On Friday 14th of September I attended the 2nd Tallinn Tax Conference entitled Future of the Corporate Income Tax in the World: is this the end of the CIT as we know it? Chaired by Dmitri Jegorov, Deputy Secretary-General, Ministry of Finance, Estonia, it was a fascinating debate looking at whether corporation tax is fit for purpose in the 21st Century and asking the question, if we did not have it, would we invent corporation tax as it exists today? In this blog piece I have set out some of the key arguments which were raised. (The presenters have not been asked to review my comments.)

All the participants answered the exam questions “no”. However there was disagreement over whether the issue is the continuance of corporation tax itself or whether it is simply a question of redefining the split of profits between different countries. There were some arguments for a new system, either a destination-based cash tax or the EU’s Common Consolidated Corporate Tax Base (CCCTB). However most participants thought the current system needed amending not radically changing.

Global factors influencing the tax base

Jeffrey Owens, Director, WU Global Tax Policy Centre, Institute for Austrian and International tax Law, Vienna University of Economics and Business, began by noting a number of global factors which put pressure on tax regimes in general:

  • the global economy remains fragile;
  • inequality, which is a destabilising factor;
  • the growth of protectionism and the rollback of internationalism in parts of the world;
  • pressure on government budgets - whether related to an ageing population, defence, or the need to develop or maintain physical infrastructure.

Jeffrey noted that the corporation tax base in particular is destabilised by digitalisation but also by changing work practices and the growth of the informal (also called “gig”) economy. However it is not just corporation tax which is being affected. For example, what will be the impact of 3D printing be on a country’s ability to collect customs duty?

Is corporation tax sustainable and is there a race to the bottom on rates?

Jeffrey pointed out that while 50 years ago developed countries may have raised around 20% of their tax from corporations, this has now fallen to between 8-9%. Nevertheless the corporate tax take as a percentage of GDP has remained stable. In developing countries it is a different picture where corporation tax is often 20% or more of the tax take. Historically tax rates in OECD countries were between 40-45% but are now 20-22%. In non-OECD countries it is about 25-35%. Jeffrey concluded we will probably see rates dropping to an average of 18%-20%.

John Vella, Associate Professor of Taxation, University of Oxford, was far more pessimistic. Showing a graph of how tax rates have come down he said he could see nothing indicating that this trend would not continue. There are concerns that recent cuts in the US rate will trigger further reductions elsewhere - although other participants thought that was more like the US catching up with the rest of the world. John noted that corporate tax regimes are becoming ever more complicated, countries are introducing more and more unilateral measures (such as digital taxes) and the cost of collection is rising. As rates fall, the risk is that corporation tax systems will crumble under their own weight.

Rather than let them slowly expire would it not be better to completely rethink the model of how we levy corporation tax?

David Bradbury, Head of Tax Policy and Statistics Division, Centre for Tax Policy Administration, OECD, was much more optimistic. He thought we are seeing a “race to the middle” rather than a “race to the bottom”. He noted that the gap between statutory rates and effective rates has been narrowing as bases broaden - for example by restricting depreciation allowances, capping interest deductions or limiting the use of loss carryovers.

The heart of the issue

John Vella noted five characteristics of a good tax regime:

  • economically efficient so that it does not distort business activity;
  • fairness;
  • robust to profit shifting;
  • ease of administration;
  • stable.

He concluded corporation tax does not fare well against any of these measures. It is recognised to be inefficient as it distorts, for example, the place and amount of investment, the form of investment (subsidiary or branch) and the method of financing (debt, equity, raised locally, raised on international markets etc). From an academic perspective it does not make much sense to talk about fairness but John noted that this is a key issue for the public and politicians who consider corporation tax is failing this test. Robustness has partly been addressed through the OECD Base Erosion and Profits Shifting (BEPS) program but tax avoidance has not been totally eliminated. Corporation tax is complex and costly to administer.

John noted that, paradoxically, the BEPS programme has exacerbated some of the problems. For example, on the basis that corporation tax does distort business decisions, this is less likely to occur where the tax can be avoided. By tying tax more closely to the place where value is generated, perversely the BEPS project may make it more likely that tax will drive business decisions. He, and others, also thought that there may now be a greater incentive for countries to compete by lowering the tax rate.

John Vella thought the root of the problem was with the structure of corporation tax which is based on a split between resident and source States. Both of these mean focusing on mobile factors such as where the head office is based, where research and development is carried on and IP is developed, and even where production is carried out. All of these can be moved to take advantage of more favourable tax regimes. The solution then could be to move to more immobile factors: shareholders or consumers. While proposals have been made to focus on the shareholder base, John only considered consumers.

Carlos Lobo, partner of EY Portugal, Tax Policy Leader for the Mediterranean area, Professor at the Law School of Lisbon, analysed the root problem in a slightly different way. He noted that historically taxing rights have been tied to 3 pillars:

  • territory;
  • power - to be able to collect the tax;
  • materiality - i.e. something tangible to tax.

With the globalisation of companies production and profits are no longer linked to a territory. It is becoming harder for countries to assert the power to tax and digitalisation means that value is in intangible rather than material assets.

Why has corporation tax lasted so long?

