Taxation Archives - WITA

How difficult is China’s business environment for European and American companies?

Jude Althagafi — Wed, 26 May 2021 13:26:03 +0000

Despite tensions over China’s discriminatory business practices, China’s trade continues to thrive, and the country has taken over from the United States as the first destination for foreign investment. American and European businesses continue to be engaged in China’s large and growing market, even amid a trade war between China and the United States.

Drawing on surveys of companies and international comparisons, we show that – contrary to the prevailing narrative – China’s business practices have improved significantly in recent years. China’s business environment is today generally more favourable than that in other large countries at similar levels of development and, in some though certainly not all aspects, is in line with the Organisation for Economic Co-operation and Development average.

Differences over geopolitics and human rights must be addressed, but it is clear that trade and investment agreements conditioned on accelerated reforms in China would yield substantial dividends. The benefits of such deals would accrue not only to foreign investors in China and exporters to China, but also to consumers and importers in the European Union and, especially, in the US, where punitive tariffs on China remain in effect. Critical aspects in the negotiations would include better access for American and European investors to China’s market for services and improved enforcement of rules and regulations in China. As in many middle-income countries, uneven enforcement of the law (rather than the law itself) remains a critical problem in China.

Brugel

To read the full report from Brugel, please click here.

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The US Proposals On Digital Services Taxes And Minimum Tax Rates: How The EU Should Respond

Sebastian Petersen-Alven — Thu, 15 Apr 2021 20:27:18 +0000

OECD members are negotiating a global digital services tax and a global minimum corporate tax. EU member-states should support recent US proposals to conclude the talks.

Globalisation and digitalisation allow customers to use foreign digital services or purchase directly from foreign producers more easily, but current international tax rules mean that these producers can often escape paying corporate tax in countries where they make sales. As a result of their frustration about this situation, many countries, including large EU member-states such as France and Italy, have introduced digital services taxes (DSTs), setting them at odds with the US.

Under international tax treaties, a customer’s or user’s home country (referred to as the ‘market jurisdiction’) can generally only tax a foreign producer’s profits if the producer has a permanent establishment in that country, such as a fixed place of business. DSTs depart from this norm. But DSTs suffer from design flaws. They are typically a tax based on revenues, rather than profits, which can harm firms which are not yet profitable. DSTs generally apply only to digital services (DSTs define this differently), disadvantaging the digital economy over the offline economy. Finally, DSTs often include certain revenue thresholds that effectively single out large tech giants based in the US, rather than taxing domestic businesses. This causes friction with the US – the Office of the US Trade Representative has concluded that various countries’ DSTs discriminate against US firms, which may be a precursor to imposing retaliatory tariffs.

The 37 member-states of the Organisation for Economic Co-operation and Development (OECD) are currently negotiating a global replacement for national DSTs, aiming for a mid-2021 agreement. The OECD countries that already have DSTs have generally promised to revoke them in the event of an OECD agreement.

DSTs have been disparaged by many economists and raise relatively little income: for example, the French government estimated its DST would raise €400 million in 2020, which (based on 2019 corporate tax revenues) would amount to less than 1 per cent of corporate profit taxes. Nevertheless, DSTs have become totemic. Many governments believe – probably correctly – that the increase in the number of countries imposing DSTs makes the US more likely to change international tax rules to agree to a global replacement (and less likely to impose retaliatory tariffs). The EU member-states with DSTs generally want the global replacement to be a ‘market jurisdiction tax’, which would give the jurisdiction where a customer or user is located an agreed right to tax a share of a foreign producer’s profits.

The Biden administration has its own agenda in the OECD negotiations: the US is pushing a proposal for a global minimum corporate tax rate that could be applied in addition to a market jurisdiction tax. The minimum tax rate proposal would entitle countries to increase taxation on firms’ profits, if those profits were only taxed elsewhere below the global minimum rate. The intention is to reduce incentives for US firms to shift profits to low-tax countries.

On both these issues, a deal based broadly around the current US proposal is a realistic possibility and is in the EU’s interests.

On the DST issue, the US recently began supporting the principle of a market jurisdiction tax as a substitute for DSTs. But if the OECD negotiations fail to reach an agreement, DSTs will remain in place and their number will probably increase. Then the Biden administration would probably impose tariffs, triggering a new round of damaging trade wars. The design of the US proposal suits EU member-states: it allocates taxing rights between jurisdictions based on sales generated in that jurisdiction, which benefits countries with wealthy consumer bases. The proposal will probably only result in a minimal reallocation of the tax base away from those EU member-states in which the tech giants currently book profits (such as Ireland and Luxembourg). The proposal also corrects many of the defects of DSTs – for example, it would tax a share of producers’ profits, mitigating the impact on firms which are yet to achieve profitability. Most importantly, the proposal provides a face-saving path for EU member-states to remove their own DSTs.

US Proposals On Digital Services Taxes

To read the full insight piece by the Centre for European Reform, please click here.

