FUTURE TAXATION OF COMPANY PROFITS

Transcription

1 FUTURE TAXATION OF COMPANY PROFITS What to do with intangibles? Presentation at Taxation of the digitalised economy: analysing the OECD approach event

2 WHAT IS BEING PROPOSED? SMALL INNOVATIVE OPEN ECONOMIES LIKELY TO LOSE TAX REVENUE POLICY OPTIONS TO ADDRESS CHALLENGES GOING FORWARD

3 WHAT IS BEING PROPOSED?

4 Three proposals on the table Marketing intangible approach Compromise between current transfer pricing system and a destinationbased corporate income tax Allocation according to location of marketing intangibles User participation Targeted specific digital services (ringfencing) Allocation according to location of users A global minimum tax back-stop that e.g. denies of deduction on outbound payments if a certain Effective Tax Rate (ETR) threshold of the payee is not met Potentially build on the GILTI provisions 4

5 Marketing intangibles: compromise between today s transfer pricing system and destination-based corporate income tax Current Transfer Pricing (TP) system Ensure MNEs do not obtain an inappropriate tax advantage by pricing within-group transactions differently from arm s length principle Key feature: corporate income beyond allocation based on cost plus/return on asset basis using the arm s length principle, is allocated to the entrepreneurial risk-taker(s) in the MNE group. Marketing intangible approach 1. The Marketing Intangible (MI) approach starts by defining a split between routine and residual income 2. Affiliates of the MNE group are compensated for their routine functions, cf. current TP rules 3. Residual income further split between income arising from marketing intangibles and other intangibles 4. The residual income deemed to arise from other intangibles is still allocated cf. current TP principles 5. The share of residual income deemed to arise from marketing intangibles is allocated to market of destination for the good or service 5

6 Significant outstanding challenges with implications for the impact of the marketing intangibles approach 1 Whether definitions of Permanent Establishment (PE) are revised or not, and if so how? (e.g. digital PE and link to implicit user contribution principle) 2 How to define a normal return to physical/tangible assets and other intangibles? 3 How to define and value marketing intangibles relative to other intangibles? 6

7 Marketing intangible approach goes well beyond tech: covaries with other intangibles, can we tell the difference? Marketing intangibles and other intangibles as a share of total enterprise value by sector Percent Pharmaceutical 53% Media 73% Internet & software 56% Biotechnology Services Manufacturing Telecoms Retail Construction Transportation Mining 34% 34% 29% 36% 33% 25% 18% 32% 17% 23% 4% 35% Automotive 28% 7% 35% Power & Utilities 17% 14% 30% Insurance 24% 3% 27% Wholesale Oil & Gas 9% 13% 14% 8% 23% 21% Banking 17% 20% 3% Note: The definition of marketing intangibles is based on IFRS 3 definition of marketing and consumer related intangibles and equal to the sum of the two. Furthermore, the results should only be considered indicative according to the authors. Source: Brand Finance GIFT report 2017, page 33 & 47 44% 29% 33% 42% 41% 42% 51% 65% 65% 35% 30% 73% 13% 76% 88% 86% 86% 85% Marketing intangibles Other intangibles 7

8 SMALL INNOVATIVE OPEN ECONOMIES LIKELY TO LOSE TAX REVENUE

9 Significant share of current corporate tax revenue is at stake in the Nordics and Germany Conservative approximate distribution of tax revenue on routine and residual profits by country, 2017 Percent Foreign residual return Domestic residual return Routine profits Denmark Finland Sweden Germany Note: Assuming a normal return 4% and using average export shares within R&D intensity sectors. The estimates are based on a sample from corrected for the real change in corporate tax revenue from to See appendix of the study for a detailed description of the methodology. Source: Copenhagen Economics based on Amadeus database, Input-output tables, OECD and Eurostat. 9

10 USA Denmark Sweden Germany Finland India China Five reasons why the Nordics will lose net tax revenue 1 High return on assets in R&D intensive industries 12% 12% Denmark Sweden Finland 8% 8% 7% 6% 6% 6% 4% 5% 5% 5% 5% 4% 4% Disproportionately high tax base from high R&D industries % Tax base / GVA % Denmark Sweden 6.4% Finland 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 3 Marketing intangibles especially important in high R&D industries Share of enterprise value +13pp 40% 31% 32% 26% 27% High R&D Mediumhigh R&D Medium R&D Mediumlow R&D Low R&D Share of corporate income tax revenue (right axis) Multiple of tax revenue relative to GVA High R&D Mediumhigh R&D Medium R&D Mediumlow R&D Low R&D 4 Nordics are net-exporters of high R&D goods and services Share of total output 5.7% 6.4% 5.6% 2.1% 1.2% 5 Intangibles especially important in developed economies 69 % 68 % 58 % 58 % 58 % 53 % 42 % Nordics lose net tax revenue High R&D Mediumhigh R&D Medium R&D Mediumlow R&D Low R&D Source: Copenhagen Economics based on Amadeus, input-output tables, Brand finance and OECD Stan database. 10

