Tax Competition, Tax Co-Operation and BEPS
Abstract
The OECD Base Erosion and Profit Shifting (BEPS) project was initiated to tackle the cross-country tax avoidance practices of multinational companies (MNEs). We argue that the BEPS project inevitably impacts a range of existing tax competition policies pursued by states to lower the costs of capital with a view to attracting mobile investment and profits, and, hence, MNEs. Despite the measures to be introduced by BEPS, tax competition practices will continue, mainly because coordination is not incentive-compatible. However, the nature of tax competition will change as a result of BEPS. Before BEPS, tax competition policies were a mix of low statutory rates and specialised regimes designed to accommodate specific activities or transactions. After BEPS, tax competition policies are likely to become more rate-based. Governments will have to tighten some specific regimes aimed at attracting highly mobile capital and profits, such as the patent box regime, rulings arrangements and interest deductions. At the same time, they may reduce the tax burden on mobile and non-mobile activities by implementing economy-wide cuts (chiefly through tax rate cuts) allowed under BEPS. Many countries, including France, Italy, Japan, Spain and the UK, have announced cuts in the corporate statutory tax rate. To foster real investment, governments could also increase depreciation allowances or introduce an Allowance for Corporate Equity (ACE). The interesting feature of the ACE in the context of BEPS is that it reduces the incentive to classify financing instruments as tax-advantaged debt.
References
Arachi, G., Bucci V., and Casarico A. (2015). Tax structure and macroeconomic performance. International Tax and Public Finance, 22(4), 635-622.
Arnold, J. M., Brys B., Heady C., Johansson A., Schwellnus C., & Vartia L. (2011). Tax policy for economic recovery and growth. The Economic Journal, 121, 59–80.
Arulampalam, W., Devereux, M., & Maffini, G. (2012). The direct incidence of corporate income tax on wages. European Economic Review, 56(6), 1038-1054.
Avery Jones, J. F. et al (1998). Tax treaty problems relating to source. European Taxation, 38(3), p78.
Bond, S., & Xing, J. (2015) Corporate taxation and capital accumulation: evidence from sectorial panel data for 14 OECD countries. Oxford University Centre for Business Taxation, Working Paper, 10/15.
Cabinet Office, Prime Minister's Office, 10 Downing Street, and the Rt. Hon David Cameron MP (2013). PM praises OECD action plan to tackle tax evasion and avoidance [Press release]. Retrieved from https://www.gov.uk/government/news/pm-praises-oecd-action-plan-to-tackle-tax-evasion-and-avoidance
Clements, P. (2013). Inversions: A UK Perspective. 5 Colum. J. Tax L. Tax Matters 1.
Coalition Agreement, May 2010.
Collier, R., Devereux, M., & Maffini, G. (2016, January). Response to the Consultation on the Tax Deductibility of Corporate Interest Expense. Oxford University Centre for Business Taxation, Policy Papers Series. Retrieved from http://eureka.sbs.ox.ac.uk/6155/1/collier-devereux-maffini-paper.pdf
Collier, R., & Maffini G. (2015). The UK International Tax Agenda for Business and the impact of the OECD BEPS Project. Oxford University Centre for Business Taxation, Working Paper 15/13. Retrieved from https://ideas.repec.org/p/btx/wpaper/1513.html
The Conservative Party. (2015). The Conservative Party Manifesto.
de Mooij R., & Devereux M. (2011). An applied analysis of ACE and CBIT reforms in the EU. International Tax and Public Finance, 18(1), pp. 93-120. Doi: 10.1007/s10797-010-9138-8
Department of Finance, Ireland. (2014). Competing in a Changing World, A Road Map for Ireland’s Tax Competitiveness. Dublin: Department of Finance. Retrieved from http://budget.gov.ie/Budgets/2015/Documents/Competing_Changing_World_Tax_Road_Map_final.pdf
European Commission (2015a, 18 March). Communication from the Commission to the European Parliament and the Council on Tax Transparency to Fight Tax Evasion and Avoidance. COM (2015) 136 Final. Brussels. Retrieved from http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf
European Commission. (2015b, 17 June). Communication from the Commission to the European Parliament and the Council. COM (2015) 302 final. Brussels. Retrieved from http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52015DC0302&from=EN
European Commission. (2016, 28 January). Proposal for a Council Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market. COM (2016) 26 Final. Brussels. Retrieved from http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52016PC0026&from=EN
Fuest, C., Peichl, A. & Siegloch, S. (2015). Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany. American Economic Review, forthcoming.
