By: Tom Ryan, policy analyst at the TaxPayers' Alliance
Recently, Priti Patel spoke out against the plan for an OECD minimum corporation tax, arguing that it “means a return to the bad old days when western governments metaphorically put a finger in the dam and wished away innovation, competition and advance”. She called on the treasury to “delay implementation of the OECD regime in Britain”, however following concessions from chancellor Jeremy Hunt who agreed to run impact assessments of the plan the rebellion was shelved.
The reality of the new OECD minimum is that states which ‘defect’ from the regime, choosing to adopt a more competitive rate below 15 per cent, will be the ones that pay the price. Previous proposals for a global minimum have asked states to tax companies according to a consistent formula. However, tax competition lived on through variable applications of the rules. In this way, states which avoided the spirit of the rules by adopting more competitive interpretations stacked the deck against states which were more faithful to the rules. As Dan Neidle of Tax Policy Associates recently pointed out, the new OECD global minimum makes this impossible, and also prevents the UK from acting competitively.
The new plan, partly formulated by British treasury officials, means that states can apply ‘top-up’ taxes to companies which make considerable profits in other countries. If the UK set corporation tax to 10 per cent, a company headquartered in Germany could not side-step the global minimum with a subsidiary here. Under the new rules, if such a subsidiary registered profits in the UK that were taxed below the minimum rate, Germany would be entitled to levy ‘top-up’ taxes up to 15 per cent. Therefore, states which attempt to establish a more competitive tax regime will be leaving money on the table that just ends up in another treasury’s coffers.
Companies cannot simply avoid countries with the global minimum in place. There are so many that it would be pretty much impossible. 137 countries have signed up to the plan, meaning that companies which avoid the bloc will hamstring themselves considerably. The US may be an exception, as it looks that the OECD minimum is at risk of being rejected by the Republican led Congress. However, the US has recently implemented rules on ‘global intangible low-taxed income’ which may mean that it is also a less attractive prospect for multinationals. The reality is that so many states will be implementing this global minimum that competitive regulation will be impossible.
The unfortunate reality is that the UK may have no choice but to abide by the plan. That’s not a good thing for a competitive and efficient tax system and it’s not a good thing for Britain, so it is vital that politicians across the party divide continue to beat the drum of tax simplification and reform. Corporation tax is out of date, and even if other states could not offer more competitive rates, it would still dampen inward and domestic investment. The tax was created for an industrial world in which the activities of corporations were far simpler and more geographically constrained. Today, attempts to tax these organisations require the application of complicated ‘transfer pricing’ rules which attempt to account for conceptual problems of attributing value creation, which are often complex and difficult to understand. Ultimately these taxes depress shareholder returns which in turn reduce investment, leading to increased prices and lower wages.
Therefore even though the OECD minimum is below the UK corporation tax rate and would not mean that the UK loses out to states offering more competitive tax regimes, it would nonetheless lose out were we to adopt a more competitive system in future. The minimum would frustrate attempts to lower the tax burden, and it may keep our most damaging tax in place. Taxing distributed income instead would be far preferable, because it would not impede investment. That is, taxing income as it is distributed from the company, rather than as it is generated by the company. Other efforts to improve rates of investment despite corporation tax, like full expensing, can certainly help with the problem but ultimately do not adequately address the fundamental problems with a profits base for corporate tax.