SHOULD UNFAIRNESS BE MAINTAINED IN CORPORATE TAXATION? - THE DISGUISE OF THE TAX INCIDENCE IN EU AND OECD TAX PLANNING - Timbro
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TIMBRO SHOULD UNFAIRNESS BE MAINTAINED MATTHIAS BAUER IN CORPORATE TAXATION? NOVEMBER 2019 THE DISGUISE OF THE TAX INCIDENCE IN EU AND OECD TAX PLANNING
© The author, Timbro and ECIPE November 2019 www.timbro.se info@timbro.se Layout: Markus Konow 2 TIMBRO
ABOUT THE STUDY
This study is meant to address the failure of governments and international institutions
(e.g. the EU, OECD and IMF) to account for the distributional consequences of tax policies.
The focus of this study is on the “incidence” of corporate taxes, i.e. the financial burden
corporate taxes cause for individual citizens in their capacity as workers, consumers,
entrepreneurs and investors.
This study shows that international institutions as well as individual governments
primarily aim to defend the level of tax revenues. Fairness considerations hardly play a
role in the day-to-day politics of corporate tax reform. In fact, a deeper look at corporate
tax law and existing reform proposals reveals that the often-stated objective to achieve
more fairness in taxation is nothing more than a sham. The fairness argument became a
powerful political tool to disguise policymakers’ unwillingness to design simpler, more
transparent and more objective tax regimes.
The OECD’s recent proposals for international corporate tax reform would add another
worrisome component to opaque corporate tax regimes: since workers bear the largest
part of the corporate tax incidence, a reallocation of tax revenues to countries where
consumers are based would imply that the greatest part of the reallocated tax revenue
would be borne by workers of exporting companies. In other words: Workers would be
forced to effectively pay taxes to foreign governments that do not represent them.
These concerns go beyond tax obfuscation. They are about democratic legitimacy and
representation, and governments’ respect for human rights and the freedom of speech.
Neither the OECD, nor the EU, nor national governments have so far analysed the economic,
social and human rights impacts of the corporate tax reforms discussed at the OECD. This
study is an attempt stimulate a more informed debate about current tax practices. It is
also an attempt to raise public support for simpler tax rules, more transparency and more
clarity regarding the real financial burden taxes cause for each and every citizen.
ABOUT THE AUTHOR
Matthias Bauer is Senior Economist at the European Centre for
International Political Economy (ECIPE), an independent, non-profit
think tank dedicated to trade policy and other economic policy issues
of importance to Europe. His areas of research include international
trade, the economics of digital markets and the digital economy,
European Single Market integration, European fiscal affairs and
capital market policy.
Should unfairness be maintained in corporate taxation? 3CONTENTS
ABSTRACT........................................................................................................................................................ 5
1. INTRODUCTION........................................................................................................................................... 6
Tax obfuscation at EU and OECD level................................................................................................. 6
Corporate tax: a tax most harmful to economic activity and government accountability..... 7
No analysis of the economic and social implications from the reallocation of tax rights by
the OECD...................................................................................................................................................... 8
2. OECD AND EU IDEAS FOR THE REFORM OF INTERNATIONAL CORPORATE TAX RULES.. 10
The OECD’s ‘Addressing the Tax Challenges of the Digitalisation of the Economy’ initiative...
10
The EU’s Digital Services Tax (DST) proposal..................................................................................11
Tax avoidance vs. tax incidence........................................................................................................... 12
3. THE TAX INCIDENCE: HOW IT IMPACTS WORKERS, CONSUMERS, ENTREPRENEURS AND
INVESTORS .................................................................................................................................................... 14
Tax incidence neglected in the debate about corporate tax reform(s) .................................... 14
The distributional implications arising from the corporate income tax incidence................ 16
The incidence of special taxes on digital services (DSTs)............................................................ 19
4. QUANTIFYING THE CORPORATE INCOME TAX BURDEN THAT IS BORNE BY WORKERS .22
Methodological considerations ........................................................................................................... 23
Results........................................................................................................................................................ 24
5. CONCLUSIONS FOR GOVERNMENT ACCOUNTABILITY IN TAX POLICYMAKING................... 30
Tax incidence and the OECD’s corporate tax subsidy scheme ................................................... 30
Tax obfuscation and bureaucratic opposition to tax competition............................................... 31
Policy recommendations....................................................................................................................... 32
REFERENCES................................................................................................................................................. 34
APPENDIX....................................................................................................................................................... 37
4 TIMBROABSTRACT
Some governments are concerned about the be borne by workers of exporting companies
impact of digitalisation on revenues from taxes on financing foreign governments that do not represent
corporate income. At the same time, governme- them. Even if some governments enjoy a net increase
nts and international organisations remain igno- in government revenues from new corporate tax
rant to the distributional implications of corpo- base allocation rules, the additional tax revenues
rate taxes – the so-called corporate tax incidence. would not be enjoyed by those workers that pay
A vast body of economic research demonstrates taxes to foreign governments and, accordingly, suffer
that workers bear more than 50 per cent (some- from lower wages or lower wage growth.
