FUTURE TAXATION OF COMPANY PROFITS What to do with intangibles? Presentation at Taxation of the digitalised economy: analysing the OECD approach event 19-02-2019
SMALL IN SMALL INNO NOVATI TIVE VE OP OPEN EN WHAT WHA T IS IS BEI BEING NG ECO ECONO NOMIES MIES LIK LIKEL ELY Y TO O PROP PR OPOS OSED? ED? LOS OSE E TAX AX REV REVEN ENUE UE PO POLIC LICY Y OP OPTIO TIONS NS TO O AD ADDR DRESS ESS CH CHAL ALLEN LENGES S GO GOIN ING G FOR FORWAR WARD
WHAT IS BEING PROPOSED?
Three proposals on the table… 1 2 3 Marketing intangible User participation A global minimum tax approach Targeted specific “back - stop” that e.g. • • Compromise digital services (ring- denies of deduction • between current fencing) on outbound transfer pricing system Allocation according payments if a certain • and a destination- to location of users Effective Tax Rate based corporate (ETR) threshold of the income tax payee is not met Allocation according Potentially build on • • to location of the GILTI provisions marketing intangibles 4
Marketing intangibles: compromise between today’s transfer pricing system and destination-based corporate income tax Current Transfer Pricing Marketing intangible approach (TP) system 1. The Marketing Intangible (MI) approach Ensure MNEs do not obtain starts by defining a split between routine • an inappropriate tax and residual income advantage by pricing 2. Affiliates of the MNE group are within-group transactions compensated for their routine functions, cf. differently from arm’s current TP rules length principle 3. Residual income further split between Key feature: corporate income arising from marketing intangibles • income beyond allocation and other intangibles based on cost plus/return 4. The residual income deemed to arise from on asset basis using the other intangibles is still allocated cf. current arm’s length principle, is TP principles allocated to the 5. The share of residual income deemed to entrepreneurial risk-taker(s) arise from marketing intangibles is in the MNE group. allocated to market of destination for the good or service 5
Significant outstanding challenges with implications for the impact of the marketing intangibles approach 1 Whether definitions of Permanent Establishment (PE) are revised or not, and if so how? (e.g. digital PE and link to implicit user contribution principle) 2 How to define a normal return to physical/tangible assets and other intangibles? 3 How to define and value marketing intangibles relative to other intangibles? 6
Mar Market eting inta ing intang ngible ible app pproa oach h go goes es well ell be beyon ond d te tech: h: cova varies ries with with oth ther r inta intangibles ibles, , can we te tell ll th the dif difference? Marketing intangibles and other intangibles as a share of total enterprise value by sector Percent Pharmaceutical 53% 88% 35% Media 86% 73% 13% Internet & software 86% 56% 30% Biotechnology 85% 34% 51% Services 76% 34% 42% Manufacturing 73% 29% 44% Telecoms 65% 36% 29% Retail 65% 33% 33% Construction 42% 25% 17% Transportation 41% 18% 23% Mining 32% 4% 35% Automotive 35% 28% 7% Power & Utilities 30% 17% 14% Insurance 3% 27% 24% Wholesale 23% 9% 14% Oil & Gas 21% 13% 8% Marketing intangibles Banking 20% 17% Other intangibles 3% Note: The definition of marketing intangibles is based on IFRS 3 definition of marketing and consumer related intangibles and equal to the sum of the two. Furthermore, the results should only be considered indicative according to the authors. Source: Brand Finance GIFT report 2017, page 33 & 47 7
SMALL INNOVATIVE OPEN ECONOMIES LIKELY TO LOSE TAX REVENUE
Significant share of current corporate tax revenue is at stake in the Nordics and Germany Conservative approximate distribution of tax revenue on routine and residual profits by country, 2017 Percent 100 100 100 100 17 18 19 Foreign residual return 21 35 41 Domestic residual return 37 48 48 Routine profits 42 41 33 Denmark Finland Sweden Germany Note: Assuming a normal return 4% and using average export shares within R&D intensity sectors. The estimates are based on a sample from 2010-2015 corrected for the real change in corporate tax revenue from 2010-2015 to 2017. See appendix of the study for a detailed description of the methodology. Source: Copenhagen Economics based on Amadeus database, Input-output tables, OECD and Eurostat. 9
