World: The great tax competition
23 June 2014
Posted by: Author: EY Tax Insights
Author: EY Tax Insights
While governments around the world are joining forces when it comes to supervising large taxpayers, they are still very much in competition when it comes to convincing multinationals to move their headquarters to their respective jurisdictions. In recent decades, governments have lowered their corporate income tax rates to less than 26% on average in 2011, compared with 45% or more in the 1980s, according to the OECD.
Globalization has been an important driver behind that trend. Despite their moves to cut corporate tax rates, many countries still see a need to protect firms at home. While free trade agreements have pared customs duties around the world, they still remain high on many goods and materials, according to the EY report Indirect tax in 2013. These duties shield domestic industry and are an important source of revenue for governments
Tax Insights: Is tax competition between countries on the increase?
Maarten Boudesteijn, Group Tax Manager at Royal Cosun, a Netherlands-based agro-industrial group: If you refer to the corporate income tax rate, it sure is. The UK, for instance, is heading towards a lower corporate income tax rate. Ireland has been there for a while, but now, more countries are reducing their corporate income tax rate. Obviously, it is not only this statutory rate; it is also the tax base on which the rate is charged. At the end of the day, the question is whether you’re better off with a lower tax rate. I think the reductions will come to a stop. Government budgets are under pressure, and there are increasing demands for greater corporate citizen responsibility and more transparency.
In the future, do you expect a trend toward higher tariffs around the globe?
Tariffs are already an existing feature. To enter the Russian or Chinese markets, especially in the food sector, you run into high customs tariffs. That is where you have a disadvantage to local producers on your cost price. Customs duties pose an obstacle for entry to the market.
How much of an impact do these duties have on your business strategy?
Our employees look into tax regimes before we enter a market. They know that, if we do not have free trade agreements in the Asia Pacific region, we will not be able to enter the market. Our products are highly cost price driven. If you can manufacture for the lowest cost price, you will be able to gain some market share. It is business planning in order to enter those markets. Tax has to assess how we can assist the business to successfully gain market share.
How do you respond to the challenge of high import duties? For example, you mentioned Royal Cosun would like to sell baby food ingredients in China. What approach could you take?
There is potential in the Asian market; what is blocking us now are import duties. We are assessing the possibility of exporting a semi finished product to Southeast Asia and finalizing the production of the ingredient locally. That’s where business and tax meet. From Southeast Asia, you can go into China, which is the market where you want to be. Next to China, it is India and Korea. But there is an operational challenge to find a producer that is up to our standards in order to sell in these countries. You need to meet very high standards because of the fact it is baby food. It is a work in progress.
What do you think will happen with import duties in coming years?
The ideal outcome is that they will be abolished. Import duties can be an important instrument to protect local business, especially in fast growth countries. If you look at the fast growth countries, however, at some stage they have to be realistic; I think custom duties will only further disturb and distort the market.
- Corporate tax rates keep falling: nearly a third of 59 countries were expected to cut their corporate income tax rates in 2013, according to the EY report The outlook for global tax policy in 2013.
- Expanding the tax base for a variety of taxes will be important to cover existing government deficits, especially as tax rates are reduced.
- Import duties remain a tool for protecting domestic production, as well as raising revenue, and are an example of the shift to more indirect taxation.
- Multinationals should engage in these discussions and keep updated on global developments.
- When individual countries move forward unilaterally with changes to their international tax regimes, rather than act as part of agreed global standards, this can inadvertently cause double taxation and become a barrier to free trade.
This article first appeared taxinsights.ey.com