Jeffery Owens outlined a number of factors:

  • inertia;
  • the losers from any change are more vocal and better organised than the winners;
  • transitional costs;
  • no academic consensus on the best system.

What are the potential solutions?

In his opening Jeffery suggested that any major changes to corporation tax should:

  • raise at least the same amount as is currently raised;
  • not add to uncertainty; and
  • have wide global acceptance – at least amongst the G20.

Interestingly, in her overview of the recent tax reform, Mindy Herzfeld, Professor of Tax Practice, Director of International Tax LLM, University of Florida, pointed out that the US changes breach all three of these principles.

Destination cash flow

John Vella said that from an academic point of view a destination based cash flow tax is preferable to the current system because it is a tax on economic rents and not on profits. It solves the problem of trying to tax mobile factors and addresses all the elements of a good tax system. David Bradbury noted any such system would have to have wide global acceptance. If it was implemented unilaterally it could destabilise the global environment by attracting exporters who would not be taxed in that country under the destination principle but equally would not be taxed in the country of export which whould be operating a traditional tax regime. It would therefore lead to both double taxation and non-taxation.

A further issue identified was that a destination based cash flow tax is very similar to a VAT but excluding the labour element. Applying such a corporate tax along with a VAT would therefore leave most taxing rights in the state of the consumer. John, however, noted that there are various forms of a destination tax and it should be possible to design a system where not all the taxing rights go to the destination state

Formulary apportionment

Another possible solution would be to move to global formulary apportionment. This would have a similar consequences to a destination based tax if the formula is weighted towards sales. Scott Hodge, President of the Tax Foundation, noted that the US state tax system is sometimes quoted as an example of where formulary apportionment is used. However this demonstrates the complications which can arise. Originally, the idea, was to apply a formula based on three factors - employees, assets and sales. However different states now use different weightings of these factors, often as a lever of competition. For example, some states have moved the weighting to sales in order to favour large companies which are exporting much of their product to other US states.


Uwe Ihli, Head of Section, Unit TAXUD D1 – Company Taxation Initiatives, DG Taxation and Customs Union, European Commission, spoke about CCCTB as being the way forward in Europe. He thought that with the recent reform, the US had jumped from having an outdated tax system a modern one and that the EU needed to respond. He was clear that Member States should agree tax incentives within a CCCTB in order to encourage inward investment from outside the EU. The EU needed to have an eye to US developments, for example it may not be wise to have a patent box regime which reduced tax to below 13% if that was going to be clawed back under the US global intangible low taxed income provisions.

Uwe noted that both companies and countries express the need for certainty over tax laws and the tax take and a CCCTB should help deliver this. But an argument sometimes raise against CCCTB – by both those parties – is the need for flexibility so a state can adapt to external change or business development. So a compromise between stability and flexibility is needed and a decision needs to be taken over what powers should be left with member states. Furthermore, a CCCTB directive could not cover every detail of the law – for example what level of business entertaining should be deductible. Some discretion would have to be left to Member States, although Uwe thought it would preferable for countries to maintain their different approaches through the non-corporate tax measures where possible.

Abolish corporation tax

Several presenters noted economists consider corporation tax to be the most distortive form of tax. One option would be to abolish it and concentrate on taxing other factors, especially less mobile ones such as consumers and land owners. However David Bradbury noted that while capital can oppose over taxation by moving location, customers and property owns can do so by voting. Politicians will ultimately be influenced by the electorate. There was general agreement that, politically, corporation have to be seen to pay tax. Furthermore, corporation tax is meant to be a tax on the return to capital; as it could be too complicated to focus only on taxing shareholders it is more administratively more convenient to tax companies as an intermediary.

The Estonian system

As the conference was in Tallinn, the Estonian system – of not taxing corporate profits until they are distributed - was held out by some as a good model. Scott Hodge thought this was the model for the future. He also strongly advocated full expensing of all costs to reduce the distortionary nature of corporate tax. It was noted though that the Estonian model only works properly where the personal tax rate is equal to the rate of tax on distributions. In most countries the rate is higher would create an incentive to leave profits in a corporate wrapper.

Better the devil you know?

It was pointed out that in the last 40 years there have been numerous reports and commissions on changing the corporation tax system; but none has been implemented. Indeed in the closing panel only 2 out of 6 thought there would be radical change in their lifetime.

Some final takeaways:

  • there is no agreement on a model corporation tax;
  • the BEPS project was essential and has achieved a lot but the current debate about the future of the tax system needs to be taken out of the BEPS framework (the BEPS project was never intended to fundamentally re-write the rule book or change the balance of taxing rights between states);
  • there are arguments for agreeing a band for corporation tax rates globally;
  • incentives can be useful but need to be carefully targeted and reviewed;
  • technology will have a big impact, on administration (such as tax authorities having real time access to companies’ accounting systems) but also on the calculation of corporation tax – for example putting together artificial intelligence, blockchain and other developments it may be possible to take transfer pricing back to basics and have a more transactional approach;
  • countries should consider the impact on small and medium sized enterprises not multinationals;
  • it is important to consider the incidence of capital taxes (and indeed the interaction of all taxes) more broadly at the same time as reviewing corporation tax.