There is a raging political debate throughout the world about the taxation of multinationals. To provide some empirical underpinning for these policy discussions, Markle-Shackelford study financial statements for 10,642 corporations from 85 countries from 1988 to 2007. They find that effective tax rates are about the same for multinationals and domestic-only firms. They report that ETRs declined by seven percentage points or 20% over the last two decades. German, Japanese, Australian and Canadian decreases were large. British, French, and American declines were more modest. Japanese firms always faced the highest ETRs. The ETRs for tax havens and countries from the Middle East and Asia (ignoring Japan) were always lower than those for the U.S. and European countries.
This paper provides evidence for tax competition between companies, through their tax planning. Obviously companies see benefits in reducing their tax payments, but being too far out of line may result in reputational costs. These costs could include closer attention from tax authorities, a negative reaction from analysts who believe that effective tax rates are unsustainable. To combat this, companies use information on the tax performance of their rivals as a benchmark.
Evidence is provided using a large dataset of corporations. Evidence is strongest for a form of competition between companies in the same country. For companies in non-European countries we also find evidence for benchmarking within industries. The reaction to competitors’ tax planning is stronger for companies with higher effective tax burden and between the largest companies.
The European Commission is preparing a proposal to fundamentally change the way in which multinational profits in Europe are taxed across countries. Under the proposal, profits of the entire multinational group would be consolidated on the basis of a set of common European rules. Total profits would then be allocated to Member States by using a fixed formula, consisting of e.g. sales, employment, payroll and asset in each country where the multinational is active. It is most likely that this proposal would be introduced only in a subset of EU countries – so-called enhanced cooperation.
The paper considers a variety of coalitions of the common policy. It shows that:
When losing countries opt out of a coalition, enhanced cooperation among the winners may create new losers. Thus, in the end, enhanced cooperation may not be feasible. But it is more likely amongst countries that are similar in size and openness.
Some countries will find it more attractive to form an enhanced cooperation agreement than engage in full harmonisation in the entire EU.
4 Who bears the burden of greater non-wage labour costs?
This paper asks how far social security contributions paid by employers – such as employers’ national insurance in the UK – are passed on to workers in the form of lower gross wages. Using data from 14 OECD countries between 1980 and 2004, it shows that, in the long-run, a 1% point rise in the social security rate is associated with a 0.55% fall in gross wages and only a 0.23% rise in labour costs. Among other things, this suggests that location decisions of multinational companies are less likely to be affected by such taxes. However, the distribution of this effect between employers and employees is influenced by the degree of coordination of the bargaining process across countries.
5 Evaluating EU proposals for financial services VAT reform
This paper analyses recent proposals of the European Commission to require member states to allow financial service firms to “opt in” to paying VAT. The paper shows that such firms only have an incentive to opt in for business-to-business transactions. This can actually save the firm tax, since it can reclaim the VAT that it has paid on inputs. There is no incentive for firms to opt in on business-to- consumer transactions. The paper calculates that the upper bound on the amount of tax revenue that might be lost in the UK is small: no more than 0.2% of total tax revenue.