times more than 300 per cent) of the corporate Two of the world’s largest consumer markets,
tax burden, and empirical research suggests that China and India, are subject to high degrees of state
low-skilled, young and female employees bear a interventionism. Due to the tax incidence, workers
larger share of the corporate tax burden. Due to of companies in market economies would indi-
the tax incidence, the opaqueness and heteroge- rectly subsidise state-owned enterprises (SOEs) in
neity of corporate income tax law and multiple these countries (and other recipient countries). In
double taxation effects, it is impossible to objec- other words, corporate taxation according to where
tively measure the real tax burden that is carried users/customers are based would result in indirect
by individual citizens. In other words, it is unac- subsidies paid by market economies to interventio-
ceptable to maintain corporate taxes if the politi- nist countries’ state-owned enterprises with whom
cal objective is to achieve more transparency and they may even compete.
more (perceived) fairness in taxation. Estimates suggest that the implied gross tax
Despite the vast empirical evidence about the subsidy paid by European workers to foreign
significant distributional consequences of taxes governments would amount to more than 91 bil-
on corporate income, neither the European Com- lion USD annually (not taking into consideration
mission nor the Organisation for Economic Coo- the possible reallocation of foreign exporters’ pro-
peration and Development (OECD) consider the fits to European tax bases). The implied gross tax
tax incidence in their policy documents. The fai- subsidy paid by European workers to the govern-
lure to recognise the empirical evidence on the tax ment of China, for example, amounts to more than
incidence undermines the bureaucratic and poli- USD 3.5 billion per year, with German workers
tical accountability in fiscal policymaking. Any alone accounting for about USD 1.2 billion annu-
corporate tax reform, including digital services ally. The OECD-proposed subsidy scheme brings
taxes (DSTs), minimum corporate income taxes to the fore a number of critical concerns that have
and the reallocation of global taxing rights, must for a very long time occupied international trade
be assessed by its distributional implications. The diplomacy. These concerns go beyond the mere
abolition of tax competition, as suggested by some role of government intervention in international
European Union (EU) and OECD policymakers, trade, e.g. through subsidies and tax credits. They
would cement corporate tax-induced wage depres- are about democratic legitimacy and representa-
sion and shield opaque corporate tax regimes that tion, and governments’ respect for human rights
are incomprehensible for most taxpayers and poli- and the freedom of speech. Neither the OECD
ticians (tax obfuscation). nor the EU and national governments have so far
A reallocation of tax revenues to countries provided assessments of the tax incidence. Nor
where consumers are based would imply that the have they analysed the social and human rights
greatest part of the reallocated tax revenue would impacts of their proposed corporate tax reforms.
Should unfairness be maintained in corporate taxation? 51. INTRODUCTION
On 25 May 2019, International Monetary Fund defending governments’ tax revenues rather than
(IMF) Managing Director Christine Lagarde the often-stated objective to achieve more fairness
stated that ‘[t]he public perception that some in taxation on the basis of more transparent and
large multinational companies pay little tax has more objective tax regimes.
led to political demands for urgent action. It is not All this gives reason to doubt high-level poli-
difficult to see why.’ (IMF, 2019a) tical statements about fairness in corporate tax-
No doubt, there is a long-standing perception ation. In fact, complex and non-transparent
among citizens and policymakers across the world corporate income tax laws systematically dist-
that multinational companies do not pay their fair ort citizens’ perceptions of the amount of taxes
share of tax. And yet, despite Mrs Lagarde’s concerns they personally pay and tax fairness respectively
about ‘tax avoidance, tax revenues and some large – a phenomenon that is known as ‘tax obfusca-
digital companies,’ her political remarks are misle- tion’. Inconsistent notions about ‘tax avoidance’,
ading and politically inappropriate. The corporate ‘tax evasion’ and ‘tax fairness’ demonstrate that
tax literature demonstrates that it is impossible to the existing system of corporate taxation, as it
make any informed judgements about fairness in is enforced in most countries across the globe, is
corporate taxation.1 Corporate tax law is problema- broken and in need of substantial reform.
tic in many respects. Tax policymakers have been Misguided notions of tax fairness are still at the
repeatedly plugging alleged holes but in fact main- heart of contemporary debates on tax reform, e.g.
