Seldom does the UK chancellor of the exchequer join the French and German finance ministers in a letter to the Financial Times (Februaary 16). Unfortunately their common policy prescription on this occasion points in the wrong direction. Taxing the income of rich households at progressive rates is sensible and fair, but taxing the income of corporations is not. Corporations are owned by hospitals, universities and pensions as well as households, and not all household owners are rich.
One beneficial result of policy competition between OECD nations over the past three decades has been the gradual reduction of corporate tax rates. The ministers seek to reverse this process by divvying up the corporate tax base in a manner that prevents multinationals from shifting their income to jurisdictions that don’t subscribe to high corporate taxation.
With investment sagging in most OECD countries, and unemployment far too high, this is not the time to tax businesses more heavily. Instead, business taxation should be slashed. This would not only encourage investment and employment; it would also reduce and even eliminate the incentive for profit shifting.
The ministers make much of the argument that some European multinationals pay lower taxes than small businesses. In the US, average multinational tax rates are higher than average small business rates, because most small companies are organised as “pass through” entities that are taxed solely at the shareholder or partner level, not at the business level. Rather than raise tax rates on their own multinationals, the European ministers should encourage greater use of “pass through” entities on their side of the Atlantic.
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Och här är finansminstrarnas drapa
We are determined that multinationals will not avoid tax
Globalisation and technology have brought about profound changes to our world. Britain, France and Germany have long been open, trading economies, but the pace of change is increasing rapidly, as the digital age and freer movement of capital means companies across the world are increasingly unconstrained by country borders. Ecommerce and the internationalisation of supply chains have led to an explosion in choice for consumers across the world, but have also fundamentally changed the way companies are structured. An increasing share of global business value lies in brands and intellectual property. The value of the top 100 global brands alone is estimated at $2.4tn.
Germany, France and Britain want competitive corporate tax systems that attract global companies to our countries and help our economies to grow. They are a significant source of growth, investment, employment and tax. But we also want global companies to pay their fair share of taxes.
International tax standards have struggled to keep pace with our changing economy. This has allowed some multinational companies to restructure their business to minimise the amount of tax they pay, shifting the taxation of their profits away from the jurisdictions where they are being generated, so that they pay less tax than smaller, less international companies.
We are taking steps to clamp down on tax avoidance in our own countries. But acting alone has its limits. Clamp down in one country and those companies, their lawyers and their accountants move elsewhere. In fact, the Organisation for Economic Co-operation and Development has argued that unilateral action could even be counterproductive. That’s why we need to act together.
At a meeting of the G20 in November, we called for co-ordinated and collective action to strengthen the international corporate tax rules, backing and providing additional resources for the OECD’s work to identify gaps in the tax rules.
The OECD is the world authority on tax standards, and with secretary-general Ángel Gurría’s leadership, it has been making a powerful case for change. Its report into Base Erosion and Profit Shifting will be presented to the G20 meeting in Moscow this weekend. It found that the practices that some multinational enterprises use to reduce their tax liabilities have become more aggressive over the past decade. Some multinationals are exploiting the transfer pricing or treaty rules to shift profits to places with no or low taxation, allowing them to pay as little as 5 per cent in corporate taxes while smaller businesses are paying up to 30 per cent. This distorts competition, giving larger companies an advantage over smaller, more domestic companies. In this difficult economic climate, it cannot be right that larger companies can avoid paying tax, with families and small businesses ending up paying more. And to keep tax rates low you have to keep taxes coming in.
Some argue that avoidance is the fault of complexity in the tax system; solve that, and the problem goes away. But this simply is not the case. Global corporate taxation is complicated because the world is complicated. Some high-profile cases that have caused public concern have not related to complexity but rather quite simple tax concepts – concepts that have not necessarily kept up to date with a more complex world. Setting domestic tax rates and rules are rightly the preserve of national governments. However, the lack of co-ordination on an international level leads to distortions and thus to damage for corporations and governments That is why we need international co-operation between national tax systems. The OECD is preparing a plan of action, which, if agreed by the participating countries, will be put to the G20 in July. The UK will use its chairmanship of the transfer pricing group to draw up necessary changes to the principles on which multinationals’ profits are allocated between countries. Germany will lead work on how to prevent the erosion of the corporate tax base including through exploitation of gaps between countries’ tax laws and through harmful preferential tax regimes of countries, and France will co-chair with the US work on how to determine tax jurisdiction, particularly in the context of etrading and reclaiming of profits shifted to low-tax countries and jurisdictions.
Securing reform will not be easy. These are complex rules, reflecting the complex nature of the global and digital age. But the principle at the heart of any changes is a simple one: a competitive tax system that supports businesses, but where everyone pays their fair share. With the help of the OECD, there is a growing international consensus that reform is needed. As the finance ministers of the British, French and German governments, we are determined to turn that consensus into action.
Chancellor of the Exchequer, UK
Minister of Finance, France
Federal Minister of Finance, Germany