The OECD has published their latest report on tax policy reform, which looks to identify trends in changes to tax policy across the globe. The key findings showed continuing trends for countries to use tax policy to boost growth, while also focusing on reducing inequalities, and driving behavioural change.
The competition between countries for low headline rates of corporation taxes has been well documented over the last few years and this trend is intensifying again, particularly following President Trump’s proposed rate reductions. But with these rate reductions, how does a country balance the books and where will this race to the bottom end?
Interestingly, the OECD expects corporation tax rates to stabilise at an average of between 10 per cent and 20 per cent for small countries and between 20 per cent and 30 per cent for larger countries as rates lower than this are likely to create political issues.
One country which is currently out of step with this trend is the US whose top rates of corporation tax exceed 35 per cent. However, last night the new Trump administration revealed plans to reduce corporation tax to no higher than 20 per cent. If these plans go ahead then we could see more fluctuation in corporation rates across the globe.
Rate reductions usually go hand in hand with a broadening of the tax base to ensure the tax take is balanced and maintained; and this can be seen by continued efforts to tackle international tax avoidance under the BEPS initiatives and other measures such as limitations to loss carry forward provisions – like those already introduced in the UK.
Some countries are also developing tax incentives to attract highly skilled and high net worth individuals. Whether we will see this in the UK remains to be seen, but with the Government so focused on Brexit, and its immigration implications, it is unlikely to be high on the agenda for now.
While property taxes contribute only a small proportion of taxes raised, the OECD recommend that they are increased as they usually do not adversely affect growth. However, rate increases in the UK were widely criticised by many small businesses earlier this year, which would suggest that the theory doesn’t necessarily work in practice.
With all the talk about reducing corporation tax rates, it’s easy to forget that most tax take comes from personal income taxes, social security and VAT, with a continuing shift of the tax mix towards labour and consumption taxes since the financial crisis.
This is why, in addition to the BEPS initiative for corporates, there is also a global focus on reducing tax avoidance by individuals. €80 billion has already been received by countries in unplanned additional revenue as a result of voluntary disclosure programmes and other similar initiatives in this area.
Time will tell whether the UK tax base will be sufficiently broadened to allow further reductions in headline rates, but if reforms go ahead in other jurisdictions then we could see more movement to ensure the UK remains competitive.
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