tain a legal hydra that creates more problems than recent calls in the EU and elsewhere for special
it solves. Due to the tax incidence, the complexity taxes (sometimes called penalty taxes) on success-
of corporate income tax law and multiple double ful digital services companies. The same applies
taxation effects that arise from corporate taxation, for the OECD’s broader initiative to rewrite the
it is not possible to objectively measure the real tax rules of the international corporate tax regime:
burden that is carried by individual taxpayers. It is Under the auspices of the ‘inclusive framework’
therefore impossible to maintain corporate tax regi- representing 129 sovereign governments and terri-
mes if the political objective is to achieve more objec- tories, the OECD’s Task Force on the Digital Eco-
tivity and more perceived fairness in taxation. nomy (TFDE) has been suggesting a fundamen-
tal change to long-established corporate income
Tax obfuscation at EU and OECD level tax rules. As of July 2019, it is difficult to predict
Corporate income taxes are at the heart of nume- the precise impacts of what has been proposed by
rous inefficiencies. They are at the root of double the OECD’s tax planners. The least that can be
taxation for multiple sources of individual inco- said is that the OECD tabled a number of rather
mes. As a result of the economic incidence, taxes premature ideas that, if they were adopted, would
on corporate income depress the real income of render corporate taxation more complex and less
workers, consumers and entrepreneurs. Paradoxi- objective (see discussion below). Many observers
cally, due to the positive impact on progressivity in indeed warn that a reform on the basis of these
the overall tax system, more tax avoidance by cor- ideas would render international corporate tax
porations would have a positive impact on house- codes more intricate and arbitrary, thus making
holds’ disposable incomes. Nevertheless, as will be the system riskier and costlier for companies tra-
shown below, policymakers still mainly care about ding and investing across national borders.2
1 See, e.g., Hanappi (2018, p. 4) stating that ‘variations in the definition of the tax bases across countries and other provisions can have large
effects on the effective tax burden on investors. For instance, corporate tax systems differ across countries with regard to several important
features such as, for example, tax depreciation, investment tax credits or tax incentives for research and development (R&D).’
2 The vast majority of businesses that submitted opinions to the OECD’s ‘public consultation on the tax challenges of digitalisation’ highlight
6 TIMBROCorporate tax: a tax most harmful to economic taxation’ are dominant in the public debate about
activity and government accountability corporate taxation. At the same time, there is only
In the past, the OECD actually recognised that very little public awareness and/or interest in the
taxes on corporate income are most harmful to the ‘corporate tax incidence’. Numbers provided by
creation of value added and commercial activities Google Trends indicate that there is currently no
as they ‘discourage the activities of firms that are public interest in the incidence effects of taxes on
most important for [economic] growth: invest- corporate income. Indeed, both the knowledge
ment in capital and productivity improvements’. and concerns about the tax incidence are rare
(OECD, 2010, p. 22). With the current trend, even among tax activists, public officials and elec-
however, the OECD argues that a considerable ted lawmakers (see section 3.1 for a discussion).
challenge for governments arising from the digi- Despite vast economic evidence about the sig-
talisation of the economy relates to the question nificant distributional consequences of taxes on
of how taxing rights on corporate income genera- corporate income, which will be addressed below,
ted from cross-border activities should be alloca- this asymmetry is reflected by major recent EU,
ted among governments. EU policymakers follow IMF and OECD publications on corporate tax
suit, highlighting the need to reallocate corporate reform. As shown by Figure 2, EU, IMF and
Figure 1: Lack of public awareness of distribution of real burden (tax incidence effects) of
corporate taxation
200
180
160
140
120
100
tax revenues. While the mere size of tax revenues OECD officials are mainly concerned about
80
currently dominate at EU and OECD levels, eco- governments’ future ‘tax revenues’ and ‘tax avoi-
nomic
60
consequences and, importantly, distribu- dance’. The term ‘tax incidence’ is only mentio-
tional implications on individual citizens hardly ned three times in a publication released by the
play
40 a role. The question about who is really bea- IMF in 2019 on the future of corporate taxation
ring the burden of taxes on corporate income, the in the global economy (total number of words:
so-called
20
corporate tax incidence, is supressed in 36,313). At the same time, neither the European
corporate tax reform debates. Commission’s impact assessment on the digi-
0
As outlined
2017-01-01 by Figure
2017-04-01 2017-07-011, terms
2017-10-01like2018-01-01
‘aggressive 2018-04-01tal services
2018-07-01 tax (67,1512019-01-01
2018-10-01 words)2019-04-01
nor the 2019-07-01
OECD’s
tax planning’, ‘corporate tax avoidance’ and ‘fair recent consultation document on international
aggressive tax planning corporate tax avoidance fair taxation corporate tax incidence
Source: Google Trends. Query of 17 July 2019. Interest over time. Period covered: 1 January 2017 - 14 July 2019. Region:
worldwide. Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of
100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means that there was
not enough data for this term.
that the proposed measures would likely be more risky and costly for companies trading and investing across international borders. See
https://www.oecd.org/ctp/beps/public-consultation-tax-challenges-of-digitalisation-13-14-march-2019.htm for general information on the
consultation and https://www.oecd.org/tax/beps/public-comments-received-on-the-possible-solutions-to-the-tax-challenges-of-digitalisation.
htm for a collection of individual submissions.
Should unfairness be maintained in corporate taxation? 7corporate tax reform (14,382 words) contain the tional credibility of these institutions, particu-
word ‘incidence’. Importantly, contrary to the larly that of the European Commission, whose
IMF and the OECD, the European Commissi- understanding of fairness is dubious. The failure
on’s tax policy department (over-)emphasises the to recognise the existence and empirical evidence
issue of ‘tax fairness’, but does not mention ‘tax on tax incidence undermines the bureaucratic
incidence’ once. The rather systematic disguise and political accountability in fiscal and econo-
of tax incidence effects undermines the institu- mic policymaking.