Goodridge, P., Haskel, J., & Wallis G. (2015). Accounting for the UK productivity puzzle: a decomposition and predictions. Imperial College Business School, Discussion Paper 2015/02.
Hansard Deb, 7 January 2015, column 92 WH. [Electronic version]. Retrieved from https://www.theyworkforyou.com/whall/?id=2015-01-07a.92.0
HM Treasury. (1999). The Chancellor of the Exchequer's Full Budget Speech. Retrieved from http://news.bbc.co.uk/1/hi/events/budget_99/news/293864.stm
HM Treasury & HM Revenue and Customs. (2014, March). Taxing aggressive tax planning in the global economy: UK priorities for the G20 – OECD project for countering Base Erosion and Profit Shifting. Retrieved from https://www.gov.uk/government/publications/tackling-aggressive-tax-planning-in-the-global-economy-uk-priorities-for-the-g20-oecd-project-for-countering-base-erosion-and-profit-shifting
HM Treasury & HM Revenue and Customs. (2015, October 22). Tax deductibility of corporate interest expense. Retrieved from https://www.gov.uk/government/consultations/tax-deductibility-of-corporate-interest-expense
HM Treasury, HM Revenue & Customs, and the Rt. Honourable David Gauke MP. (2014, November 11). Proposals for new rules for preferential IP regimes: Germany-UK joint statement. Retrieved from https://www.gov.uk/government/publications/proposals-for-new-rules-for-preferential-ip-regimes-germany-uk-joint-statement
HM Treasury & the Rt. Honourable David Gauke MP. (2015, June 1). Financial Secretary on the government's business taxation plans. Retrieved from https://www.gov.uk/government/speeches/financial-secretary-on-the-governments-business-taxation-plans
Houlder, V. (2009, 7 December). Taxation risks business exodus. Financial Times. Retrieved from http://www.ft.com/intl/cms/s/0/6c6da6e0-e2d1-11de-b028-00144feab49a.html#axzz1z1G87HG6
The Institute for Fiscal Studies (IFS) & Mirrlees, J. (Eds.) (2011) Tax By Design: The Mirrlees Review. Oxford: Oxford University Press.
IFS Capital Taxes Group. (1991). Equity for Companies: A Corporation Tax for the 1990s. IFS Commentary no. 26. London: Institute for Fiscal Studies. doi: 10.1920/co.ifs.1991.0026
Keen, M. (2001). Preferential Regimes can Make Tax Competition Less Harmful. National Tax Journal, 54(4) 757-762.
Keen, M., & Konrad, K.A. (2013). The Theory of International Tax Competition and Coordination. In A.J. Auerbach, R. Chetty, M. Feldstein & Emmanuel Saez (Eds.), Handbook of Public Economics (Volume 5, pp. 257-328). Amsterdam: North Holland Publishing Co.
Kentish, Ben. (2016, October 23). Brexit: Government 'may have to slash corporation tax' to put pressure on EU in negotiations. The Independent. Retrieved from http://www.independent.co.uk/news/uk/politics/brexit-latest-business-corporation-tax-eu-referendum-article-50-a7376816.html
Khomami, N. (2016, September 3). Theresa May to tell G20 UK is 'open for business' despite Brexit vote. The Guardian. Retrieved from https://www.theguardian.com/politics/2016/sep/03/theresa-may-g20-uk-brexit-china-hinkley-point-c
The Labour Party. (2014, June 30). Labour’s Policy Review: Delivering Long-term Prosperity - Reform of Business Taxation. Retrieved from http://www.policyforum.labour.org.uk/uploads/editor/files/Business_Taxation.pdf
London School of Economics Growth Commission. (2013). Investing in Prosperity: Skills, Infrastructure and Innovation. London: London School of Economics and Political Science.
Maffini, G., Xing, J., & Devereux, M. (2016). Capital allowance and investment: evidence from UK corporate tax returns. Oxford University Centre for Business Taxation, Working Paper, 01/16.
McDonald, H. (2014, 14 October). Ireland to abolish controversial 'double Irish' tax arrangement. The Guardian. Retrieved from: https://www.theguardian.com/world/2014/oct/14/ireland-abolish-double-irish-tax-scheme-apple
OECD. (1998). Harmful Tax Competition: An Emerging Global Issue. Paris: OECD Publishing.
