Wen | Wang Yan, a researcher at the Caesar Research Institute
In the face of the economic shortage and economic momentum slowing down caused by the economic recession, how to build an internationally competitive national tax system in the post-epidemic era is undoubtedly an important issue facing every economy.
Abstract: The rapid advancement of this round of international tax reform is closely related to the following three aspects: 1. Solve the tax challenges brought about by economic digitalization by distributing more taxation rights and surplus profits to market countries; 2. Combat tax evasion by multinational enterprises (clarify the global minimum tax rate of 15%, and draw a bottom line for tax competition among countries; 3. Enrich fiscal resources and alleviate the pressure of fiscal deficits. Research by the U.S. Tax Foundation shows that a well-structured, neutral and competitive tax system has advantages in at least four ways: 1. it is easier for taxpayers to comply with; 2. it promotes sustainable economic growth and investment in a country; 3. it increases revenues in favor of government priorities; and 4. it becomes a beneficiary of international tax reform.
As of the beginning of November this year, the cumulative number of confirmed COVID-19 cases in the world exceeded 250 million, and the COVID-19 pandemic, which has lasted for more than two years, has not only changed people's production and lifestyle, but also profoundly shaped the operating rules of the real world. The most intuitive thing is that the global economic downturn and the decline of growth momentum, increasing geopolitical tensions, trade protectionism and unilateralism are quietly rising... In this context, tax exchanges and tax cooperation between different regions and economies are also accelerating, and the reform of international tax rules by international organizations is gradually on the agenda, such as the G20/OECD international tax reform plan ("double pillar"). Among them, Pillar 1 aims to solve the tax challenges brought about by economic digitalization by distributing more taxation rights and surplus profits to market countries; Pillar 2 sets out the bottom line for tax competition in countries while combating tax evasion by multinational enterprises by establishing a set of international tax rules that are interrelated to each economy and clarify the global minimum tax rate of 15% (from a deeper perspective, this round of international tax reform has finalized the global minimum tax rate rules, that is, to lock in the tax competitiveness of some economies, such as the United States). In addition, expanding tax sources, alleviating the pressure of fiscal deficits, and strengthening macroeconomic regulation and control capabilities are also another driving force that cannot be ignored in this round of international tax system reform.
As an important part of economic policy, tax policy is an important determinant of a country's economic performance and shoulders the heavy responsibility of the country's development in a certain historical period. It can be said that "neutrality" and "competitiveness" are the two core characteristics of a country's tax system, and they are also important indicators to measure the competitiveness of a country's tax system. Among them, neutral tax laws seek to maximize revenue increases with minimal economic distortions; competitive tax laws refer to maintaining low marginal tax rates, which is closely related to the profit-seeking nature and high liquidity of capital. In other words, countries with high marginal tax rates are not conducive to attracting investment and construction, and there may be problems with tax avoidance. Overall, a well-structured, neutral and competitive tax system has advantages in at least four areas: 1. it is easier for taxpayers to comply with; 2. it promotes sustainable economic growth and investment in a country; 3. it increases revenues in favor of government priorities; and 4. it is a beneficiary of international tax reform.
According to data released by the U.S. Tax Foundation, many OECD countries have undergone several tax reforms over the past few decades, and the marginal tax rate on corporate and personal income has dropped significantly. Currently, most OECD countries have achieved significant revenue increases through broad-based taxes such as payroll tax and value-added tax. On the other hand, in the wake of the COVID-19 pandemic, many countries have adopted a series of temporary reforms to their tax systems to cope with the income shortage caused by the recession and promote economic recovery. However, there are natural physical differences in the tax systems between different countries, and the implementation of temporary tax measures during the epidemic has also shown great differentiation (mainly reflected in the optimization of the tax structure). The following is an analysis of representative countries that have implemented temporary tax law reforms during the COVID-19 pandemic, based on data from the International Tax Competitiveness Index (ITCI, 2021).
