There are big changes afoot around the direction of tax policy in the next few years. A new G20/OECD joint agenda is moving its focus on from modernising and coordinating international tax rules to a new tax program focused on inclusive, economic growth.
The President-elect in the US appears ready to influence the US to a more protectionist economy. Both of these factors are likely to influence the Australian Government and its Treasury advisors over the medium term.
G20/OECD tax focus to date
For some years now, the G20 has had a focus on tax. We have watched the pressures of the global financial crisis trigger the G20 to request the OECD embark on two broad programs of reform – a focus on tax transparency together with a modernisation of the global tax rules to prevent base erosion and profit shifting (BEPS). The result of these two programs saw new levels of international co-operation and significant progress around bank secrecy and exchange of tax information. Last October, the OECD delivered its final BEPS reports broadly recommending changes to tax rules around three key principles:
- Aligning taxation with the location of economic activity and value creation
- Setting coherence between domestic tax systems and across the international rules
We are now in the second phase of the Action Plan – implementation and a post-implementation country review program. Many countries are working on domestic legislation to reflect the recommendations. A new multi-lateral treaty will be ready for signing in 2017 to give rapid effect to proposed changes to double tax treaties. Developing countries are being encouraged to join the BEPS framework and those that have committed are being provided with support to build tax capability. The G20 and OECD are working on objective criteria to identify non-cooperative jurisdictions with respect to tax transparency, with defensive measures being considered against listed jurisdictions.
Post BEPS, the G20/OECD new tax direction is inclusive growth. Governments are now turning their attention to how tax policy can promote economic growth as well as tackling income inequality. It will be an opportunity to rethink tax policy away from traditional design models. Part of the task will be to better understand the tax drivers of innovation and economic growth; considering what type and size of companies are more likely to innovate and employ more workers; and encouraging labour market participation. Another task will be to better understand how different taxes affect the low wealth or low income segments of our society.
As pre-work in respect of this new direction, in July 2016 the OECD released a working paper titled “Tax Design for Inclusive Economic Growth”. The paper explores ways to design tax systems which relook at taxation from an equity perspective rather than from an efficiency perspective. Some of the options considered are quite confronting for Australians. The paper looks at income tax and GST base broadening (particularly via targeting deductions/exemptions which disproportionately benefit high income groups), taxing capital and its returns (broadening land tax, taxing capital gains more progressively, considering tax on the principal residence), introducing/strengthening inheritance taxes, as well as providing adequate and targeted relief to low income earners.
In Australia, both the Government and Opposition are already referring to “inclusive growth” in many of their public statements and policy positions. The National Innovation and Science Agenda, which included incentives for investors in qualifying early stage innovation companies, the review of the Research and Development Incentive, plans to lower the company tax rate and changes to the superannuation system, are all piecemeal initiatives around this broad theme. It is likely that as more work is done at the global level, we will see more of these ideas incorporated in the Australian tax system over time.
The G20 is also cognisant that tax certainty is a key requirement for trade and investment and has asked both the IMF and the OECD to start working on this initiative as a subset to the inclusive growth agenda.
Tax uncertainty is created where legislation is unclear or retrospective or changes frequently or unpredictably. Uncertainty is also created where a country’s tax regulator acts in an inconsistent or unfair manner, or where domestic and international tax rules conflict resulting in double or non-taxation.
In December 2016, Germany will take leadership of the G20 and tax certainty will be a key priority. To support this work, the OECD has now launched a global business survey on tax certainty. The survey runs from 18 October to 16 December 2016 and is an opportunity for business to support the development of practical and concrete policy options for a more certain and predictable global tax system.
US tax policy
We also now face changes to US tax policy as the President-elect is about to enter the White House with Republican majorities in both Houses. The Trump tax reform plan has broadly a focus on reducing taxes, and broadening the tax base, with the aim of making US domestic firms more competitive in the global market place. That being said, the plan is subject to considerable uncertainty due to its lack of detail.
The key announcements are:
- Tax Rate: The Trump Plan will lower the “business” tax rate from 35% to 15%, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business
- Multinational profits offshore: It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%
- Base broadening: It eliminates most corporate tax expenditures except for the Research and Development credit
- Option to fully depreciate or claim interest deductions: Firms engaged in manufacturing in the US may elect to expense capital investment and lose the deductibility of corporate interest expense. An election once made can only be revoked within the first three years of election; if revoked, returns for prior years would need to be amended to show revised status. After three years, election is irrevocable.
From an Australian perspective these announcements are significant as it means yet another one of our trading partners may drastically reduce its tax rate. The repatriation tax rate will also encourage companies to bring back what is estimated to be US$2.6 trillion in foreign-sourced earnings currently trapped overseas, potentially providing more funds for infrastructure and investment within the US.
In terms of US global tax policy, it is likely that the OECD BEPS program will not be impacted by the change in Government given its progress is so far advanced. However, the US and OECD are likely to place further pressure on the EU to back away from claims around EU State Aid, so that the US tax base is protected. The EU will also be encouraged to adopt transfer pricing principles in line with the OECD BEPS project and in uniformity with other OECD participants in the program.
The global market place is likely to get more competitive. Tax mismatches and arbitrages will no longer be the basis for competitive advantage. Rather as countries compete for economic activity, there is likely to be a greater focus on pro-business and pro-jobs policies, measures to build clever economies and a lowering of company tax rates. But at the same time, we will see more of a social conscience from governments: inclusive growth cannot come at the cost of low income earners.