FUTURE TAXATION OF COMPANY PROFITS What to do with intangibles? - - PowerPoint PPT Presentation
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
19-02-2019 Presentation at Taxation of the digitalised economy: analysing the OECD approach event
WHA WHAT T IS IS BEI BEING NG PR PROP OPOS OSED? ED? SMALL SMALL IN INNO NOVATI TIVE VE OP OPEN EN ECO ECONO NOMIES MIES LIK LIKEL ELY Y TO O 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
Three proposals on the table…
4
User participation
digital services (ring- fencing)
to location of users 2 A global minimum tax
denies of deduction
payments if a certain Effective Tax Rate (ETR) threshold of the payee is not met
the GILTI provisions 3 Marketing intangible approach
between current transfer pricing system and a destination- based corporate income tax
to location of marketing intangibles 1
Marketing intangibles: compromise between today’s transfer pricing system and destination-based corporate income tax
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Current Transfer Pricing (TP) system
an inappropriate tax advantage by pricing within-group transactions differently from arm’s length principle
income beyond allocation based on cost plus/return
arm’s length principle, is allocated to the entrepreneurial risk-taker(s) in the MNE group. Marketing intangible approach
starts by defining a split between routine and residual income
compensated for their routine functions, cf. current TP rules
income arising from marketing intangibles and other intangibles
TP principles
arise from marketing intangibles is allocated to market of destination for the good or service
Significant outstanding challenges with implications for the impact of the marketing intangibles approach
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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) 1 How to define a normal return to physical/tangible assets and other intangibles? 2 How to define and value marketing intangibles relative to other intangibles? 3
Mar Market eting inta ing intang ngible ible app pproa
h go goes es well ell be beyon
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
7 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
Source: Brand Finance GIFT report 2017, page 33 & 47
Percent
73% 56% 34% 34% 29% 36% 33% 25% 18% 32% 28% 17% 24% 9% 13% 17% 35% 13% 30% 51% 42% 44% 29% 33% 17% 23% 7% 14% 14% 8% 23% 53% Pharmaceutical Media Internet & software 76% Services 35% Manufacturing 41% Retail 4% Construction Transportation Mining 73% Automotive Power & Utilities Biotechnology Oil & Gas Insurance 27% Wholesale Telecoms Banking 88% 42% 86% 86% 85% 65% 65% 35% 30% 21% 20% 3% 3% Marketing intangibles Other intangibles
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
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Percent
48 19 37 Denmark 33 21 42 Germany Finland 18 41 41 Sweden 17 35 48 Domestic residual return Foreign residual return Routine profits 100 100 100 100
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.
Five reasons why the Nordics will lose net tax revenue
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High return on assets in R&D intensive industries
1
8% 6% 5% 12% 8% 5% 7% 6% 5% 4% 5%
Low R&D High R&D
6% 12%
Medium- high R&D
4%
Medium R&D Medium- low R&D
4%
Denmark Finland Sweden
Disproportionately high tax base from high R&D industries
2
Marketing intangibles especially important in high R&D industries
3
Nordics are net-exporters of high R&D goods and services
4
Intangibles especially important in developed economies
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2.0% 7.0% 1.4 1.8 0.4 0.0% 0.0 0.2 0.6 1.2 0.8 1.0 1.6 1.0% 3.0% 4.0% 5.0% 12.0% 6.0% 8.0% 9.0% 10.0% 11.0% 13.0%
8.8% 1.3
Denmark Finland
12.4%
Sweden
6.4% 1.5 1.8
Multiple of tax revenue relative to GVA Share of corporate income tax revenue (right axis) Tax base / GVA
32%
High R&D Medium- high R&D Medium- low R&D Medium R&D Low R&D
26% 40% 31% 27% +13pp 6.4%
High R&D
5.7%
Low R&D Medium- high R&D Medium- low R&D Medium R&D
5.6% 1.2% 2.1%
Share of enterprise value Share of total output
Source: Copenhagen Economics based on Amadeus, input-output tables, Brand finance and OECD Stan database.
