No pressure to reduce corporation tax rates generally; any cost based incentives should be targeted, temporary and timely; multilateral approaches and cooperation are needed to avoid adverse spill overs, tax competition and a growth in compliance and double taxation. There is support of the work of the OECD on Pillars 1 and 2 as well as for a European common consolidated corporate tax base. Reducing employment taxes may help support employment but is not a panacea for job losses. The best tax stimulus measure are likely to involve increasing the cash in the hands of the consumers who are most likely to spend it rather than save.
On Tuesday 7 July the first roundtable in a series on tax policy responses to COVID-19 crisis was held. Sponsored by KPMG International and Jericho Chambers, a more detailed explanation of the program can be found here. The first event, attended by representatives from corporates and both the IMF and OECD, discussed what measures European-based multinationals thought would be helpful to stimulate economies once countries and jurisdictions move out of lockdown periods and into the recovery phase.
The event was held under the Chatham House rule and this note is a summary of the views expressed. A list of attendees1 is included, but all opinions are anonymized and do not represent official views of any organization or any KPMG Member Firm.
Reduction in corporation tax
Participants expressed that reducing corporation tax was not an efficient way to stimulate the economy and that governments should focus on a broad base with low rates; if specific incentives were needed they should be temporary, targeted and timely.
It was noted that - while many assume that taxes will need to be raised in the long term in order to reduce deficits that were created during the lockdown period - there are many voices in the current debate suggesting that taxes should not be increased too quickly as lockdowns are relaxed in order to avoid dampening any recovery.2 Therefore, the first question discussed was whether or not there is a case for a general cut in corporation tax in order to stimulate investment.
There was general agreement that this would not be the best approach. In order to stimulate economic activity, any incentive needs to be temporary, targeted and timely. In the current environment there is a need to stimulate investment, consumption and employment. However, a general cut in corporation tax is not a targeted measure and could benefit companies which have remained profitable throughout the pandemic period. The rate is not usually the most important factor in investment decisions and a cut rewards past investment, but does not stimulate new investment. Therefore, governments that provide an economic stimulus would be better off focusing on specific incentives and only reducing corporation tax rates if they have no other options.
It was pointed out that corporation tax acts as an automatic stabilizer - if a company’s profits reduce, it pays less tax. Where a company is loss-making or in financial difficulty, a rate reduction does not provide immediate relief. It is better to focus on a broad base and low rates and as many countries and jurisdictions have adopted that approach it leaves no room for further reductions - although in some cases incentives which narrow the tax base may be appropriate.
One participant noted that some companies have performed well during the lockdowns or even increased their profits. A reduction in corporation tax would provide a windfall and from a domestic perspective, reduce the tax revenues paid, however the savings may lead to multinationals investing more outside their home jurisdiction leaving no immediate benefit to the home country.
Finally, it was pointed out that Europe relies heavily on VAT and many countries have high social security charges. The tax wedge on labour income is high in Europe. If it will be necessary to increase taxes in the longer term, it will be politically difficult to reduce corporation tax while at the same time increasing VAT or personal income tax. In fact, one participant thought that, in a European context, tax on large companies may rise in the longer term as it would not be feasible to tax small companies and tax on individuals already high in many places.
Tax raising measures
The reduction in corporate profits and the low tax take may provide the opportunity for a country or jurisdiction to make significant, long term changes to its corporation tax regime. This could involve considering if the rate was too high generally in comparison with other countries; but there was some concern expressed about tax competition and it was noted that the EU and OECD have a role to play in encouraging coordination to avoid adverse spill over affects. Although it was also noted that the need for individual countries to act quickly may make this difficult to achieve.
Once an economy has moved out of the initial recovery phase it is possible that the government may start to look at tax-raising measures in order to repay a deficit built up during the crisis period. In such cases cutting corporation tax rates generally does not seem appropriate. The current situation may, however, provide the opportunity for a fundamental rethink to improve the corporate tax regime. For example, if a government wished to introduce an allowance for corporate equity, so as to address the current imbalance between the tax treatment of equity and debt financing, it may be easier to do so at a time when the corporation tax take is low. Nevertheless, any changes would need to be made on a holistic basis thinking about the structure of the economy.
