Opinions - 05.06.2023 - 14:00
The G20 and the Organisation for Economic Co-operation and Development (OECD) want to introduce a 15% tax on large companies in Switzerland and ultimately 138 countries. Their objective is to create a level playing field for all nations in terms of international taxation. The legislation would apply to corporations with an annual turnover of more than €750 million (CHF744 million) and headquarters in Switzerland.
Professor Keuschnigg, is there a global need for a global minimum tax?
Tax competition has put downward pressure on corporate tax rates. High taxes make multinational firms shift profits to low tax countries which makes high tax countries lose tax revenue. Another reason is that high taxes induce firms to shift not only profits, but also production and employment to low tax countries. However, it is a matter of national autonomy to choose low tax rates, provided that all firms – domestic and foreign - are treated equally and national policy is not a beggar-thy-neighbour policy. There is nothing against fair tax competition. The recent OECD initiatives that reinforce rules against tax motivated profit shifting and implement international information exchange, make it more difficult for firms to escape their fair tax liability. This weakens the case for a global minimum tax. Also, a minimum tax unduly interferes with national autonomy in choosing one’s own fiscal policy.
Who would benefit? Who would not benefit?
If the minimum tax legislation takes hold, it will lead to a redistribution of tax revenue as well as jobs and firm investment. High tax countries will gain, in losing less tax revenue and less business. Low tax countries will lose. All countries together might be able to collect more tax revenue (the total cake might grow), but all of them will lose because of the extra administrative and compliance costs. The global minimum tax is outrageously complex and will absorb a lot of resources in firms and tax authorities to administrate the rules.
Isn’t there more to consider than just a tax rate?
Yes. Competition among countries doesn’t end by putting some strings on corporate tax competition. Countries compete on many fronts, a lean bureaucracy, a good digital and business infrastructure, an efficient legal system, well qualified and motivated personnel, leading research universities, availability of R&D subsidies etc. All these things are valued by mobile multinational corporations, maybe even more than a low corporate tax burden.
How could this law affect Switzerland, could it have the same effect on the UK?
In Switzerland, the corporate tax burden is lower than the 15% minimum tax. For example, if a multinational company pays only a 10% tax rate in a low tax canton in Switzerland, the home country of the corporation will be allowed to charge a 5% surcharge to bring up the total tax burden to 15%. The tax revenue on the 5% surcharge will then go to the foreign country rather than stay in Switzerland. The referendum proposal suggests that Switzerland will itself impose such a surcharge so that the tax burden reaches the 15% minimum in all cantons. This will assure that all profit generated in Switzerland will also be taxed in Switzerland, and that all tax revenue is kept at home.
UK has corporate tax rates between 19% for small companies and 25% for large ones such as multinational corporations. The 25% rate is well above the global minimum tax, so the initiative should not really have any significant first order effects on UK. Possibly, it might gain some – negligible - extra tax revenue when it is able to levy a surcharge on the profit of a UK company in a low tax country. There will be not many cases. The UK might also need to pay for the extra tax personnel that is needed to administer the new and very complex rules. Overall, I do not see a noticeably effect.
Should the OECD be making tax policy for nations?
I believe not. The role of the OECD is to help with tax coordination in the sense of making systems mutually compatible. It thereby helps member countries to avoid double taxation or even no taxation when companies exploit tax loopholes. Both effects would undermine fair competition among different firms. The OECD has been instrumental in developing common rules against profit shifting and in implementing information exchange. All this is to avoid unfair tax competition and to assure a level playing field for different countries. However, imposing a minimum tax rate is an entirely different matter, is an infringement of national fiscal autonomy, and is not justified, in my view.
Christian Keuschnigg is Professor of Economics with special focus on Public Finance.
Image: Adobe Stock / YesPhotographers
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