Taxcooop conference
Competition and taxation:
a look at the landscape
Montreal, November 3, 2015
Katharina Becker, Federal Ministry of
Finance, Germany
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Competition and taxation:
a look at the landscape
Contents
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Tax competition - definition
Arguments in favour of tax competition
Arguments in favor of tax harmonisation
Tax Competition vs. tax harmonisation
Economic Analysis
„Fair“ versus „harmful“ tax competition
International Agreement on the definition of harmful tax competition
– OECD – EU – 1998 • International development after the OECDs and EUs initiatives
• The OECDs BEPS initiative 2014/2015
• Prospect
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Katharina Becker, Federal Ministry of Finance, Germany
Tax Competition
Definition
• No internationally agreed definition;
• Extension of the idea of the market (productivity of individuals and
corporations) to governments (starting in the 1990ies) ;
• “Productivity” of governments supplying public goods:
• Governments provide for public goods by applying lower tax rates
than competing countries;
3 Katharina Becker, Federal Ministry of Finance, Germany
Tax Competition
Definition
• Thereby attracting investments from third parties, who can chose
between different countries - or
• Thereby preventing domestic corporations from leaving the country
for reasons of lower tax rates in other countries
• The term tax competition however is used in connection with
corporate taxes in general
Katharina Becker, Federal Ministry of Finance, Germany
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Tax Competition
Definition
Tax competition – apparently - is not :
Competition for higher tax income through lowering tax rates
(Assumption of A. Laffer that tax income may rise when lowering the tax
rate, so called Laffer-curve)
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Katharina Becker, Federal Ministry of Finance, Germany
Tax Competition
Arguments in favour of tax competition
• Downward pressure on tax burden;
• Fiscal Discipline;
• Proper Balance of tax level and public goods;
• Fiscal sovereignty
• Possibility of smaller countries to compete with larger countries
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Katharina Becker, Federal Ministry of Finance, Germany
Tax Competition vs. tax harmonisation
Arguments in favour of tax harmonisation
• Reduction of compliance costs for all taxpayers
• Reduction of tax distortions
• Transparency for the taxpayer
• Retention of a desired tax mix (especially mobile income and
immobile income)
• Fiscal Sovereignty
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Katharina Becker, Federal Ministry of Finance, Germany
Tax Competition vs. tax harmonisation
No international agreement
Europe:
• Smaller countries favour tax competition
• Larger countries favour tax harmonisation
• No agreement because of unanimity in direct taxes
OECD:
Forum on harmful tax competiton
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Katharina Becker, Federal Ministry of Finance, Germany
Economic analysis
Economic studies are uneven;
• Several note that tax competition favours relatively small countries
and
• place larger countries into a disadvantage;
• No general refusal of tax competition
• However, no major studies on tax competition via preferential tax
rates on mobile income
Katharina Becker, Federal Ministry of Finance, Germany
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„Fair“ versus „harmful“ tax competition
Background
Fair tax competition:
General reduction of tax rates along with broadening of tax bases – as
suggested by the OECD economists
This was not the case in the real world.
Katharina Becker, Federal Ministry of Finance, Germany
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International Agreement on the definition of harmful tax
competition
OECD initiative
1998 report: Harmful Tax Competition – An Emerging Global Issue
• Focus on mobile income
• Erosion of tax income of other countries
• Criteria for harmful tax competition:
– Starting Point: No or low tax rates
– Ring fencing of regimes (insulation from the domestic markets, attraction of
mobile income such as royalties and interests with no or low tax rates)
– Lack of transparency
– Lack of effective exchange of information -- lack of „ economic activity „
• 32 regimes removed or changed
Effect : An even treatment of the general tax base
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Katharina Becker, Federal Ministry of Finance, Germany
International Agreement on the definition of harmful tax
competition
EU initiative on harmful tax competition
• Code of conduct group (Primarolo 1996)
• In general same criteria as OECD‘s FHTP
• 66 tax regimes removed or changed
Effect : An even treatment of the general tax base
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Katharina Becker, Federal Ministry of Finance, Germany
International development after the OECDs and EUs initiatives
Patent Boxes
Country
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Nominal Tax
Rate Royalties
Income
Statutory
Corporate
Tax Rate
Introduction
Belgium
France
Liechtenstein
6,8
15
2,5
34
33,33
12,5
2007
2000
2011
Luxembourg
Malta
The Netherlands
5,72
0
5
29,63
35
25
2007
2007
2003/2007
Portugal
Switzerland ,
Canton Nidwalden
11,5
8,8
23
20,60
2014
2011
Spain
Hungary
United Kingdom
Cyprus
10
9,5
10
0
30
19
22
10
2008
2003
2012
2012
Katharina Becker, Federal Ministry of Finance, Germany
International development after the OECDs and EUs
initiatives
Non-Taxation of Foreign income of US-companies
• Google
• Apple
• Microsoft etc.
By using different European tax loopholes
Advance Rulings
Considered as harmful where they deviate from the general principles of
tax law and where they offer preferential tax treatments for single
investors
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Katharina Becker, Federal Ministry of Finance, Germany
The OECDs BEPS initiative
Out of 15 action points:
• Taxation of the digital economy
• Activity Requirement for patent box regimes (nexus
approach)
• Automatic exchange of information for tax rulings
• Country by country reporting
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Katharina Becker, Federal Ministry of Finance, Germany
Prospect
EU-State Aid measures:
21.10.2015-press release of the European Commission:
EU - Commission decides selective tax advantages for Fiat in
Luxembourg and Starbucks in the Netherlands are illegal under EU state
aid rules
Commissioner Margrethe Vestager, in charge of competition policy,
stated: "Tax rulings that artificially reduce a company's tax burden are
not in line with EU state aid rules. They are illegal. I hope that, with
today's decisions, this message will be heard by Member State
governments and companies alike. All companies, big or small,
multinational or not, should pay their fair share of tax."
Katharina Becker, Federal Ministry of Finance, Germany
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Prospect
Features of EU - State aid:
• There has been an intervention by the State or through State
resources which can take a variety of forms (e.g. grants, interest and
tax reliefs, guarantees, government holdings of all or part of a
company, or providing goods and services on preferential terms,
etc.);
• The intervention gives the recipient an advantage on a selective basis,
for example to specific companies or industry sectors, or to
companies located in specific regions
• Competition has been or may be distorted;
• The intervention is likely to affect trade between Member States.
Katharina Becker, Federal Ministry of Finance, Germany
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Prospect
Guiding principles for fair tax competition:
• No non-taxation/extremely low taxation
• A general tax base for companies without favorable tax rates for
certain income types / no discrimination of certain industries
• No shift of the tax burden to less mobile tax bases (labour,
consumption, property)
• EU - possible answer: Common Corporate Tax Base
Katharina Becker, Federal Ministry of Finance, Germany
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Thank you for your attention
Katharina Becker, Federal Ministry of Finance, Germany
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