At the top of political agendas in the EU, the UK and the US, as well as among the major concerns of big businesses all over the world, is now taxation.
Despite the recent breakthrough in the Brexit negotiations, businesses in the UK look with concern at the latest polls, according to which Corbyn and his proposal of a £19-billion corporate tax increase are closer than ever to the office at 10 Downing St. Within the EU, under the pressure of French President Macron, policy-makers are trying to build consensus on a European-wide tax regulation on digital corporations profits. And when we turn to the other side of the Atlantic Ocean, where Trump is monopolizing the scene with his tweets and abrupt moves in the Middle East, the American public opinion is divided on the highly controversial Tax Reform Bill, promoted by the Administration and passed in different versions by both Chambers. With all the actors involved promising greater economic growth under their respective plans, it is probably worth digging more deeply into the current corporate tax regimes of the world’s largest economies.
Measuring corporate tax rates, however, is not as easy as one might imagine.
The snapshot we get when we compare statutory tax rates (i.e. tax rates as they appear in the laws of the country) is indeed substantially different from the situation we observe if we focus on effective marginal tax rates, which are generally lower in all major developed countries.
The difference is determined by the tax provisions offered by the government and aimed at encouraging investment in strategic sectors (R&D, for example), promoting certain activities and avoiding double taxation, especially in federal states. Additionally, the picture became more complex with the introduction of patent boxes, which are specific tax regimes that apply to profits earned from patented innovations.
In January 2017 the Oxford University Centre for Business Taxation published its annual database on tax regimes, providing an insightful analysis of the current statutory and effective tax rates in the G20 countries.
In the US the much-criticised top rate of 35% corresponds to an effective rate of 23%. Trump repeatedly claimed that his Tax Reform will not only cut the rate to 20% but also eliminate all the current loopholes in the system to close the gap between the effective and statutory figures, even though most economists disagree and fear for the consequences of the reform on the $440-billion federal deficit in the next decade.
In 2017 the UK’s statutory corporate rate is 19% – the fourth lowest in the G20 after Russia, Saudi Arabia and Turkey – while the effective tax rate to which British businesses are subject after all deductions and incentives are applied stands at 17%, on average. Even the much-feared rise of the Corporate Income Tax rate to 26% proposed by the Labour Party would still keep the UK below the G20 average statutory rate. City managers can still sleep soundly for a while.
On the continent several instances of tax avoidance by major corporations, especially in the digital sector, have convinced both EU national leaders and the European Commission to focus on taxation. While Juncker’s Commission is addressing case-by-case the recent operations of the top five US-based digital corporations, the FAANGs (Facebook, Amazon, Apple, Netflix, Google), the EU heads of government are working to create a common tax regulation. As established in the treaties, taxation is a national competence but the EU could still legislate to force companies to pay their taxes where revenues are produced, thus preventing the common practice of transferring taxable income to the companies’ subsidiaries in low-tax countries. Top corporate tax rates in fact differ significantly across the continent, from Ireland’s 12.5% to Belgium’s 33.99%, with most of the UK’s competitors having a rate above 25%. Despite the recent progress made by the Commission with its millionaire rulings against Amazon and Apple, however, the European Council (the body composed of the EU heads of government) is still divided on the issue and no relevant advancement has yet been made.
Clearly, with highly mobile business assets and revenues and the shrinking provision of public services, taxation is a key arena of political debate. But, while there is no one-size-fits-all recipe, we should avoid falling for the electoral claims and look deeper at what the numbers really tell us.
N.B. This article reflects the author’s opinions only.
“Sometimes it is difficult to evaluate policies and voters are not always willing or able to research and compare their country’s situation with the rest of the world.” Richard, Economics, 1st year, Warwick.
“I believe we are slowly sliding towards a fierce tax competition between countries. The risk is to see tax revenues decreasing and public services shrinking. Probably actions on an international level are required to bring this trend to a halt.” Alice, EPAIS, 1st Year, Warwick.