Figure 2: Ignorance of distribution of real burden (tax incidence effects) of corporate taxation in major
EU, OECD and IMF publications
45
42
37
34
31
16
3 3 3
0
"Fairness" "Avoidan ce" "Aggressive tax "Tax revenue" Tax "incidence"
planning/competition"
IMF Policy Paper: Corporate Taxation in the Globl Economy (IMF 2019)
OECD Addressing the Tax Challenges of the Digitalisation of the Economy, Public Consultation Document (OECD 2019)
European Commisison Impact Assessment of EU Digital Services Tax (European Commission 2018)
Source: Own analysis. Absolute number of mentions of terms ‘Fairness’, ‘Avoidance’, ‘Aggressive tax planning/competition’, ‘Tax
Revenue’ and Tax ‘incidence’ in IMF (2019), OECD (2019) and European Commission (2019).
No analysis of the economic and social work on international tax reform. The OECD’s
implications from the reallocation latest policy ideas, which were vaguely outlined
of tax rights by the OECD in February 2019, go well beyond the scope of
In the EU, the governments of Denmark, Finland, companies with digital business models. What
Ireland and Sweden opposed new taxes on digital started as a coordinated attempt to address cer-
services (DSTs), forcing European finance minis- tain ‘tax challenges of the digitalisation of the
ters to focus instead on the OECD’s ongoing economy’ (OECD, 2019, 2015a, 2015b) has now
8 TIMBROturned into a multilateral effort to overturn the This paper is an attempt to balance and advance
sovereign right of individual jurisdictions to tax the debate on international corporate tax reform.
income originating within their own borders. The Recognising that there is some political appetite
implementation of the OECD’s ideas could result to explore new forms of more transparent taxation
in a profound reallocation of international taxing that are fit for the digital age, this paper is also an
rights and tax revenues generated from inter- attempt to remind policymakers that taxes on cor-
nationally operating companies, irrespective of porate income have a depressing effect on citizens’
whether these companies are traditional or digital. real disposable incomes, future investment and
Civil society groups as well as tax justice future innovation. The paper will highlight that
advocates generally welcome the OECD chal- the overall financial burden of corporate taxes is
lenging the current distribution of international borne by all those who are already legally obli-
taxing rights (see, e.g., TJN, 2019). Most of them ged to pay direct taxes on labour income (income
were also in favour of the EU’s attempt to impose tax), personal consumption (sales taxes, VAT) and
taxes on digital services. However, technical input capital income (capital income taxes). Acknow-
to the discussions on tax reform is mainly provi- ledging the fundamental link between taxation
ded by public academics, tax advisory companies and democratic representation, it will be argued
and finance ministries. Many point to an overall that tax competition is a necessary condition for
positive impact on the future efficiency and future governments willing to enforce tax policies that
fairness of the tax system. However, the politi- are considered fair by their local populations.
cal economy of interest groups, i.e. groups and Section 2 outlines recent OECD and EU ideas
individuals’ own economic incentives to provide for the reform of international corporate tax rules.
political decision-makers with certain policy-re- Section 3 details the tax incidence literature. Due
levant advice, suggests that technical guidance to the extensive coverage in the academic litera-
from some of these groups should be treated with ture, particular attention will be paid to the inci-
caution. Tax practitioners and legal experts provi- dence of taxes on corporate income that is borne
ded much feedback. Yet, criticism mainly addres- by workers. Section 4 provides some back-of-the-
sed certain technical details rather than the wider envelope estimates for the corporate tax-indu-
economic, social and political implications of the ced burden that is borne by workers in OECD
measures proposed by the OECD. countries. Acknowledging the essential link
Most corporate tax experts, including public between taxation and democratic representation,
academics, representatives of finance ministries on the one hand, and the OECD’s commitment
and the EU’s and OECD’s tax officers, do not to private sector-driven (market) economies on
question the expediency of taxes on corporate the other, estimates will be provided for the part
income. The same applies for tax law practitioners of the incidence that workers in market economies
who are influential stakeholders in the tax reform would transfer to the governments of China and
debate (see, e.g., CEO, 2018). However, govern- India, two populous countries that are known for
ments should be concerned about the distributio- high degrees of state interventionism and high
nal consequences of taxes on corporate income. It levels of state-owned enterprise engagement.
is, after all, individual citizens in their capacity as Section 5 concludes with a discussion on how tax
workers, consumers, entrepreneurs and investors competition can advance government accounta-
who suffer from significant distributional conse- bility in tax policymaking, contribute to due tax
quences: Taxes on corporate income suppress citi- transparency – in favour of tax regimes that are
zens’ real incomes through lower wages, higher considered fairer by larger parts of governments’
consumer prices and lower capital income.3 local constituencies.