11 Potentially higher tax burden on businesses MNEs in low tax jurisdiction will experience higher ETR MI approach gives more diffused tax base Potentially negative real economic impact due to the distortive nature of corporate income taxes Unclear rule for loss consolidation across borders No harmonised set of rules exists to ensure that MNEs can off-set losses cross-border Asymmetry tends to increase the effective tax burden Key parameters have no solid empirical foundation Increased tax uncertainty and probability of disputes increasing the overall tax burden In conclusion: It is both a country and company tax issue, likely to impact investments and real activity 11

12 POLICY OPTIONS TO ADDRESS CHALLENGES GOING FORWARD

13 Problems and aims to be defined before moving to solutions BEPS project focused initially on addressing transfer pricing policy issues: Changes to transfer pricing guidelines Addressing nexus avoidance (updating PE) Strengthening effective regulation of foreign controlled companies (CFC) as well as polices versus socalled Tax Heavens More recently, challenging notions of where economic value is being created the user contribution principle. We suggest policy reforms should: 1. Aim to reduce transfer pricing problems, taking into account already implemented BEPS efforts as well as national reforms of corporate tax regimes, notably in the US. 2. Maintain/increase incentives to growth friendly policies at national level 3. Be based on meaningful, verifiable criteria with manageable compliance costs 13

14 Hungary Ireland Lithuania Czech Republic Poland Slovenia United Kingdom Estonia Finland Iceland Latvia Slovak Republic Switzerland Denmark Sweden Turkey Israel Norway Austria Chile Netherlands Spain United States Luxembourg Canada Korea Italy New Zealand Greece Belgium Japan Germany Australia Mexico Portugal Recent progress related to transfer pricing issues must be taken into account 1 The effect of the US tax reform and implemented BEPS measures should be fully digested before adding new, untested ideas in the global corporate tax arena 2 Convergence in global statutory rates will also tend to reduce transfer pricing issues 28% 19% 19% 19% 20%20% 20% 20% 21% 21% 22% 22% 22% 23% 25% 25%25% 25% 26%26% 27% 28% 28% 29% 30% 30% 32% 30% 30% 30% 23% 19% 15% 13% 9% 14

15 Reductions in statutory rates is not merely a race to the bottom 1 Lower nominal rates reduce debt bias 2 Lower rates partly paid by tax reforms historically 3 Overall corporate tax take not collapsing Effective tax rates on equity and debt 38% 39% 38% 36% 34% 34% 34% 25% 28% 28% 24% 19% 20% 16% 12% 14% 10% 6% -1% -15% -14% -12% -12% -10% -15% -14% -17% -17% -27% -24% -24% -46% -39% -39% -59% -55% -68% AR BR IN JP DE MX ID US CN FR GB AU SA ZA RU TR KR CA IT Equity-Financed Equipment Debt-Financed Equipment Corporate tax revenue in the EU, , percent of GDP % % Source: CBO (2017) International Comparisons of Corporate Income Tax Rates, page 24 and European Comission 15

16 The marketing intangibles approach has three obvious drawbacks 1 Reducing national incentive to support growth: the fiscal spoils from successful highrisk entrepreneurial projects are shared globally while the costs of failures are born by host countries. Return multiples in VC world 50x x 10-20x 5-10x 1-5x 0.4% 1.1% 2.5% 5.9% 25.3% 2 Key parameters have no solid empirical foundation What defines a normal return for taxation purposes? How to define marketing intangibles relative to other intangibles? How to value marketing intangibles? In practice the division of marketing and other intangible will have to done in the absence of meaningful yardsticks based on sound economics 3 High compliance costs and requiring unrealistic levels of international cooperation The MI approach creates new administrative challenges for which no obvious solutions exists while at the same time keeping the challenges of the current transfer pricing regime Realistic that international co-operation prevents years of litigation? Formula apportionment opens new avenues of tax shifting: choice of business models 0-1x 64.8% 0% 25% 50% 75% 100% 16

17 A minimum taxation regime: targeted and realistic 1 Generally in line with the BEPS efforts to limit base erosion and creating a level playing field 2 Importantly from a policy efficiency perspective, a minimum taxation regime would stop industry specific distortions 3 while making a minimum tax regime work is not necessarily a walk in the park, it appears to be infinitely more manageable and meaningful than the other alternatives on the table 17

18 CONTACT Sigurd Næss-Schmidt, Partner & director of economics Copenhagen Economics Langebrogade 1 DK-1411 Copenhagen K