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The Trouble with Tax Competition: From Practice to Theory

Caroline Hillier — Mon, 06 Feb 2017 20:34:56 +0000

Introduction

Politicians, policymakers, commentators, and academics worldwide debate harmful tax competition and decry the “race to the bottom” regarding corporate tax rates. These terms-“harmful competition” and “race to the bottom”-refer to efforts by individual countries to change their corporate income tax systems to attract investors, revenue, or other resources away from other countries. These efforts range from providing low corporate tax rates to treating certain taxpayers more favorably than others.

Despite the ubiquity of these terms, however, there is no accepted definition of harmful tax competition. Moreover, not only is the definition a subject of debate but so too is everything else related to tax competition. Is tax competition sometimes helpful rather than harmful? What types of tax competition are “harmful,” and what types are not? Is anything even wrong with tax competition? Although academics and policymakers have tried to answer these questions, results have been limited.

The lack of agreement on harmful tax competition has not prevented countries from trying to stop it. This Article looks to recent developments in the fight against tax competition in order to reverse-engineer the concept of harmful tax competition as understood by governments and international organizations. If governments are designing rules to fight harmful tax competition, a study of what those rules target can tell us what those countries consider to be harmful tax competition. In other words, this Article applies lessons from the practice of limiting so-called harmful tax competition to inform the theory surrounding this concept.

Reverse-engineering a definition of harmful tax competition leads to three important insights. First, countries and international organizations have not settled on one definition of harmful tax competition or one explanation for why or when tax competition becomes harmful because they do not in fact want to eliminate tax competition entirely. Instead, the goal is to constrain tax competition in a way that favors the country or countries (in the case of international organizations) involved. This means that there is no generally accepted baseline of acceptable tax competition against which to define harmful tax competition. The baseline is whatever the party defining tax competition considers will make it most competitive; rules that shift the competition away from this baseline therefore are deemed harmful. This lesson is important not just for individual countries but also for the European Union, whose anti-tax-competition measures may have been designed to make the EU more appealing to investors and voters in the face of anti-EU sentiment and Brexit.

Second, the distinction between tax avoidance and tax competition is much less clear than is generally understood. Tax competition is competition among governments, while tax avoidance consists of efforts by taxpayers to avoid the taxes imposed by governments. However, tax avoidance today relies on tax competition since most international tax avoidance transactions are only valuable to taxpayers if the country on the other side of the transactions provides a low rate or preferential treatment. Countries are complicit in tax avoidance schemes-and taxpayers (often multinational corporations) are complicit in tax competition. Recent efforts to curtail tax avoidance therefore can be described as efforts to limit tax competition.

Finally, and most crucially, since anti-avoidance measures target international tax competition, and measures targeting international tax competition are efforts to shift competition in favor of the country or countries passing the anti-tax-competition measure, both recent anti- tax-competition and anti-avoidance measures are themselves forms of tax competition. In other words, even when countries seem to be trying to limit tax competition, they are in fact competing.

These lessons are of fundamental importance to policy debates about international taxation. Because policymakers frequently use the prevention or limitation of tax competition as a justification for their own policies, highlighting that anti-tax-competition measures are in fact their own form of competition complicates the idea that only some countries are involved in tax competition and underscores the need for more nuanced conversations about what countries intend to achieve with their tax systems.

This Article proceeds in four parts. Part II highlights the lack of agreement on what is or is not tax competition and sets out the general arguments in the academic literature for and against tax competition. Part III discusses efforts to curtail tax competition over the past several decades and uses these efforts to identify what countries understand to constitute “harmful” tax competition. A consensus over the definition of “harmful tax competition” grew out of work done by the Organisation for Economic Co-operation and Development (OECD) and the EU at the end of the 1990’s. This was followed by more recent developments, including the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, the European Commission’s state aid decisions, the EU’s proposals for an anti-avoidance directive and a common corporate tax base, and several unilateral efforts. These more recent developments reveal how beliefs about what is harmful about tax competition have changed over the past two decades.

Part IV draws three lessons from these developments.

Part V proposes a typology of tax competition. Acknowledging that politicians are unlikely to forgo terms like harmful tax competition entirely, the proposed typology provides tools for more nuanced and deliberate discussions of tax competition, which in turn may lead to greater transparency regarding how countries use their tax systems to increase their competitiveness.

This Article identifies what countries target with their anti-tax-competition measures and what politicians really mean when they rail against tax competition. It highlights that using the term “harmful tax competition” masks a much more complex debate, and that this term incorporates normative judgments that vary depending on the speaker. Just as Richard Revesz previously argued in the context of interjurisdictional competition over environmental regulations that we should eliminate the term “race to the bottom” and replace it with discussions that “focus instead on the underlying causes of the socially undesirable results[,] this Article argues that the term harmful tax competition causes more trouble than it is worth, and that debates over international tax policy and competition between jurisdictions should focus on what countries actually intend to accomplish when they use this term.

SSRN-id2912477

To view the original Article on the Social Science Research Network, please click here

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