The OECD is bragging about an agreement among 136 countries that sets a minimum 15% corporate tax rate on multinational enterprises. If directors of private companies fixed prices like that, they’d face up to 10 years in prison.
Imagine the outrage if a group of bankers got together and agreed among each other not to compete, but to manipulate the price of the currency to their mutual advantage.
Imagine the public outcry if a group of bakers got together and agreed to all charge more for a basic staple food, bread.
Or if construction firms agreed amongst themselves not to outbid each other on government contracts.
How about steel manufacturers colluding to fix prices and allocate customers, thereby harming the entire mining, manufacturing, and engineering industries?
Or imagine if media companies got together to co-ordinate advertising rates and discounts, to their own benefit but the cost of their clients?
You don’t need to imagine, because all of these happened, and punitive action was taken against the perpetrators for ‘anti-competitive behaviour’.
Seventeen banks, three of them South African, were fingered in forex rigging scams in 2015, and fined by competition authorities here and abroad.
The country’s biggest construction companies were fined a grand total of R2.9 billion over bid-rigging during the 2010 FIFA World Cup and other government contracts.
Several big food companies were fined large sums for co-ordinating bread price increases for years.
Three South African media houses were ordered to pay millions in penalties for collusion and price fixing in 2019.
When government does it
Collusion between private companies can cost directors, in their personal capacities, up to 10 years in prison.
But when governments get together to collude amongst themselves by how much they can fleece private companies, it is a different matter. Then, it’s not collusion. Then it is ‘a ground-breaking tax deal for the digital age’.
That is how the Organisation for Economic Co-operation and Development (OECD) describes an agreement between 136 countries – including South Africa – to shift the profits of multinational companies back to high-tax jurisdictions, and to set a global minimum corporate tax rate of 15%.
The OECD is worried about what they, in fluent bureaucratese, call BEPS. While left undefined in its press release, BEPS stands for ‘base erosion and profit shifting’, which refers to the ability of multinational corporations to shift profits from high-tax jurisdictions to low-tax jurisdictions, and thereby supposedly eroding the tax base of the higher-tax jurisdiction.
Many low-tax jurisdictions actively canvass multinationals to locate their businesses in their countries and offer ‘tools’ in order to help them do so. These schemes can be quite complicated.
The benefit to the tax haven is to be able to collect tax, albeit at a low rate, on income that otherwise would have been booked elsewhere. Some tax havens don’t collect tax at all and are content with seeing the local economy benefit from fees, business and employment. The benefit to the corporation, obviously, is to pay less tax.
On one hand, it is arguable that companies ought to pay tax in the jurisdictions in which they earn their revenues. On the other, that is a pretty artificial distinction. If I buy an item from a British seller listed on Amazon.com, South Africa already charges income tax on the money with which I do so, charges VAT on the transaction, and may charge an additional excise tax to ‘protect’ the high prices of domestic sellers.
Why should South Africa have an additional tax claim on the ensuing corporate profit, and why should it supersede the claim of the country in which either Amazon or the seller is domiciled?
Chasing business away
Of course, it is painful for a country to realise that a high corporate tax rate chases business away. But in the private sector, high prices do the same. The solution is not to collude to keep prices high, but to become more competitive and efficient, and offer higher quality at a lower price.
Countries ought to do the same. Those that can offer attractive services and institutions to multinational enterprises, at a good price (i.e. a low tax rate), should win business from countries that offer less by way of benefits and charge more tax. This isn’t a problem for anyone other than the less efficient government.
That Sudan, the DR Congo, Zambia, Brazil, Venezuela and France all levy corporate tax rates between 32% and 35% should be nobody’s problem but their own. They don’t deserve to host major multinational enterprises with such punitive, confiscatory tax policies.
That Barbados, Hungary, Bulgaria, Paraguay, Ireland and a dozen others have tax rates below 12.5% is not a problem for anyone, other than for governments that levy high taxes.
