TaxBlog

The US and Canada share the spotlight with such countries as the Republic of Congo, China, Brazil and Germany in having some of the highest effective tax rates on capital among 81 developed and developing countries, according to a study by the CD Howe Institute, the Canadian conservative think tank.

According to its conclusions, highly taxed Canada ranks a disappointing 8th, while the “investment-hostile” Republic of Congo ranks first. However, it found that the US ranks among the most heavily burdened, with an effective tax rate on capital of 38%, above its neighbours Canada at 36.6% and low-tax Mexico at 13.8%.

Argentina, Brazil and Germany complete the top five in the list of tax-burden “bad boys.”

Unsurprisingly, the most tax-favoured jurisdictions include Hong Kong at 6.1%, Singapore at 11.5% and Ireland at 14%, reflecting their low corporate income tax rates.

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Richard Murphy posts claims from business that it is paying to much tax. These claims apply to NZ as well as the UK. Quoting him and changing the UK to NZ:

1) NZ business pays too much tax;
2) NZ is out of line on tax rates;
3) If only tax was cut NZ business would be more innovative;
4) Then we’d all be better off.

His response is:

We support competition, but think business should compete on the basis of innovation and the quality and price competitiveness of its products, rather than continually looking for state subsidy – direct and indirect – to create a “competitive” environment. Tax competition has forced many developing countries to undermine their revenue bases in their efforts to attract inward investment with no benefit to anyone other than shareholders overseas.

It is time the issue of tax competition was examined afresh since it is quite clear business will not be happy until we reach the stage where it pays no tax.

Personally I don’t know of any business leader or executive that is proposing a zero tax on capital system. This will never happen in any democratic state anyway because it is unlikely that the population will elect a government with such policies.

Secondly, tax competition is a reality, and unless the EU has a standardised tax system there will always be tax competition. I’m no expert on UK or EU law but the recently announced decision on Cadbury Schweppes shows that tax competition is a real threat to developed countries such as the UK. So the question then is – how should an EU member state such as the UK respond to such an environment. Either by competing by lowering the headline tax rate, or by providing more services in return for the higher tax rate.

Either way one thing seems obvious – tax competition make governments more accountable, not less. That is one thing NZ could have more of.

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One of the topics I find fascinating is the EU situation.

Each EU member country has the right to tax, but is still subject to the EU’s jurisdiction.

This story shows how this applies in tax.

Europe’s highest court ruled that countries could not go after profits earned by subsidiaries in other European countries as long as the businesses were not “artificial� arrangements to avoid paying taxes.

While potentially painful for high-tax countries like Germany, France and Italy, lawyers said the landmark decision could help promote European integration by making cross-border expansion more attractive.

In a case brought by Cadbury Schweppes, the soft-drink and candy maker, the European Court of Justice in Luxembourg said that national laws restricting the ability of a company to set up a foreign subsidiary in a lower-tax country were justified only when those operations were “wholly artificial arrangements.�

The court said the burden of proof would be on the company to show that it had real operations in the low-tax country, like physical offices, employees and equipment.

Cadbury had challenged the British government’s 1996 tax bill for £8.6 million, or $16.1 million, on its subsidiaries in Ireland, which is one of the lowest-tax countries in Europe. A British court referred the case to the Luxembourg judges.

In theory, the ruling will allow companies doing business across Europe’s borders to establish foreign subsidiaries in low-tax areas. But in practice, it will be up to national courts to decide, case by case, whether companies are abusing European law, the court ruled.

“This case shows the need to coordinate better fiscal policies to avoid double taxation,� said Maria Assimakopoulou, the European Commission’s spokeswoman on taxation.

But any such move has been opposed by Britain, Denmark and others arguing that national governments’ control over taxation should be sacrosanct.

What’s interesting is that the EU is promoting tax competition between its’ member states. Where a country such as Ireland can attract the business of multinationals, they will transfer price as much of their income to that country as they can. Therefore leaving the other member states out of pocket, forcing them to reduce their tax rates. I predicted this would happen in Germany, they cannot survive with high tax rates in the current EU environment.
Therefore what this mean is that there will be a race to the bottom. This will be more so the poorer EU member countries. They will set their tax rates as low as they can to attract the business of the multinationals. These poorer countries can do this because they don’t have the left redistributionist welfare policies of high tax countries such as Germany.

So this leaves the likes of Germany no option but to cut their welfare payments, and tax rate to compete.

A final point. This isn’t just transfer pricing, but also manufacturing decisions we are talking about here. If manufacturing can be shifted to lower tax states, then this will also have the same effect, less tax for the wealthy states (wages taxes ect).

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