| The OECD’s agenda on tax competition and tax havens |
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| Europe must embrace tax competition, but to get the full benefits it must be transparent, cooperative and based upon service provided, not secrecy, according to Jeffrey Owens, head of the OECD’s drive in the 2000s on tax havens and tax compeititon |
Tax is an increasingly important factor influencing location decisions, but the final destination is not dependent solely on tax regimes, said Jeffrey Owens, director, Centre for Tax Policy & Administration, OECD. ‘If tax were the only determinant of these location decisions, we would see a massive overflow of activities from high tax to low tax countries, which clearly has not been the case,’ he said.
Specific taxes which influence location decision making, said Owens, are .corporate income tax, particularly headline rate of tax, ‘but there are other taxes which may be equally important, including non-profit related business taxes; social security contributions and VAT can also be a massive factor.’
The way in which the tax system is administered is also important, he said, ‘in today’s rapidly changing environment, corporations increasingly expect tax administrations to provide predictability, certainty, consistency and to engage business in the formulation of new rules.’
At the level of individuals, personal income taxes, capital gain taxes and tax on wealth and inheritances will all influence the attractiveness of different locations for highly skilled professionals.
So how have governments responded to this more competitive environment? ‘Since the mid 1980s, we have seen corporate and personal income tax slashed, with Europe, and in particular, Ireland, taking the lead,’ said Owens. ‘Today very few countries have CIT rates near the 45 per cent plus in the early 1980s; and even fewer countries have top marginal PIT rates about 50 per cent.’
Another response from governments has been the review of international tax arrangements, with an increasing number of countries examining whether to move from active income a worldwide basis to taxing income on a territorial basis. In addition, some countries are moving away from a confrontation to a cooperative approach to tax.
According to Owens, both the EU and OECD have adopted an approach to tax competition which is characterised by several points; and more than a decade ago both parties launched parallel and complementary projects to deal with harmful tax competition. ‘Both initiatives were very successful, but – and it’s a big but, this success may be short lived,’ claimed Owens.
‘Countries are now designing regimes to get around the EU and OECD criteria which comply with the letter, but not the spirit of the rules, and regimes which are less transparent. We are seeing the emergence of a new and more subtle form of competition with involves more sophisticated regimes and a more creative use of tax treaties. Thus, it’s a mistake to believe that this work is over, but it is unclear whether there is the political will to deal with it.’
The fact that large MNEs are primarily in the business of producing ideas and not things, combined with companies’ emphasis on globally centralising activities, ensures that there is greater exposure to tax differentiates. ‘This poses difficulties for governments,’ said Owens. ‘Services are where the potential corporate tax bases is, so lose your services and your have lost a significant part of your tax base, and usually in a way where the existing international rules have been respected. Governments are nervous about this prospect and some are already calling for a revision of the rules.’ |
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| Article appeared in the August 2008 issue.
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