On 5 October 2015, the OECD released their 13 final reports and an explanatory note on its Base Erosion & Profit Shifting (BEPS) project. Three days later G20 Finance Ministers endorsed this final BEPS package in Lima, Peru. We gladly refer to the website of the OECD (www.oecd.org/ctp/beps) for an overview of the aforementioned reports.
Tivalor explored the BEPS jungle comprising more than 1.600 pages of recommendations, with from time to time some binding minimum standards committing OECD member states. Being announced as the biggest reform in international taxation since the twenties of previous centuries, tax and transfer pricing consultants globally produced additional summaries, overviews and selling propositions to assist their clients in dealing with the Tsunami of work to be undertaken (big data, IT and systems overhauls, etc.) in preparation of the armageddon of tax planning.
Indeed, in a post-BEPS world, there will be more transparency of MNE tax matters and transfer pricing will be even more complex. Before considering any action, international groups should strategize their tax and in particular their transfer pricing function, and, most of all, keep calm (or not?).
But first of all, in this first article, we will start with perhaps some more macro-economic, perhaps even some philosophical views.
Although plenty of the BEPS texts were available beforehand, it took us more than 3 days work to analyze the differences between the final texts and the earlier drafts, and their impact on companies and economies globally. Apparently, we are not as swift as the G20 Finance Ministers or may not have a large enough bureaucratic power houses to do the analyses… Just to say that the direction has been clear from the beginning. The discussion in Peru probably would have been more political in nature than tax technical, not to say that politicians have almost blind faith in the technical work prepared by the respective OECD working parties. Throughout the reports, the BEPS efforts are labelled as the creation of a level playing field in tax competition. Such level playing field in tax completion, in our view, may create a disruption in overall global competitiveness, which is something the G20 countries may already find appealing, as we will showcase.
The G20 regroups 19 countries and the EU, representing around 85% of Gross World Product. Founded in 1999, the aim of the G20 has been studying, reviewing, and promoting high-level discussion of policy issues pertaining to the promotion of international financial and economic stability. Below is a table with some key metrics such as GDP (nominal and per capita) and the members’ current account balance.
As can be seen in the table above, the nominal GDP is quite skewed to the right, and overall the G20 members had a negative current account balance (in 2013, the year when the BEPS action plan was initiated, with a left skew). The latter means that overall, at that time, meaning that the G20 is a net borrower from the rest of the world. Not considering the EU, we note that about 58% of the member countries were also OECD members, representing some 68 % of the total G20 countries’ GDP
In view of tax and the level playing field, we consequently looked into the G20 countries 2013-2014 ranking on the Global Competitiveness Index (GCI) as published by the World Economic Forum (WEF). We also considered statutory corporate tax rates (we looked at 2013 and 2015 rates), and compared them to the global and OECD average statutory corporate tax rates for the same periods.
From the table above, we can derive that:
Interestingly, despite the G20 member countries’ corporate tax rate being well above the global average, their average GCI ranking is still in the top 25% (36th out of 148 countries globally). Off course other factors also come into play to determine overall competitiveness of an economy. Our analysis was limited to competitive features of tax system of G20 member countries. These features were also analyzed in the GCI study of the WEF.
Amongst others, the most problematic factors for doing business in a country were surveyed. Business people were requested to choose from 16 factors, their top 5 problematic factors, and were asked to rank them. Two of the factors that could be reported as complicating business in a country relate to tax: (i) tax regulations and (ii) tax rates. The table below shows the results of this survey:
From the table above, we can see that overall issues with tax regulations issues were ranked 4th, and tax rate issues ranked 3rd, on a GDP weighted basis. We can also derive that the discontentment was stronger in larger economies that usually have higher corporate tax rates (as mentioned before).