69 % 53 % 42 %
Germany
58 %
Denmark India USA Finland
68 %
Sweden China
58 % 58 %
Nordics lose net tax revenue
Potentially higher tax burden on businesses
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MNEs in low tax jurisdiction will experience higher ETR
more diffused tax base
real economic impact due to the distortive nature of corporate income taxes 1 Unclear rule for loss consolidation across borders
rules exists to ensure that MNEs can off-set losses cross-border
increase the effective tax burden 2 Key parameters have no solid empirical foundation
uncertainty and probability of disputes increasing the overall tax burden 3
In conclusion: It is both a country and company tax issue, likely to impact investments and real activity
Problems and aims to be defined before moving to solutions
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BEPS project focused initially on addressing transfer pricing policy issues:
guidelines
avoidance (updating PE)
regulation of foreign con- trolled companies (CFC) as well as polices versus so- called Tax Heavens
notions of where economic value is being created – the user contribution principle. We suggest policy reforms should:
taking into account already implemented BEPS efforts as well as national reforms of corporate tax regimes, notably in the US.
friendly policies at national level
with manageable compliance costs
Recent progress related to transfer pricing issues must be taken into account
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Convergence in global statutory rates will also tend to reduce transfer pricing issues
19% 19% 19%20% 20% 20%20% 21% 21%22% 22% 22%23% 25%25% 25% 25%26% 26% 27%28% 28% 28%29% 30% 30%30% 30% 30% 32% Ireland Hungary New Zealand Lithuania United Kingdom Slovenia 15% Czech Republic Israel Poland Turkey Estonia Finland Iceland Latvia 9% Slovak Republic United States Switzerland Portugal Sweden Norway Austria Chile Netherlands Germany Spain 19% Luxembourg Italy Canada Korea Greece Belgium Japan Australia Mexico 13% 23% Denmark
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
1 2
Corporate tax revenue in the EU, 1995-2016, percent of GDP Effective tax rates on equity and debt
Reductions in statutory rates is not merely a race to the bottom
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Source: CBO (2017) International Comparisons of Corporate Income Tax Rates, page 24 and European Comission
0.0 2000 1995 2005 2.0 0.5 2010 2015 1.5 1.0 2.5 3.0 3.5 2.6% 2.6% 38% 36%34% 34% 28%28% 25% 24%20% 19% 16%14% 12% 10% 6%
AR BR US ZA MX DE IN JP ID CN
IT FR GB AU SA 39% RU TR KR CA 38% 34%
Equity-Financed Equipment Debt-Financed Equipment
Lower nominal rates reduce debt bias
1
Lower rates partly paid by tax reforms historically
2
Overall corporate tax take not collapsing
3
Reducing national incentive to support growth:
the fiscal spoils from successful high- risk entrepreneurial projects are shared globally while the costs of failures are born by host countries.
1
Key parameters have no solid empirical foundation
return for taxation purposes?
intangibles relative to other intangibles?
intangibles? In practice the division of marketing and other intangible will have to done in the absence of meaningful yardsticks based on sound economics
2
High compliance costs and requiring unrealistic levels
new administrative challenges for which no
keeping the challenges of the current transfer pricing regime
co-operation prevents years
shifting: choice of business models
3
The marketing intangibles approach has three obvious drawbacks
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100% 0% 25% 50% 75% 0.4% 64.8% 50x+ 1.1% 20-50x 2.5% 10-20x 5.9% 5-10x 25.3% 1-5x 0-1x
Return multiples in VC world
A minimum taxation regime: targeted and realistic
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Generally in line with the BEPS efforts to limit base erosion and creating a level playing field… Importantly from a policy efficiency perspective, a minimum taxation regime would stop industry specific distortions 1 2 while making a minimum tax regime work is not necessarily a walk in the park, it appears to be infinitely more manageable and meaningful than the other alternatives on the table 3
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