One participant drew the distinction between reducing corporation tax as a stimulus measure, which was generally considered inefficient and a separate consideration of whether or not the rate was too high in general, especially in comparison to other countries in a similar situation. An example shared was in Germany, where the combined effective tax rate is around 30 percent, and is higher than many other highly developed countries. The global trend in such countries is a rate of around 20-25 percent. It was also noted that it is more efficient to tax the use of income than the production of income. Tax may discourage production whereas if you tax the use, people can take the tax into account when choosing how to spend their money. For example, on consumption or investing.
Another participant noted that care does need to be taken to avoid tax policy leading to competition and a race to the bottom. There could therefore be space for more action at either an EU an OECD level to ensure coordination and avoid competition.
Investment based incentives
There was measured support for using investment based incentives provided they were properly targeted. It was thought research and development credits could be used to increase the overall research activity. By contrast profit based incentives like patent boxes were not favoured.
It was generally agreed that investment incentives such as accelerated tax depreciation or super deductions may be beneficial in some cases but tend to affect the location of investment and the timing rather than the overall amount of investment. Although it was noted that in the current environment the timing of investment spend might be important. The timing of announcing any incentives and their implementation is critical as it will take time for them to have any effect. It is also difficult to calculate the multiplier effect they could have as the current crisis is very different to previous ones. It will be necessary to understand what instruments would have the greatest impact given their cost in any particular country or jurisdiction.
Patent boxes were not considered an effective stimulus measure as they are a profit based incentive which only applies once an investment has already been made and the innovation has become profitable. There is also concern that they can be used to simply shift intellectual property profits from one location to another.
There was more support for research and development incentives; these can help grow the total amount of research carried out rather than shift activity from one location to another, although it was noted that investment in technology based research and development might ultimately impact on the requirements of companies for employment.
A further point was made that there should be a focus on help for start-up enterprises.
Accelarated repayments
Loss carry back provision could be very beneficial, but mechanisms need to be found to accelerate tax repayments.
There was support for more flexibility in using tax losses and particularly loss carry backs. A carry back would provide assistance to a company which had been profitable, and is therefore viable, but was experiencing financial difficulty due to lockdowns. However, any tax repayment usually only comes after a tax return has been filed and can therefore be delayed. It was asked if innovative mechanisms could be found for delivering tax repayments at an earlier stage, in anticipation of a filing that is not yet due.
OECD Pillar 1 an 2 - multilateral approach
There was general support amongst the corporate participants for multilateral approaches and cooperation. This included support for the OECD Inclusive Framework discussions on Pillar 1 and a multilateral approach to considering Pillar 2, for progressing a common consolidated corporate tax base at the European Union level and, in some cases for considering global formulary apportionment – although the later was not thought to be politically acceptable to most governments.
Concern was expressed about the growing number of unilateral digital services type taxes, which result in increased compliance and potentially double taxation. By contrast there was support for the OECD Inclusive Framework work on modernizing the international tax system in the light of digitalization (so-called Pillar 1) and for an inclusive, multilateral approach to considering a minimum global tax (Pillar 2). There was also support for a common consolidated corporate tax base (CCCTB), provided it was on a consolidated basis and not simply a common corporate tax base. It was thought that the delay in agreement was due to various countries having a concern over sovereignty whereas many corporates saw the advantages, particularly in terms of reduced complexity and administration and cross-border loss utilisation. Some participants noted that a CCCTB would also reduce tax competition between European Member States.
It was pointed out that Europe has been discussing CCCTB for over 15 years now and it may be necessary to update the proposals given wider global developments. Throughout this time companies have generally supported the move but became less enthusiastic when the European Commission began to talk about CCCTB in terms of an anti-abuse measure rather than the benefits to companies. It was suggested that proposals at the OECD level on a global minimum corporation tax will lead to discussions about some kind of harmonisation of the tax base which in turn would facilitate the debate about a CCCTB.