Viadouban, the historic center of Tallinn, Estonia
Located in northeastern Europe, Estonia has a population of about 1.33 million and is known worldwide for its open and free economic policies, along with Latvia and Lithuania as the "Baltic States". Currently, Estonia is a member of the European Union, the Eurozone, NATO, the OECD and the Schengen Visa Area, and is one of the leading countries in Eastern and Central Europe in terms of per capita FDI.
Figure 1-2. International Tax Competitiveness Index ITCI: Rankings and ranking changes in selected countries
(Note: ITCI has studied more than 40 tax policy variables and examined the tax regulations of OECD countries on corporate income tax, personal income tax, consumption tax, property tax and overseas income tax to measure the competitiveness of the country's tax policy and whether the tax structure is in line with the principle of neutrality, and whether the tax environment is suitable for investment and business development.) Source: ITCT, Caesar Institute
This year marks the eighth consecutive year estonia has been selected by the U.S. Tax Foundation as "the most tax-competitive country among OECD countries." Studies have shown that its superior tax competitiveness benefits from the following five-point tax system characteristics: first, the implementation of zero tax rate on enterprise income, only 20% income tax on dividends; second, the unified tax rate on individuals is 20% (but not applicable to personal dividend income); third, the property tax is only taxed on land, real estate or capital is not taxed; fourth, its territorial tax system stipulates that 100% of the profits earned overseas by domestic companies are exempt from domestic taxation; fifth, the basis for the application of value-added tax is very broad. The tax burden is not heavy and easy to comply with. Of course, there are also some obvious shortcomings in its tax system, such as the current fact that the country has only signed tax treaties with 58 countries, which is far lower than the average of OECD countries (75 countries).
We have seen that in response to the impact of the new crown epidemic, many European tax bureaus have introduced VAT emergency measures during the epidemic last year, such as applying for deferred VAT payment for companies with business difficulties during the epidemic. On this basis, Estonia has also proposed two measures for VAT/GST, one is to eliminate the 22 euro exemption for small consignments imported from outside the EU, aimed at increasing tax fairness while increasing revenue, and the other is to change the VAT procedures related to unpaid invoices (bad debt treatment), thereby improving the certainty of taxation.
In order to support businesses and individuals that have been severely damaged during the COVID-19 pandemic, Estonia has reduced its consumption tax on natural gas, fuel (diesel and liquefied gas) and electricity for a period of two years since May last year, and began raising the tobacco consumption tax in 2020, first to increase the country's budget revenue while avoiding too low tobacco prices, and second, to improve the health of the whole population. Interestingly, neighboring Latvia has also begun to tax only the dividend portion since learning from and borrowing from Estonia's corporate income tax management measures, while also allowing enterprises to deduct property taxes and reinvest their profits tax-free when calculating taxable income, surpassing Estonia in this year's individual corporate tax rankings (see Figure 1). It is foreseeable that with the continuous development of the process of enterprise globalization, the gradual landing of the "double pillar" is bound to bring new challenges and opportunities to the international tax management of enterprises.
Table 1: Priority tax measures in Estonia during the COVID-19 pandemic (information updated as of April 2021)
Source: OECD (2021), Translated by the Caesar Institute
In terms of international tax competitiveness in a narrow sense, the U.S. tax system has the following three advantages: first, the commercial investments related to machinery can be fully expensed; second, it allows for a "last-in, first-out" (LIFO) treatment of inventory costs; and third, it allows enterprises to deduct property tax when calculating taxable income. Broadly speaking, the United States, with its special international status and "right to speak", can exert its direction and boundaries in international rule-making. For example, the "Made in America Tax Plan", through a series of corporate tax reform measures, aims to solve the transfer of profits and offshore transfers while making the internal and external competitive environment more fair, more conducive to the United States to maintain the international competitiveness of taxation. Although the conflict between democrats and Republicans has cast a shadow on the advancement of the DOMESTIC tax hike plan in the United States, in the face of the growing fiscal deficit and high debt level under the impact of the new crown epidemic, the Biden administration has bundled a number of tax increase plans while expanding fiscal spending.