There is no corporate tax at all in Anguilla, the Bahamas, Bahrain, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Saint Barthélemy, Tokelau, the Turks and Caicos Islands, United Arab Emirates, Vanuatu, and the Wallis and Futuna Islands. Likewise, this is not a problem for citizens of these countries and is only a problem for high-tax jurisdictions.
Corporate taxes have a direct negative effect not only on investors, who ultimately pay them, but also on employees, whose wages go down as taxes go up, and customers, who pay higher prices to fund higher taxes.
This means it is not a benevolent action on the part of the OECD to arrange for mass collusion to set a minimum tax rate, at whatever level.
High-tax South Africa
South Africa’s corporate tax rate, at 28%, is substantially higher than the world’s average of 20%. This fact, and that it makes the country uncompetitive for foreign investment, has been acknowledged by the National Treasury in its 2020 Budget Review (p.38 ff.).
It has remained unchanged for over a decade and has hardly moved at all since the year 2000, when the global average was 28,3%. Clearly, many other jurisdictions have substantially decreased their corporate tax rates, with the result that South Korea, Canada, the US, India, the Netherlands, Spain, Chile, Turkey, Denmark, Norway, Switzerland, the Czech Republic, Poland, the UK, Ireland, and Hungary now all tax their companies less.
Not coincidentally, corporate tax receipts in South Africa had been plummeting, even before Covid-19 clobbered them. As a share of tax revenue, corporate income tax makes up only 8%, which is way below the African average of 19.1% and even lower than the OECD average of 10%. The high nominal tax rate levied in South Africa appears to do little to help tax revenues.
Treasury has promised to reduce corporate tax rates, but only if it can do so in a revenue-neutral manner. That means it is just an accounting trick: in reality, it has no intention of reducing the corporate tax burden at all.
The OECD’s solution to the problem of high corporate tax burdens is to encourage the least confiscatory jurisdictions to ratchet up their tax rates, so as not to disadvantage countries like South Africa too much.
Ireland, Liechtenstein, the Chinese territory of Macao, Andorra, Bulgaria, Bosnia and Herzegovina, Chile, North Macedonia, Paraguay, Hungary, and Barbados will all have to jack up their corporate tax rates to meet the 15% minimum. Expect their economies to take a hit.
Of the zero-tax jurisdictions, it looks like only Vanuatu is not a party to the agreement and is not a territory of a country that is. Expect its economy to boom.
Another serious downside of an agreement to harmonise corporate tax rates is that this leaves none of the 136 countries that are party to the agreement free to experiment with alternative, simpler, taxation systems.
In the US, the tax code adds up to 74 608 pages. Even to experts, it is impossible to know all the myriad ways in which the government can dispossess you of your hard-earned income. Every year, according to the Tax Foundation, American households and businesses spend more than 8.9 billion hours complying with federal tax filing rules, at a cost of more than $400 billion to the economy.
A similar problem exists in almost every other country, including South Africa.
Proposals for simpler, fairer, and more efficient tax systems have periodically been made. These range from a single land value tax, to a single tax on consumption, to a single tax on income.
With some provisos and variations, any of these could be turned into a highly efficient tool to supply government with its needed revenue, while limiting tax avoidance (legal) or tax evasion (illegal) opportunities, and minimising dampening or distortionary effects on the economy.
All of these could lead to a boost in economic growth that will benefit both rich and poor. Yet all of these innovations will now be off the table in countries that signed up to the OECD’s corporate tax collusion scheme.
The very idea of a harmonised, global tax regime is an affront to tax innovation, national sovereignty, and liberal principles.
Companies, like people, ought to be able to choose residency in countries that treat them the best, and offer an optimum balance, for them, between government services and the tax to pay for them. The idea that countries ought to be able to collude to make sure there is no escape from high taxes is deeply problematic.
Keep an eye on Vanuatu. It could become the next Cayman Islands, and the best of Irish luck to it.
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