The question was raised whether or not the current circumstances made a favourable time for introducing more radical reform globally such as formulary apportionment or a destination-based cash flow tax. While some of the corporate participants were favourable towards formulary apportionment it was noted it would need global consent and it was thought that there was not the appetite amongst countries for such fundamental change. By contrast there is significant support for the OECD Inclusive Framework work. Pillar 1 does bring about some fundamental change in the taxing rights between countries and the existing international tax norms; but the impact assessment shows it does not create a significant reallocation of revenues, this was flagged as potentially not well known and might need further perception management. Pillar 2 by contrast could see much larger increases in tax revenue and that this would not be a shift from one location to another.
Reducing labour related taxes
Reducing social security and other taxes on labour may help protect jobs but the issues of growing job losses and youth unemployment due to COVID and the skills gap will need more fundamental solutions.
It was noted that social security taxes are high in many European countries and there was some support for reducing the rate to support employment. But it was pointed out that the issues are more complex than simply reducing the employment tax burden generally. There is a risk that there will be widespread unemployment as economies come out of lockdowns and this may affect young people in particular. There is a mismatch between what many companies require and the skills of the workforce and those coming out of education. There is also tension between investment in technology and the desire to increase productivity on the one hand and the need to protect employment on the other. Often technology developments replace existing jobs and there is a need to upskill or retrain those who lose their jobs, therefore creating a need to find the right instruments to target these specific problems. COVID has merely highlighted a problem that already existed.
One participant thought if there is widespread unemployment in the short-term, it will not be addressed by the private sector or increased investment. Government intervention would be required which may point towards the need for governments to create savings instruments to increase borrowing capacity, these would have the benefit of rewarding savings, which people might do more of following the crisis, but also allow the government to benefit from those who are choosing to save rather than spend.
Employee share ownership
Employee share ownership arrangements may assist in staff motivation and financial stability.
Some of the participants strongly supported the use of employee share ownership arrangements -particularly on the basis that shareholders tend to make more productive and valuable employees. Such arrangements also can provide financial stability as employees tend to hold onto their shares for a longer period than certain other categories of investor. It was noted that in some countries, such as Germany, the amount of shares which can be issued to employees under tax relief measures was quite low and needed to be increased to a level of several thousand euros per year. Some concern was expressed in encouraging a situation where employees had a considerable amount of their savings in their employer company and there are arguments for incentivizing wider diversification of share portfolios and educating people more about the longer term benefits of investing in shares.
Temporary reduction of income tax and VAT
Increasing cash in the hands of consumers – through income tax or temporary VAT reductions or cash transfers - should stimulate spending and growth but VAT changes would need to be carefully targeted to ensure the benefits were passed on and not retained by business.
It was noted that reducing personal income tax or providing cash transfers would be one way to stimulate consumption.
There was some support for reducing VAT in order to help consumption. This could help in two ways, by leaving more cash in people’s hands to spend or bringing forward spending which would have been made in any case. A temporary reduction would therefore have a bigger impact as it would encourage people to spend now while the price is cheaper. Nevertheless it was pointed out that in other countries, such as France, there has been targeted VAT reductions in the past (in France this was focused on restaurants) and the effect had been that the business owners kept the saving and increased their profits rather than passing the benefit to the consumer. Therefore, it is important to target any incentive carefully to either increase spending or to increase the margins for a business -and ensure it is properly utilized.
by Chris Morgan
Chris became Head of Tax Policy for KPMG UK in 2011. In this role he was a regular commentator in the press, as well as on radio and TV, led discussions on various representations with HMRC/HMT. In 2014 Chris spearheaded KPMG UK’s Responsible Tax for the Common Good initiative. In September 2016 Chris took on the role of Head of...