Global corporate tax rates - is the race to the bottom finally over?

19 October 2018

The latest report on tax policy reform from the OECD suggests that while there is still an international trend for corporate income tax (CIT) rate cuts, countries with historically high CIT rates, such as France and most notably the United States, have recently been leading the field.

Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, commented that these changes were long overdue and that, 'most of these countries appear to be engaged in a "race to the average" with their recent corporate tax rate cuts now placing them in the middle of the pack.' 

As rates converge in this lower band, what were once seen as radically low rates are becoming the new normal. The average CIT rate across OECD countries is now 23.9 per cent, down from 32.5 per cent in 2000. 

One worldwide CIT rate?

So, what would the effect be of most, if not all, countries having the same corporate tax rate?

Would it remove the need for much of the recent Base Erosion and Profit Shifting (BEPS) driven legislation which aims to ensure profits are taxed in the countries they arise? Perhaps, but there is always likely to be a handful of countries who don’t fall in with the pack. Plus, headline tax rates are one thing, but how much tax is actually paid is quite another.

More likely, converging rates could be a result of the BEPS driven measures – with a broadening tax base, countries are freer to reduce rates whilst maintaining their tax take.

What's next in global tax policy?

How to tax highly digitalised businesses was part of the original BEPS project and is still a key area of focus for the OECD, but the lack of global consensus has blocked the adoption of a unified approach for now.

Environmental tax reform is also high on the OECD’s priority list and, as noted in its February 2018 report on taxing energy use, ‘taxes continue to be poorly aligned with environmental and climate costs of energy use, across all countries.’  The OECD sees this as key to a cost effective environmental policy, so we may see more changes in this area in future years.

Future moves for the UK

In the meantime, other recent changes made by several countries include the introduction of a lower SME tax rate or a higher rate for larger companies – so could we expect to see a comeback for the UK small companies rate, or indeed a new large companies rate? 

The UK government will need to balance the benefits of attracting investment and the revenues it generates with what could be seen as an easy win with the electorate – to increase corporate tax rates for the largest of companies (that are already facing an effective one-off cash tax hit with accelerated payment dates coming in next year).

Alternatively, if the UK wants to encourage growth, especially in a post-Brexit world, lowering the corporation tax rate even further, beyond the incoming 17 per cent rate, could be a useful inducement for companies to stay and to invest in the UK . If so, the race could be far from over.

For more information please get in touch with Nick Blundell.