3 See Table 2 in the Appendix for an overview of literature on the incidence of corporate income taxes on workers.
Should unfairness be maintained in corporate taxation? 92. OECD AND EU IDEAS FOR THE REFORM OF
INTERNATIONAL CORPORATE TAX RULES
The OECD’s ‘Addressing the Tax Challenges of ments agree on rules that would further increase
the Digitalisation of the Economy’ initiative their overall tax burden, resulting in new legal
The OECD’s recent consultation document out- uncertainties and significantly higher tax com-
lines several proposals grouped under two cate- pliance costs.
gories: revised profit allocation and nexus rules Companies’ concerns are legitimate.
(pillar 1) and a global anti-base erosion proposal Governments’ appetite for higher tax revenues
(pillar 2). Regarding the ‘broader tax challenges has generally been strong in the past. Regarding
proposals to revise nexus and profit allocation taxes on corporate income, statutory corporate
rules’, the OECD laid out three policy ideas: tax rates in OECD countries have indeed decre-
ased since the 1970s, but governments’ revenues
1. Taxation according to user participation; from corporate income taxes actually increased.
2. Taxation on the basis of so-called mar- Since the mid-1990s, revenues from taxes on
keting intangibles; corporate income even grew at rates exceeding
3. Taxation of operations of ‘significant the growth of tax revenues from other sources
economic presences’. (see, e.g., Bauer, 2018). Moreover, governme-
nts across the world are increasingly looking
As a result of continued concerns about corpo- for new ways to collect additional taxes from
rate tax base erosion, which were already addres- foreign companies that operate in their terri-
sed by the OECD’s recent base erosion and pro- tory without having a taxable presence in their
fit-shifting (BE PS) measures, the OECD is also countries. This is reflected by numerous dispu-
taking into consideration a ‘global minimum tes over the allocation of international compa-
corporate tax regime’. The full list of the major nies’ taxable income, e.g. tax avoidance allega-
features of the proposals, as stated in the consul- tions (see, e.g., Álvarez-Martínez et al., 2018;
tation document, are summarised in Table 1 in Andersson, 2018), the EU’s Digital Services Tax
the Appendix. initiatives (see below) or the EU’s multiple sta-
For now, following the responses to the te-aid cases (see, e.g., European Commission,
OECD’s recent consultation, suffice it to say 2019), and the European Commission’s ‘Task
that internationally operating companies are Force on Tax Planning Practices’ to investigate
alarmed.4 Most businesses are actually in favour the discriminatory tax ruling practices of EU
of greater levels of harmonisation of natio- Member States.
nal tax codes. The current system, a complex The OECD seems to be guided by the wil-
patchwork of highly diverse national tax laws lingness to further increase tax code complexity.
and international tax treaties, causes high com- While OECD policymakers initially indicated
pliance costs. It also comes with substantial not to ringfence certain industries with respect
legal risks for businesses that trade and invest to different tax treatment, a recent consultation
across borders. Following the proposals, busi- document suggests not only to ringfence highly
nesses are concerned that at least some govern- digital business models, but also ‘consumer-facing
4 See responses submitted to the OECD’s consultation. View https://www.oecd.org/ctp/beps/public-consultation-tax-challenges-of-digita-
lisation-13-14-march-2019.htm for general information on the consultation and https://www.oecd.org/tax/beps/public-comments-recei-
ved-on-the-possible-solutions-to-the-tax-challenges-of-digitalisation.htm for a collection of individual submissions.
10 TIMBROindustries’.5 It is hard to see where lawmaker can The EU’s Digital Services Tax (DST) proposal
draw a line on the basis of non-discriminatory Some European policymakers have for a long
rules. And it is hard to see how businesses with time been calling for a certain degree of mini-
comply B2B and B2C value chain can comply with mum taxation in the EU, obliging internationally
such regulations without running into legal risks. operating companies to pay at least some tax in
Some governments have pre-empted the OECD’s EU countries. Following a EU-wide attempt to
reforms by promoting new forms of corporate tax- introduce special taxes on the revenues of some
ation based on ideas regarding ‘user participation’ digital services companies, some EU governments
or ‘marketing intangibles’, i.e. certain non-physical are now contemplating national digital services
assets owned by a firm, which are likely to dispropor- taxes (DSTs). The French government has already
tionately benefit the governments of countries with imposed a narrowly defined DST (the Senate of
large populations, e.g. China and India. the French Parliament passed the legislation on 11
However, achieving full consensus is diffi- July 2019). Its final version excludes French and
cult. It is unlikely that all 129 governments will European companies.6
find a consensus on the OECD’s latest ideas. The DST initiative became the EU’s most sig-
For instance, while the OECD’s Pillar 2 propo- nificant attempt to reform parts of the Member
sals were initially supported by Germany and States’ corporate income tax legislation. Several
France, the suggestions offered under Pillar 1, i.e. EU efforts, such as the Common Consolidated
the allocation of more corporate profits to the Corporate Tax Base (CCTB) or the Consolidated
countries or markets of online users, have gener- Corporate Tax Base (CCTB), aimed to largely eli-
ally been supported by the governments of India, minate discretionary corporate tax policies within
the UK and the USA. the Single Market, but didn’t attract support from
Furthermore, the EU’s experience demon- Member States.
