Tax Them If You Can: Fiscal (Re)sources in a Globalised World

A fundamental reform of the corporate tax system, which was designed 100 years ago and is failing to address issues related to globalisation and digitization, is needed as soon as possible. The case to be made for this is not only ethical or political but also economic, heard the panel moderated by Mr Martin Sandbu, economics commentator for the Financial Times.

Mr Sandbu noted a shift in recent decades away from taxing capital to taxing labour and consumption, with the political reality of this becoming especially clear to people during the recent austerity measures. Unilateral action, for instance recently by France, have been a response to an absent multilateral framework for addressing ever lower or non-existent tax rates for mobile capital.

SocDems MEP Paul Tang said this growing unfairness is something that is easy to understand for people and that this has been the driving force behind the ongoing debate on the issue. He pointed out the current system dated back to 1920s “when we had factories with chimney”, but the questions being grappled with today are for instance “what is the location of intellectual property”.

One aspect driving the problem is that countries are competing to attract capital. Mr Tang, referencing estimates by economist Gabriel Zucman, pointed out at the EU’s five tax havens – Cyprus, Ireland, Luxembourg, Malta and the Netherlands – effectively “rob” the EU states with higher tax rates of EUR 42 billion in tax revenue a year. The thing is that the tax haven countries only keep EUR 5 billion of this, while the rest goes to shareholders.

Ms Sarah Perret, an economist with the OECD, presented the OECD’s efforts in the field, most notably the OECD/G20 Inclusive Framework on BEPS (base erosion and profit shifting), which has over 130 countries collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules. Ms Perret outlined a two-pillar solution that is currently being considered. It involves a relocation of taxing rights, which would notably give more taxing rights to territories where the company’s customers are located, even if the company itself is not present there in any form. The second pillar involves the possibility of a global minimum tax. While many problems remain, the bigger risk is not doing anything and see solo initiatives that are followed by retaliation, she pointed out.

Dr Karl Soukup, director of the European Commission Directorate for Competition, said the Commission’s thinking has been largely in line with the OECD’s. The Commission has proposed a long-term solution as well as short-term one in the form of a digital services tax, but the latter failed to reach unanimity at the level of the EU Council.

Mr Marko Mršnik, senior director at Sovereign Ratings Europe, S&P Global Ratings, said that rating agencies were looking closely at what is happening at the revenue side, as this can for instance be a crucial risk factor for default. He said that BEPS cost large countries 20% to 30% in corporate tax revenue, while it also affected other economic indicators. Without it the current accounts of some countries that are in the red would be balanced or in surplus. He does believe that efforts to address the problem are producing results, for instance in Luxembourg, while Mršnik sees potential implementation problems with the OECD’s plans, related to issues with information access etc.

Dr Frank-Jürgen Richter, the chairman of Horasis, Switzerland, which has served as a platform for reflection by business, said that the discussion on the topic has been marked by finger-pointing. He stressed tax havens in the EU and tax competition needed to stop, while he also called for a change of the mindset that sees taxes as something inherently bad as opposed to something that needs to be paid for the public good. His concern is that politicians are always one step behind and while he sees positive developments, real results need to come now.