Ernst & Young’s European Tax Symposium: highlights – part 1January 29, 2013
Lisbon, Portugal — 14 June 2012
Our panelists discuss the dramatic rise in tax enforcement, with the focus now on perceived aggressive tax planning by corporations.
This article was first published in the Ernst & Young Global Tax Policy and Controversy Briefing, Issue 11, December 2012 (pdf, 4.26 MB)
Around the world uncertainty continues to impact the tax landscape, overlaying and sometimes clouding broader tax trends. Whatever their source, these new uncertainties impact the global enterprise and the tax function, sometimes unexpectedly and dramatically, as demonstrated by the series of urgent and unplanned policy actions in the Eurozone.
Outside Europe, nations continue watch unfolding events with hawklike vision, making efforts to reduce deficits in readiness for potential contagion by increasing the tax burden and improving collection. As a result, tax enforcement continues its dramatic rise, with the focus now onto perceived aggressive tax planning by corporations.
Anti-abuse measures are proliferating as a result and countries are moving more rapidly to shore up tax base erosion caused by the rapid and profound globalization of business.
Underlying these rapid changes, longer term trends continue to play out and impact the enterprise; corporate tax rates continue to fall and countries look towards territoriality, increasing the pressure on the United States to execute an international tax reform package, while indirect taxes continue their seemingly inexorable rise, whether as an immediate policy tool of choice in some countries, or a new way to tax in others.
In his opening remarks, Stephan Kuhn, Ernst & Young’s Tax Leader for Europe, the Middle East, India and Africa, described a model which views the shifting landscape through the four lenses of globalization, shifting economy, rapid and significant tax legislative change and a changing model for tax administration.
After covering the broader economic landscape and globalization trends, Stephan then turned the conversation over to a panel of Ernst & Young tax leaders — about whom you can read more in the box — who discussed the tax impacts in greater detail. What follows are some of the key remarks from this session.
About our panel
- Stephan Kuhn (moderator) is Ernst & Young’s Europe, Middle East, India and Africa Tax Leader.
- Chris Sanger is Ernst & Young’s Global and EMEIA Tax Policy Leader.
- Jeffrey Owens is senior policy advisor to Ernst & Young’s Global Vice-Chair of Tax Services.
- Debbie Nolan is Ernst & Young’s Americas Tax Controversy Leader.
- Klaus von Brocke is Ernst & Young’s EU Direct Tax Leader.
Stephan Kuhn: As capital flows are reshaped and cross-border transactions dramatically increase, the impact on taxation has been ground breaking. Governments, at the same time as they are dealing with massive economic and financial stresses, have to decide how to react to globalization from a tax policy perspective. They are “jockeying for position” in the new world order, and they are asking the people who police their policies — the tax administrators — to suddenly view the world through a global lens.
So let us focus in more intently on these tax impacts and ask our panel to share with us their insights on what it all means. Jeffrey, can you help us start to make sense of how the world of tax is changing? Who are the winners and losers?
Jeffrey Owens: If I could identify who winners are going to be, I don’t think I’d be sitting here! But to answer your question of “What’s been driving policy?” I don’t think it’s very difficult to identify the drivers. Governments are facing a conflict.
On one side, they need more competitive tax systems because they know the longterm answer to the crisis we are facing is growth, especially employment growth, because that will reduce the needs of public expenditure and it will increase tax. So the first thing they have to do is they have to produce a competitive tax system.
The second thing is, in the short term, they need money. That’s why we’ve seen a number of countries putting in revenue increasing measures, generally on the VAT side, and we’ve also seen higher earners paying more personal income taxes.
The third thing is more compliance. Governments have had to reconcile making a tax system competitive, raising revenue and also showing their citizens that the gains and the pains from globalization are being fairly shared.
Because when you look at the figures today, the growing inequality in Europe, the United States, China and India, we can’t continue like that because inequality undermines social cohesion and when you don’t have social cohesion, your economies don’t function well. So there are a lot of conflicts that governments are facing.
There’s also the whole debate of what I call “How do we share the pie?” Who gets what? How do we share the multinational tax base? That’s a debate that’s become more difficult to handle because we’ve got new players around, newly influential countries.
Stephan, you talked earlier of the BRICs, the next generation of BRICs, the Vietnamese, the Philippines, the other countries that are emerging. We’ve also got new organizations on the scene. A renewed, more active United Nations, the OECD’s Forum on Tax Administration and many others representing other regions. And we’ve got a new type of multinational company that is acting truly globally.