strates that governments are sharply divided on In March 2018, the European Commission
corporate tax matters. Even if some internatio- presented a two-part proposal for a EU-wide
nal agreement is reached, many uncertainties will DST. Under this proposal, a digital platform com-
remain on how the recommended measures will pany would be deemed to have a taxable ‘digital
be legislated from one jurisdiction to another. And presence’ or a virtual permanent establishment if
while many uncertainties remain as to the precise its revenues exceed a threshold of EUR 7 million
shape of the OECD’s ideas, it should be noted in annual revenues in a Member State, it has more
that, as of June 2019, the OECD had not provi- than 100,000 users in a Member State in a tax-
ded any publicly available impact assessment for able year, or more than 3,000 business contracts
its proposed measures. Neither had they provided for digital services between the company and busi-
estimates regarding the country-specific tax bases ness users per annum. The Commission’s second,
shifted from one government to another (e.g. on interim or temporary plan, aimed at a harmonised
the basis of users’ locations or economies’ endow- EU-wide DST in the absence of a global (OECD)
ment with marketing intangibles). Nor had they agreement. It suggested a 3 per cent tax on gross
addressed the tax incidence, i.e. the distributional revenues earned in the EU. The tax would apply
consequences of the proposed taxes for individual to revenues created from certain digital activities,
citizens in their capacity as workers, consumers, which the European Commission thinks esca-
entrepreneurs and investors. pes Member States’ current corporate tax rules.
5 See consultation document ‘Public consultation document, Secretariat Proposal for a Unified Approach under Pillar One, 9 October 2019 – 12
November 2019. View http://www.oecd.org/tax/beps/public-consultation-document-secretariat-proposal-unified-approach-pillar-one.pdf.
6 The final law was designed specifically to exclude one of France’s best-known digital companies, Criteo. Criteo is excluded from the French DST
due to this narrow definition. To date, France has not identified a single French or European company that will be directly affected by the DST.
France’s Secretary of State for Digital Affairs, Mr Mounir Mahjoubi, has explicitly stated that no European companies will be subject to this tax.
See, e.g., L’Express article ‘Taxation des GAFA: la France peut-elle faire cavalier seul?’ from 3 January 2019. Available at https://lexpansion.
lexpress.fr/actualite-economique/taxation-des-gafa-la-france-peut-elle-faire- cavalier-seul_2055669.amp.html.
Should unfairness be maintained in corporate taxation? 11Taxing revenues is a rather unusual practice. With (CCCTB). At the same time, many EU govern-
the DST, the European Commission fundamen- ments strongly advocate corporate tax reforms to
tally deviates from the internationally recognised take place at the OECD level. Despite these deve-
principle to tax companies’ net income (i.e. in lopments, some EU Member States have anno-
simple terms, revenues minus costs). unced or already put in place unilateral taxes on
The tax is intended to apply to revenues cre- certain digital services (see Table 3 in the Appen-
ated from selling online advertising space, digi- dix). These governments argue that their national
tal intermediary activities, which allow users to DSTs would be temporary only until new OECD
interact with other users and which can facilitate recommendations are implemented. Yet, not all
the sale of goods and services between them, and governments have explicitly stated as such. In the
revenues created from the sale of data generated UK, for example, businesses have been urging
from user-provided data. Under the second part lawmakers to ensure that an expiry clause is inser-
of the proposal, companies with total annual ted into their general ‘digital legislation’.
worldwide revenues of at least EUR 750 million
and EU revenues of EUR 50 million would be Tax avoidance vs. tax incidence
required to pay the tax. Tax revenues would go to The European Commission and many natio-
the Member States according to where the users nal EU governments argue that ‘tax avoidance’
are located. by multinational corporations is a problem for
In November 2018, the European Commis- society at large. In addition to that claim some EU
sion, largely supported by the European Parlia- governments call for a tax system that (somehow)
ment, was aiming for a consensus in the Council captures the value of user/customer data. Con-
on these proposals. However, some Member States tinuing calls from the European Commission as
strongly opposed the Commission’s proposals. In well as the European Parliament indicate that the
December 2018, the Austrian EU presidency sug- debate about corporate tax reform in general and
gested targeting revenues from the supply of digi- special taxes on a selective list of digitalised com-
tal services where users contribute to the process panies are not going to disappear any time soon.
of value creation. It did not find consensus in the Calls for minimum (effective) corporate taxes
Council. Another recommendation by France and rates7 on the one hand, and requests for an entirely
Germany to target only advertising services was new type of taxes for a discriminatory list of large
also rejected. The Council did not reach an agre- digital companies on the other, distract public
ement at the March 2019 meeting of EU finance attention – and political capital – away from the
ministers. Compromise proposals put forward by need to fundamentally reform national corporate
the governments of Austria, France and Germany tax laws to achieve a simpler, more transparent
were also rejected. and more efficient corporate tax system in the
Various EU governments (formal opposition near future.
to the EU-wide DST mainly came from Ireland, For example, larger technology-driven com-
Luxembourg, Denmark and Sweden) are still dis- panies, including those headquartered in the
missive of the idea of taxes on certain digital ser- EU, would suffer from a more fragmented, more
vices. Many also oppose EU efforts on corporate complex, more costly and more unpredictable tax
tax base harmonisation across the EU. EU poli- landscape. Many companies are already concer-
cymakers have been struggling for many years to ned about an uneven implementation of the wider
find a compromise regarding the introduction of a BEPS recommendations, which are key challenges
Common Corporate Tax Base (CCTB), followed multinational companies face today. The proli-
by a Common Consolidated Corporate Tax Base feration of unilateral gross revenue-based DSTs
7 In the EU, the Socialists and Democrats (S&D) as well as the Greens in the European Parliament have been calling for minimum effective
corporate tax rates.
