Taxcooop conference Competition and taxation: a look at the landscape Montreal, November 3, 2015 Katharina Becker, Federal Ministry of Finance, Germany 1

Competition and taxation: a look at the landscape Contents Tax competition - definition Arguments in favour of tax competition Arguments in favor of tax harmonisation Tax Competition vs. tax harmonisation Economic Analysis „Fair“ versus „harmful“ tax competition International Agreement on the definition of harmful tax competition – OECD – EU – International development after the OECDs and EUs initiatives The OECDs BEPS initiative 2014/2015 Prospect Katharina Becker, Federal Ministry of Finance, Germany 2

Tax Competition Definition No internationally agreed definition; Extension of the idea of the market (productivity of individuals and corporations) to governments (starting in the 1990ies) ; “Productivity” of governments supplying public goods: Governments provide for public goods by applying lower tax rates than competing countries; Katharina Becker, Federal Ministry of Finance, Germany 3

Tax Competition Definition Thereby attracting investments from third parties, who can chose between different countries - or Thereby preventing domestic corporations from leaving the country for reasons of lower tax rates in other countries The term tax competition however is used in connection with corporate taxes in general Katharina Becker, Federal Ministry of Finance, Germany 3

Tax Competition Definition Tax competition – apparently - is not : Competition for higher tax income through lowering tax rates (Assumption of A. Laffer that tax income may rise when lowering the tax rate, so called Laffer-curve) Katharina Becker, Federal Ministry of Finance, Germany 5

Tax Competition Arguments in favour of tax competition Downward pressure on tax burden; Fiscal Discipline; Proper Balance of tax level and public goods; Fiscal sovereignty Possibility of smaller countries to compete with larger countries Katharina Becker, Federal Ministry of Finance, Germany 6

Tax Competition vs. tax harmonisation Arguments in favour of tax harmonisation Reduction of compliance costs for all taxpayers Reduction of tax distortions Transparency for the taxpayer Retention of a desired tax mix (especially mobile income and immobile income) Fiscal Sovereignty Katharina Becker, Federal Ministry of Finance, Germany 7

Tax Competition vs. tax harmonisation No international agreement Europe: Smaller countries favour tax competition Larger countries favour tax harmonisation No agreement because of unanimity in direct taxes OECD: Forum on harmful tax competiton Katharina Becker, Federal Ministry of Finance, Germany 8

Economic analysis Economic studies are uneven; Several note that tax competition favours relatively small countries and place larger countries into a disadvantage; No general refusal of tax competition However, no major studies on tax competition via preferential tax rates on mobile income Katharina Becker, Federal Ministry of Finance, Germany 9

„Fair“ versus „harmful“ tax competition Background Fair tax competition: General reduction of tax rates along with broadening of tax bases – as suggested by the OECD economists This was not the case in the real world. Katharina Becker, Federal Ministry of Finance, Germany 10

International Agreement on the definition of harmful tax competition OECD initiative 1998 report: Harmful Tax Competition – An Emerging Global Issue Focus on mobile income Erosion of tax income of other countries Criteria for harmful tax competition: –Starting Point: No or low tax rates –Ring fencing of regimes (insulation from the domestic markets, attraction of mobile income such as royalties and interests with no or low tax rates) –Lack of transparency –Lack of effective exchange of information -- lack of „ economic activity „ 32 regimes removed or changed Effect : An even treatment of the general tax base Katharina Becker, Federal Ministry of Finance, Germany 11

International Agreement on the definition of harmful tax competition EU initiative on harmful tax competition Code of conduct group (Primarolo 1996) In general same criteria as OECD‘s FHTP 66 tax regimes removed or changed Effect : An even treatment of the general tax base Katharina Becker, Federal Ministry of Finance, Germany 12

International development after the OECDs and EUs initiatives Patent Boxes CountryNominal Tax Rate Royalties Income Statutory Corporate Tax Rate Introduction Belgium6, France1533, Liechtenstein2,512,52011 Luxembourg5,7229, Malta The Netherlands /2007 Portugal11, Switzerland, Canton Nidwalden 8,820, Spain Hungary9, United Kingdom Cyprus Katharina Becker, Federal Ministry of Finance, Germany 13

International development after the OECDs and EUs initiatives Non-Taxation of Foreign income of US-companies Google Apple Microsoft etc. By using different European tax loopholes Advance Rulings Considered as harmful where they deviate from the general principles of tax law and where they offer preferential tax treatments for single investors Katharina Becker, Federal Ministry of Finance, Germany 14

The OECDs BEPS initiative Out of 15 action points: Taxation of the digital economy Activity Requirement for patent box regimes (nexus approach) Automatic exchange of information for tax rulings Country by country reporting Katharina Becker, Federal Ministry of Finance, Germany 15

Prospect EU-State Aid measures: press release of the European Commission: EU - Commission decides selective tax advantages for Fiat in Luxembourg and Starbucks in the Netherlands are illegal under EU state aid rules Commissioner Margrethe Vestager, in charge of competition policy, stated: "Tax rulings that artificially reduce a company's tax burden are not in line with EU state aid rules. They are illegal. I hope that, with today's decisions, this message will be heard by Member State governments and companies alike. All companies, big or small, multinational or not, should pay their fair share of tax." Katharina Becker, Federal Ministry of Finance, Germany 16

Prospect Features of EU - State aid: There has been an intervention by the State or through State resources which can take a variety of forms (e.g. grants, interest and tax reliefs, guarantees, government holdings of all or part of a company, or providing goods and services on preferential terms, etc.); The intervention gives the recipient an advantage on a selective basis, for example to specific companies or industry sectors, or to companies located in specific regions Competition has been or may be distorted; The intervention is likely to affect trade between Member States. Katharina Becker, Federal Ministry of Finance, Germany 17

Prospect Guiding principles for fair tax competition: No non-taxation/extremely low taxation A general tax base for companies without favorable tax rates for certain income types / no discrimination of certain industries No shift of the tax burden to less mobile tax bases (labour, consumption, property) EU - possible answer: Common Corporate Tax Base Katharina Becker, Federal Ministry of Finance, Germany 18

Thank you for your attention Katharina Becker, Federal Ministry of Finance, Germany 19