in 2010.
The statutory corporate income tax rates in
OECD member countries dropped on average 7.2 percentage points between
2000 and 2011, from 32.6% to 25.4%. Meanwhile a study of The Greenlining
Institute (2012), on the 30 top tech companies in
the United States concludes that the ETR (effective tax rate -- what is paid as
a percentage of net income) paid by these companies decreased
from 23.6% in 2009 to 19.9% in 2010 and 16% in 2011. The study further
notes that, at the end of 2009, United States companies had at least $1tn
of foreign retained earnings and considers this as a clear indication of
profit shifting practices put in place by United States based MNEs.
The OECD says that by searching through the IMF Co-ordinated Direct
Investment Survey (CDIS), it emerges that in 2010 Barbados, Bermuda and
the British Virgin Islands received more FDIs (combined 5.11% of global FDIs)
than Germany (4.77%) or Japan (3.76%). During the same year, these three
jurisdictions made more investments into the world (combined 4.54%) than
Germany (4.28%). On a country-by-country position, in 2010 the British Virgin
Islands were the second largest investor into China (14%) after Hong Kong
(45%) and before the United States (4%). For the same year, Bermuda appears
as the third largest investor in Chile (10%). Similar data exists in relation to
other countries, for example Mauritius is the top investor country into India
(28%), the British Virgin Islands (12%), Bermuda (7%)
and the Bahamas (6%) are among the top five investors into Russia.
One study looks specifically at the effects of income-shifting practices
of United States based MNEs (Clausing, 2011). Using data from the United
States Bureau of Economic Analysis, the study finds large discrepancies
between the physical operations of affiliates abroad and the locations in
which they report their profits for tax purposes: the top ten locations for
affiliate employment (in order: the United Kingdom, Canada, Mexico,
China, Germany, France, Brazil, India, Japan, Australia) barely match with
the top ten locations for gross profits reporting (in order: the Netherlands,
Luxembourg, Ireland, Canada, Bermuda, Switzerland, Singapore, Germany,
Norway and Australia).
A report of the United States Congressional Research Service (Gravelle,
2010) concludes that there is ample and clear evidence that profits appear in
countries inconsistent with an economic motivation. The report analysed the
profits of United States controlled foreign corporations as a percentage of
the GDP of the countries in which they are located. It finds that for the G-7
countries the ratio ranges from 0.2% to 2.6% (in the case of Canada). The ratio
is equal to 4.6% for the Netherlands, 7.6% for Ireland, 9.8% for Cyprus, 18.2%
for Luxembourg. Finally, the study notes that the ratio increases dramatically
for no-tax jurisdictions with for example, 35.3% for Jersey, 43.3% for Bahamas,
61.1% for Liberia, 354.6% for British Virgin Islands, 546.7% for the Cayman
Islands and 645.7% for Bermuda.
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