Five reasons why the Nordics will lose net tax revenue 1 2 3 High return on assets in R&D intensive Disproportionately high tax base from Marketing intangibles especially industries high R&D industries important in high R&D industries 12% 12% Tax base / GVA 1.8 Share of enterprise value Denmark 12.4% 1.8 13.0% Sweden +13pp 1.5 12.0% 1.6 Finland 11.0% 1.3 1.4 10.0% 8% 8% 40% 9.0% 1.2 7% 8.8% 8.0% 32% 1.0 31% 6% 6% 4% 6% 7.0% 27% 6.0% 26% 0.8 5% 5% 5% 5% 6.4% 5.0% 0.6 4% 4% 4.0% 3.0% 0.4 2.0% 0.2 1.0% 0.0 0.0% Denmark Sweden Finland Share of corporate income tax revenue (right axis) High R&D Medium- Medium Medium- Low R&D High R&D Medium- Medium Medium- Low R&D Multiple of tax revenue relative to GVA high R&D R&D low R&D high R&D R&D low R&D 4 5 Nordics are net-exporters of high R&D Intangibles especially important in goods and services developed economies Share of total output 69 % 68 % 6.4% 5.7% 58 % 58 % 58 % 5.6% 53 % Nordics lose net tax 42 % revenue 2.1% 1.2% Denmark Sweden Germany Finland India China USA High R&D Medium- Medium Medium- Low R&D high R&D R&D low R&D Source: Copenhagen Economics based on Amadeus, input-output tables, Brand finance and OECD Stan database. 10
Potentially higher tax burden on businesses 1 2 3 MNEs in low tax Unclear rule for loss Key parameters have jurisdiction will consolidation across no solid empirical experience higher borders foundation ETR No harmonised set of Increased tax • • MI approach gives rules exists to ensure uncertainty and • more diffused tax that MNEs can off-set probability of disputes base losses cross-border increasing the overall Potentially negative Asymmetry tends to tax burden • • real economic increase the effective impact due to the tax burden distortive nature of corporate income taxes In conclusion: It is both a country and company tax issue, likely to impact investments and real activity 11
POLICY OPTIONS TO ADDRESS CHALLENGES GOING FORWARD
Problems and aims to be defined before moving to solutions BEPS project focused initially on addressing transfer pricing policy issues: Changes to transfer pricing • We suggest policy reforms should: guidelines Addressing nexus 1. Aim to reduce transfer pricing problems, • avoidance (updating PE) taking into account already implemented Strengthening effective BEPS efforts as well as national reforms of • regulation of foreign con- corporate tax regimes, notably in the US. 2. Maintain/increase incentives to growth trolled companies (CFC) as well as polices versus so- friendly policies at national level called Tax Heavens 3. Be based on meaningful, verifiable criteria More recently, challenging with manageable compliance costs • notions of where economic value is being created – the user contribution principle. 13
Recent progress related to transfer pricing issues must be taken into account 1 The effect of the US tax reform and implemented BEPS measures should be fully digested before adding new, untested ideas in the global corporate tax arena 2 Convergence in global statutory rates will also tend to reduce transfer pricing issues 30% 30% 30%30% 30% 32% 28% 28%29% 26% 27%28% 25% 23% 25%26% 22% 25%25% 22%23% 20% 21% 21%22% 19% 19% 20% 20%20% 19% 19% 15% 13% 9% Hungary Ireland Lithuania Czech Republic Poland Slovenia United Kingdom Estonia Finland Iceland Latvia Slovak Republic Switzerland Denmark Sweden Turkey Israel Norway Austria Chile Netherlands Spain United States Luxembourg Canada Korea Italy New Zealand Greece Belgium Japan Germany Australia Mexico Portugal 14
Reductions in statutory rates is not merely a race to the bottom 1 2 3 Lower nominal rates Lower rates partly paid by Overall corporate tax take tax reforms historically reduce debt bias not collapsing Effective tax rates on equity and debt Corporate tax revenue in the EU, 1995-2016, percent of GDP 38% 39% 38% 34% 36%34% 34% 28%28% 25% 24%20% 19% 16%14% 12% 10% 6% 3.5 2.6% 3.0 -1% 2.6% -8% -10% -12% -12% 2.5 -14% -15% -14% -15% -17% -17% -24% -24% -27% 2.0 -39% -39% -46% 1.5 -55% -59% 1.0 -68% AR BR IN JP DE MX ID US CN FR GB AU SA ZA RU TR KR CA IT 0.5 Equity-Financed Equipment Debt-Financed Equipment 0.0 1995 2000 2005 2010 2015 Source: CBO (2017) International Comparisons of Corporate Income Tax Rates, page 24 and European Comission 15
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