21/09/22

INTERNATIONAL TAX: Corporate income tax rates converging in OECD countries even as more incentives given, according to report.

As published on businesstimes.com.sg, Wednesday 21 September, 2022.

Statutory corporate income tax (CIT) rates are falling, leading to further convergence in rates across countries even as many continue to increase incentives to stimulate investments and innovation, particularly in the field of environmental sustainability, Paris-based Organisation for Economic Co-operation and Development (OECD) said on Wednesday (Sep 21).

In its latest report titled Tax Policy Reforms: OECD and Selected Partner Economies, OECD said efforts to protect CIT bases against tax avoidance have continued with the adoption of measures in line with the OECD/Group of 20 Base Erosion and Profit Shifting (BEPS) project.

“A major breakthrough has been reached with more than 135 jurisdictions worldwide having joined a new two-pillar plan to reform the international taxation rules and ensure that multinational enterprises (MNEs) pay a fair share of tax wherever they operate,” it said.

In October 2021, 137 countries reached a historic international agreement to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created. Pillar One will reallocate tax revenues to the country of the consumer. Pillar Two will introduce a global minimum effective tax for MNEs.

According to the annual report, CIT revenues as a share of gross domestic product (GDP) and total tax revenues have fallen between 2019 and 2020 as a result of the Covid-19 pandemic.

For the 35 OECD countries for which 2020 data are available, the average value of CIT revenues as a share of GDP fell to 2.6 per cent in 2020, from 3 per cent in 2019. Similarly, the average value of corporate income tax revenues as a share of total tax revenues fell to 8.5 per cent, from 9.4 per cent.

OECD said: “This is the most significant reduction seen since the global financial crisis of 2008 and the average corporate income tax revenues as a share of GDP are now lower than the previous lows seen in 2009 and 2010 in the aftermath of the crisis.”

In 2021, there were only 3 countries with CIT rates above 30 per cent, compared to 28 in 2020. The number of countries with CIT below 20 per cent rose to 20 in 2021, from 3 in 2020. Overall, in the OECD, the average CIT rate has declined to 23.3 per cent in 2021.

Last year, 4 countries - Colombia, France, Sweden and Switzerland - cut their CIT rates. In Colombia, the standard CIT rate was lowered to 31 per cent as part of the government’s plan to progressively cut rates to 30 per cent by this year from 33 per cent in 2019. France also lowered its CIT rate, to 27.5 per cent for companies with an annual turnover exceeding 250 million euros (S$350 million) and to 26.5 per cent for those with an annual turnover lower than 250 million euros. The plan is to progressively bring the CIT rate down to 25 per cent by 2022.

Sweden implemented a permanent cut in its CIT rate to 20.6 per cent from 21.4 per cent in response to the pandemic. In Switzerland, 11 of 26 cantons made small reductions to their corporate tax rates.

In 2021, research and development (R&D) tax incentives for marginal investments were particularly generous for large, profitable firms in Chile, France, and the Slovak Republic, with the largest increases in generosity observed in Chile, Colombia, and Greece. For small and medium enterprises (SMEs), Colombia, Iceland and the Slovak Republic offered the greatest support to profitable SMEs.

The report also highlighted large differences in effective carbon rates across sectors. Taxation of carbon emissions from energy use is the highest in road transport.

Global GDP growth reached 5.8 per cent in 2021 after a decline of 3.4 per cent in 2020, reflecting a rebound from the Covid-19 crisis.

OECD said: “Unlike the Global Financial Crisis (GFC) of 2008, when many emerging-market economies were less affected by falling output relative to advanced economies, with Covid-19, macroeconomic changes were more similar across the world, and may have lasting costs.”

Among major emerging-market economies, the gap between the GDP level recorded and pre-pandemic projections is especially large for India and Indonesia.