12 TIMBROwould significantly distort competition, interna- which the French DST burdens or restricts US
tional trade and international investment. The US commerce (USTR 2019). At the same time, ‘profit
government’s harsh criticism of the French DST shifting’ and ‘market dominance’ get intertwi-
bears a realistic risk of retaliatory trade policy ned in a way that distorts the public debate. It is
measures, which would cause additional economic important for policymakers to separate the debate
distortions. Indeed, in July 2019 the United States over whether large digital companies pay their fair
Trade Representative (USTR) launched a formal share of tax from whether they are too large per se,
Section 301 Investigation of France’s Digital Ser- and therefore require attention from, for example,
vices Tax to address whether the French DST is the European Commission and national competi-
unreasonable or discriminatory and the extent to tion authorities.
Should unfairness be maintained in corporate taxation? 133. THE TAX INCIDENCE: HOW IT IMPACTS WORKERS,
CONSUMERS, ENTREPRENEURS AND INVESTORS
Tax incidence neglected in the debate employment and growth, if policymakers, either
about corporate tax reform(s) through ignorance or convenience ignore the
In its 2017 report Tax Policies in the European Union, importance of incidence.”
the European Commission (2017) argues that a While impact assessments are not (yet) avai-
tax system is only fair and efficient if it contributes lable for the OECD’s policy ideas, unambiguous
to ‘investment and job creation, corrects inequa- lessons can be drawn from the European Com-
lities, supports social mobility and achieves high mission’s DST initiative: the tax department of
levels of compliance’. As concerns the revenue side, the European Commission published an official
the Commission acknowledges that there can be a document entitled Impact assessment. However,
trade-off between goals of efficiency and fairness. that paper reads like a political manifesto aga-
The Commission’s reasoning is largely confir- inst corporate tax avoidance and the commercial
med by the OECD, whose multilateral initiatives use of data by large companies. Importantly, the
under the auspices of the Inclusive Framework, Commission failed to provide an assessment of
particularly the OECD’s BEPS initiative, aim to the policy implications for businesses, workers,
address companies’ ‘tax planning strategies that consumers and entrepreneurs. Accordingly, the
exploit gaps and mismatches in tax rules to artifi- European Commission’s Tax Department (DG
cially shift profits to low or no-tax locations where TAXUD) was formally admonished by the EU’s
there is little or no economic activity’. own Regulatory Scrutiny Board (RSB, 2018) for
Even though in the past both the EU and the not providing a proper impact assessment. DG
OECD recognised the efficiency losses that result TAXUD’s document does not provide any infor-
from taxes on corporate income, they (so far) mation that is needed to assess the effects inten-
did not provide appropriate impact assessments ded by policymakers. Generally, the document
for their proposed policies. As a result, the cur- also fails to assess the impacts on (perceived) fair-
rent political debate is almost exclusively about ness in corporate taxation and the distributional
technical legal details, whose future impacts on consequences resulting from a reallocation of tax
companies’ international tax planning strategies base to the EU. With regard to the technicalities
are disputed. Efficiency and income distribution of the DST, the Commission blanked out the
considerations hardly play a role in the OECD’s distributional implications on different actors of
proceedings. The neglect of the incidence of cor- the economy that would result from new taxes on
porate taxes has wide implications on economic certain digital services. As a result, the European
efficiency and citizens’ perceptions of tax fair- Commission’s reasoning underlying a EU-wide
ness. As recently outlined by Baert et al. (2019) DST suffers from various logical inconsistencies.
in a study for the European Economic and Social As outlined by Copenhagen Economics (2018, p.
Committee (EESC), ‘[t]he risk is that whilst 1), the European Commission’s own assessment
public debate remains uninformed about the merely ‘relies on three arguments for the digital
importance of tax incidence, tax policy making tax [that] we find contrasting with empirical evi-
will remain suboptimal in terms of its impact on dence and solid economic reasoning’.8
8 Three main arguments forwarded by the European Commission are: 1) Fairness and level playing field: Digital companies providing these
services pay significantly less in taxes than traditional firms. 2) Loss of tax revenues: The increasing importance of internet-based services leads
to reduced tax base, and 3) EU users play a key role in increasing the value of platforms: Users of platforms are playing a large part in creating
the value, and this value creation should be taxed in the users’ country of residence.