The U.S. Treasury Department's "Green Paper" ("General Explanation of the Administration's Fiscal Year 2022 Revenue Proposal"),, released in May, said the tax hike would bring in $3.6 trillion in tax revenue over the next decade, which is also the main source of funding for the Biden administration's $4 trillion plan to rebuild the U.S. economy. Among them, the proposal on corporate tax reform can be roughly summarized as the following six aspects: 1. Increase the corporate tax rate; 2. Reform the global minimum tax rate system; 3. Abolish the FDII deduction; 4. Abolish the Base Erosion and Anti-abuse Tax-BEAT rules and replace it with SHIELD; 5. Impose a minimum of 15% global book income tax on companies with more than $2 billion in global book income; 6, Other corporate tax proposals (e.g., the government's proposal to reform tax policies on fossil fuel revenues, the removal of GILTI's exemption from foreign oil and gas extraction revenues, etc.).
Figure 3. Increase the U.S. corporate tax rate to 28%
Strengthen the lowest global tax rate for U.S. multinationals and finalize the lowest global corporate tax rate of 15%. In April, the U.S. Treasury Department unveiled the Made in America Tax Plan, which aims to fund infrastructure proposals, which plans to add $2.5 trillion in taxes over the next 15 years. These include raising the corporate tax rate from 21 percent to 28 percent (the U.S. corporate income tax was cut from 35 percent to 21 percent during the Trump era). One of the three most important provisions is raising the minimum tax rate on U.S. overseas profits, raising the minimum tax rate on low tax revenues on intangible assets (GILTI) worldwide from 10.5 percent to 21 percent. In May of the same year, U.S. Treasury officials attended a meeting of the G20 and OECD Inclusive Framework Steering Group on Base Erosion and Profit Shifting, proposing to set the world's lowest corporate tax rate at no less than 15 percent, reducing the incentive for foreign jurisdictions to maintain ultra-low corporate tax rates by encouraging higher minimum tax rates around the world; in addition, in the latest tax increase plan, many other measures such as offshore investment incentives, reducing profit transfers, and countering competition in the corporate tax field were eliminated; First, by preventing U.S. companies from transferring profits overseas and then returning profits to the U.S. tax system; second, by finalizing the world's lowest corporate tax rate of 15%, we can avoid a number of problems such as corporate tax avoidance and job loss that may occur after the implementation of the U.S. domestic tax increase program.
Figure 4. Proposed raising the top marginal tax rate for U.S. personal income tax to 39.6 percent
(The program has an impact on married couples earning more than $509,300 in the 2022 taxable year, unmarried individuals (excluding surviving spouses) earning more than $452,700, and heads of household with an income of more than $481,000.) ）
The individual tax rate was raised from 37% to 39.6%, and the capital gains tax was raised from 20% to 39.6%. Personal income tax is a personal income tax on the income (wages, and often capital gains and dividends) of an individual or family, providing financial support for the day-to-day operation of the government. In the United States, all taxpayers who are eligible for U.S. tax obligations are required to file federal and state taxes, which are the responsibility of the IRS (federal taxes are global but not double taxed), and state taxes are the responsibility of the state government of residence. In terms of capital gains tax, the new rules will be raised from 20% to 39.6%, and capital gains and dividends will be taxed at a general income tax rate of 39.6% for people with annual income of more than $1 million, and the personal income tax rate will be increased from 37% to 39.6% for those with annual income of more than $400,000, and a social security tax rate of 12.4%. Based on this, the actual capital gains tax rate collected may exceed 40%. On the one hand, the Biden administration has actively reduced the gap between rich and poor through tax and fiscal redistribution functions. On the other hand, we should also see that although the Biden administration has been actively promoting international tax reform since taking office and supporting the phased implementation of the "two-pillar" plan, whether it is to solve the excessive pressure on the US fiscal deficit, or out of consideration of the right to make international rules, or to use multilateral rules to meet the needs of the US domestic tax reform, its essence is still "US interests first".
Resources:
1. National Report on the Legal Environment of Countries Along the Belt and Road;
2. Guidelines on Taxation of Chinese Residents' Investment in Estonia;
3.International-Tax-Competitiveness-Index-2021.
4.OECD：covid-19-tax-policy-and-other-measures.
5.https://home.treasury.gov/system/files/131/General-Explanations-FY2022.
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