OECD. (2013a, 12 February). Addressing Base Erosion and Profit Shifting. Paris: OECD Publishing. doi: 10.1787/9789264192744-en
OECD. (2013b, 19 July). Action Plan on Base Erosion and Profit Shifting. Paris: OECD Publishing. doi: 10.1787/9789264202719-en
OECD. (2014a, July 7). 2014 Update to the OECD Model Tax Convention. Paris: OECD Publishing. Retrieved from http://www.oecd.org/ctp/treaties/2014-update-model-tax-convention.htm
OECD. (2014b, September). Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, OECD/ G20 Base Erosion and Profit Shifting Project. Paris: OECD Publishing. doi: 10.1787/9789264218970-en
OECD. (2014c, 21 November). Public Discussion Draft. Follow Up Work on BEPS Action 6: Preventing Treaty Abuse. Paris: OECD Publishing.
OECD. (2014d, 18 December). Public Discussion Draft. BEPS Action 4: Interest Deductions and Other Financial Payments. Paris: OECD Publishing.
OECD. (2015a, 6 February). OECD/G20 Base Erosion and Profit Shifting Project, Action 5: Agreement on Modified Nexus Approach for IP regimes. Paris: OECD Publishing.
OECD (2015b, 12 May). Public Discussion Draft, BEPS Action 3: Strengthening CFC Rules. Paris: OECD Publishing. Retrieved from https://www.oecd.org/ctp/aggressive/discussion-draft-beps-action-3-strengthening-CFC-rules.pdf
OECD. (2015c, 15 May). Discussion Draft on Action 7 (Prevent The Artificial Avoidance of PE Status). Paris: OECD Publishing.
OECD. (2015d, 22 May). Revised Discussion Draft. BEPS Action 6: Prevent Treaty Abuse. Paris: OECD Publishing.
OECD. (2015e, 5 October). Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, Paris: OECD Publishing. doi: 10.1787/9789264241190-en
OECD. (2015f, 5 October). Designing Effective Controlled Foreign Company Rules, Action 3 - 2015 Final Report. OECD Publishing, Paris. doi: 10.1787/9789264241152-en
OECD. (2015g, 5 October). Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 - 2015 Final Report. Paris: OECD Publishing. doi: 10.1787/9789264241176-en
OECD. (2015h, 5 October). Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report. Paris: OECD Publishing. doi: 10.1787/9789264241138-en
OECD. (2015i, 5 October). Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 - 2015 Final Report. Paris: OECD Publishing. doi: 10.1787/9789264241695-en
OECD. (2015j, 5 October). Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 - 2015 Final Report. Paris: OECD Publishing. doi: 10.1787/9789264241480-en
OECD. (2016). Tax Policy Reforms in the OECD 2016. Paris: OECD Publishing. doi: 10.1787/9789264260399-en
Oxford University Centre for Business Taxation. (2015). Business Taxation under the Coalition Government. Retrieved from http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Reports/cbt-coalition-report-final.pdf
Parker, George. (2016, July 3). George Osborne puts corporation tax cut at heart of Brexit recovery plan. Financial Times. Retrieved from https://www.ft.com/content/d5aedda0-412e-11e6-9b66-0712b3873ae1
Pessoa, J.P., & Van Reenen, J. (2013, June). The UK Productivity and Jobs Puzzle: Does the Answer Lie in Labour Market Flexibility? Centre for Economic Performance, Special Paper No. 31.
Prime Minister Theresa May: Britain is Open for Business. (2016, 20 September). Retrieved from http://www.itv.com/news/2016-09-20/prime-minister-theresa-may-britain-is-open-for-business/
Ruf, M., & Schmider J. (2015). Who bears the cost of taxing the rich? An empirical study on CEO pay. Oxford University Centre for Business Taxation Working Paper, 15/27. Oxford.
Vella, J., & Devereux, M. (2014). Are we heading towards a corporate tax system fit for the 21st century? Fiscal Studies, 35(4) 449-475.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2017 Richard Collier, Giorgia Maffini
This work is licensed under a Creative Commons Attribution 4.0 International License.
Our open access status means that authors retain the copyright of their work. However, all papers published in JOTA are done so under a Creative Commons Attribution 4.0 International license (CC BY). This means that others can share and/or adapt your work without your permission as long as they follow certain rules, including attributing your work correctly.
You can learn more about this on our Open Access, Licensing, and Copyright Policies page.