So trying to address this question of how we actually share the tax base is going to be more difficult. So, I think, we are going into a period of flux. I think your lives (as tax directors) are going to be more stressful.
But there is good news. Governments can use this crisis to put in growth friendly tax reforms. To me, the test case is going to be the United States.
If they can have fundamental reform next year that improves their competitiveness, that raises tax revenue — and they are going to have to raise tax revenues, because you can’t get the deficit down just by expenditure cuts — if they can do that, and produce a fair tax system, that would send such a strong signal to the rest of the world that it can be done if you have political support.
A three-year tax scorecard
Stephan Kuhn: That’s an interesting macro picture, Jeffrey. Let’s dig into the detail a little more; if we look back at the last three years — a scorecard, you might call it — what trends have we seen? And what do those trends tell us about where the world is heading next?
Of course, a headline trend is that corporate tax rates have gone down. But at the same time, the corporate tax base is expanding, which increases the tax burden. We still see a shift towards territorial taxation, and we only have three large countries left who still insist on worldwide taxation.
We see, in general — but with some notable exceptions — that CFC rules are being tightened. We can also see the shift to more indirect taxes playing out, with higher headline rates and fewer exemptions. Interest deductibility and thin capitalization also stand out as ways in which governments are tightening the reins. Klaus, give us your thoughts on what’s going on with corporate tax.
Klaus von Brocke: We’ve seen a tremendous decline in headline corporate tax rates among the OECD and some other countries in the last few years. The chart speaks for itself. In fact, 90% of the OECD countries in the last 12 years have reduced their corporate tax rates and some quite dramatically. But of course, that’s only the newspaper headline, you need to read on into the detail to understand the whole picture of how the tax base is being expanded and how countries are becoming more and more territorial.
That said, I think this trend of falling headlines rates may well be coming to an end, except for a few countries such as the UK who still seem to be traveling in that direction. From what I’ve heard recently from many countries is that we are now just starting to see a shift in the other direction. Sweden and Chile have both announced changes, and notably now one of the flat tax countries, the Slovak Republic, recently announced a tax increase.
Jeffrey Owens: The two countries you referred to are countries that already had relatively low corporate taxes, so I think what we are seeing is a hiccup. Competitive pressures will continue to push corporate taxes down, and people will be looking at what happens in the US. We have to watch what happens, because Europe will have to think about how it reacts if there’s a fundamental reform that makes the US more competitive, because by definition, that makes Europe less competitive.
Chris Sanger: This is going to be an interesting one to watch, because a lot of the rate reductions have almost been “free” for the governments because, at that same time, they’ve broadened the tax base. So I think you’re right, the “easy move” has already happened.
If I look to the UK, they have slashed their rate from 28 down to 22 eventually and I personally think it will get further, probably about 20, but not much more than that. But to start with, they did it by widening the tax base, reducing reliefs, and therefore the total tax stayed the same. But that’s gone. The new prediction is that there’s a share of total tax, corporate taxes go down from 11% to 8% in the UK.
So it’s now beginning to hurt, and I think that’s now getting to a question where governments will have to think twice about where tax rates go. The low-rate broad base is clearly the economic message that came from Jeffrey during his time at the OECD, and governments have understood it. But, that’s kind of the easy move and I think one that’s happened already.
Stephan Kuhn: We’ll see whether the UK can afford to go down so low. I’m surprised that you didn’t comment on India, who has higher rates for foreign firms than for domestic firms. How sustainable is that?
Chris Sanger: If we look at the countries that are lowering tax rates — and when we come on to territorial tax systems, it’s the same kind of principal — the countries with lower tax rates are the ones that are actively competing for business and knowing that they need low tax rates to attract activity and attract Foreign Direct Investment (FDI).
If you look to India, China, and to some extent the US, they have been able to maintain that rate, or think they have, on the basis that they have been attracting activity because of their size and because people have to be there. And I think one of the reasons the UK got to its position was that it actually woke up and realized it’s not the center of the universe and needs to attract more business now.
Outside the US a lot of these changes have happened incrementally, and the policy making systems in the other countries have allowed them to make the changes. The UK rate’s gone one percent, another percent, another percent…. It’s tried its reform in territorial dividends. It then went to CFC’s. The US’s whole system is all very much, “It’s all got to happen all at once.” That puts a huge pressure on any reform.
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