Subsequently, we looked into the tax effects on global competitiveness in more detail. The GCI basically is based on 12 pillars, across 3 sections:
Basic requirements Institutional environment (legal and administrative framework) Infrastructure Macroeconomic environment (stability) Health and primary education Efficiency enhancers Higher education and training Goods market efficiency Labour market efficiency Financial market development Technological readiness Market size Innovation and sophistication Business sophistication Innovations
It is in 6th pillar of ‘goods market efficiency’ that two tax aspects are pronounced. We found interesting to analyse into more detail these two tax matters for the G20 member countries: - Effect of taxation on investments - Total tax rate, expressed as a % of profit (including profit tax, labor tax and contribution, and other taxes – i.e. the effective tax burden of business in the countries, and in are view very much relevant to the discussion of leveling the playing field of corporate taxes, since taxes businesses face are not to be considered as silo’s indeed as the CGI rightfully combines them to assess competitiveness)
In the table below, we provide – on the right hand side – an overview of both aforementioned factors of competitiveness in view of their scores (from 1 to 7, the lower being more disadvantageous, for the first factor; and for the second factor the percentage of profits totally taxed) and their global competitiveness rank:
In terms of effect of taxation on investments we can see that the G20 member countries are situated around the global mean. In relation to corporate tax rate, they belong to the countries with the highest corporate tax rates. Corporate tax rate in G20 is on average 10 percentage points higher than the global average (or 24% higher as compared to the average global corporate income tax rate). The majority, nevertheless, has a ranking in both factors above the 40t position. In fact only 2 countries can attain a top 20 position. Accordingly, investment in G20 countries is less sensitive to total taxation than in the rest of the world (representing only some 15% of Gross World Product). The larger the economies the more visible aforementioned conclusion becomes.
We therefore may conclude that other factors of competitiveness greatly contribute to the global competitiveness of the G20 member countries overall. Or we may conclude differently: Apparently, even the competitiveness advantage in total taxation the rest of the world may have, do not rank them necessarily above the G20 countries in terms of attractiveness. Arguably, the current competitiveness landscape and its equilibrium in our view may be distorted by enforcing a tax level playing field (in view of a far-reaching harmonization, which according to some commentators (from business and officials) may be the next step beyond BEPS today, as from 2020).
The above can be further detailed by drilling down to country level, and looking into the other factors of competitiveness in more detail. As an example, we look at three economies that are close to each other, all innovation driven, with a high to top GCI ranking, yet different in view of taxation: Germany, Luxembourg and Switzerland.
The table below provides an overview of their GCI ranking and GDP, as well as the rankings of the individual pillars taken into consideration:
Switzerland has the top ranking (already for 5 consecutive years at that time), and has a strong reputation for its appealing corporate income tax rates (between some 11.5% and 24.5% depending on the canton and commune where business is located) and certain specific corporate tax regimes. Also, Luxembourg is often considered as an appealing business location in view of its corporate taxes, but is, compared to Switzerland, smaller and focused on attracting niche investments. For a small economy, Luxembourg ranks relatively high, on the 22nd position. Germany by far is the largest economy of the three countries presented, and in our experience is not considered the most appealing country to invest in from a tax point of view. Nevertheless, it holds the 4th position.
From the table above, we may conclude that:
The pursuit of the creation of a harmonized tax system or far-reaching level playing field (globally, or within the EU) would leave Luxembourg de facto with only one competitive factor left. Further tax harmonization efforts would therefore inevitably benefit to the competitive position of the larger economies. Tax harmonization between countries implies that sovereignty on taxes would be diluted in favor of global rules adapted to the needs of larger economies. This mechanism may therefore distort a certain attained equilibrium as it had been conceived up until recently.
Therefore, if fairness and morality are to be discussed in relation to taxes, one should also have the courage to ask whether it is ‘fair’ to distort the certain macro-economic equilibrium that had been reached by leveling out one of the factors of competitiveness. As showcased above, this development may be to the detriment of smaller or specific economies, while they will generally spoken be beneficial to larger economies.