14 TIMBROMost notably, DG TAXUD’s impact assess- imposed on companies is directly and/or indi-
ment document does not address the critical issue rectly shifted onto others in the economy, e.g.
of tax incidence, i.e. the questions about who is suppliers and (B2B) customers, and finally borne
effectively bearing the financial burden of special by individual (final) consumers, workers, entre-
taxes on digital services. The European Com- preneurs and investors.
missions’ tax officials thereby ignore that inci- With regard to the incidence of taxes on cor-
dence analysis is an indispensable task for those porate income, policymakers, civil society repre-
aiming for a system of fair taxation, and a system sentatives and journalists usually assume that the
that is considered fair by governments’ national tax incidence falls exclusively on company owners
constituencies respectively. As a result of that, or, as frequently stated, shareholders. Indeed,
the European Commission’s tax policy agenda is political party programmes, position papers and
characterised by a bias that has long shaped poli- media coverage suggest that policymakers invol-
tical debates on corporate tax reform. This bias is ved in the discussions about tax reform disregard
shared by organisations that have a strong impact the vast body of literature that concludes that the
on media coverage and public opinion. As cautio- largest share of the incidence of taxes on corporate
ned by Baert et al. (2019, ‘[s]ome organisations income falls on workers. As argued by Fuest et al.
similarly dismiss the idea of incidence, despite (2018, p. 1) ‘[a]ccording to surveys, most people
the academic evidence […]’. For example, the think that capital owners bear the burden of cor-
Tax Justice Network in its publication Ten Reasons porate taxation’. At the same time, there seems
to Defend the Corporation Tax calls the incidence to be a wide range of views among public econo-
argument ‘a hoax’ (Tax Justice Network, 2015). mists about the allocation of the incidence of taxes
In addition, Oxfam noted that taxing companies on corporate income: Public economists sur-
is ‘one of the most progressive forms of taxation’ veyed by Fuchs et al. (1998) state on average that
(Oxfam, 2014). Similarly, Eurodad (2017) ‘dismis- 40 per cent of the corporate tax incidence is on
sed the idea of a link between corporate taxes and capital (i.e. individual business owners, sharehol-
the income of workers or consumer price levels’. It ders, investors), leaving a substantial part of the
should be noted that, according to the EU’s Trans- burden for individual workers, landowners and
parency Register, Oxfam, Eurodad and the Tax consumers. However, in this survey, one quarter
Justice Network receive financial funding from of the surveyed economists stated they believed
the European Commission, which may have an that the share borne by capital was below 20 per
impact on these organisations’ political advocacy cent, while another quarter believed the share to
activities.9 be 65 per cent or higher.
Incidence analysis is about the question of who The lack of political recognition of the distri-
is bearing the financial burden of a tax. There is butional implications, e.g. overall tax progressi-
broad agreement among policymakers that the vity effects, from tax incidence effects is somewhat
incidence of sales taxes falls on consumers. There of a paradox. Generally, tax incidence effects are
is also agreement that the incidence of property not difficult to comprehend. Although incor-
taxes falls on the owners of real estate. The econo- porated entities (or individual ‘owners’ of part-
mic tax incidence in the area of corporate taxation nerships) act as legal taxpayers, they do not actu-
refers to the fact that the real financial burden of ally bear the burden of taxes on corporate income.
a tax is not borne by the company (e.g. an incor- The actual financial burden is shifted partly, enti-
porated entity, a partnership) on which the tax is rely or in some cases more than 100 per cent (over-
imposed under legal statute. Economic theory, as shifting) to other payers than the legal taxpayers.
well as empirical evidence, demonstrates: a tax As outlined by Melinez (2017, p. 5) in a recent
9 The EU’s Transparency Register can be accessed at http://ec.europa.eu/transparencyregister/public/homePage.do?redir=false&locale=en
Should unfairness be maintained in corporate taxation? 15OECD Working Paper, ‘[c]are should be taken on to some degree in the price of the taxed
in interpreting [legal tax liability and legal remit- service. If the service, such as advertising, is
tance responsibility], which should be understood itself used as business input then this becomes
against the backdrop of the issue of economic inci- a potential source of production inefficiency.
dence’. Melinez also outlines that ‘[t]he statutory (IMF, 2019, p. 17)
incidence and remittance responsibility may have
little relationship to economic incidence’ and that It should be noted that the estimation of
‘it is crucially important to distinguish between the tax incidence is a difficult undertaking.
the individual or entity that remits the tax and the A large body of the tax incidence literature
individual that bears its economic burden’ (p. 8). demonstrates that the size and distribution
of the economic incidence will vary according
The distributional implications arising to many impact factors, such as the precise
from the corporate income tax incidence type of tax, country-specific trade characteris-
The amount of literature focusing on the inci- tics, labour market institutions and product
dence of taxes increased since the mid-1990s. market structures, e.g. the degree of competi-
While the public debate is still driven by other tion or market concentration rates. As outli-
(political) considerations, predominantly tax ned by Clausing (2013), for example, taxes on
revenues, economists have built a vast reservoir corporate income can depress wages, but the
of knowledge about the incidence of specific cor- complexity of real-world economies makes it
porate taxes. Recognising the importance of this difficult to observe the underlying relations-
issue for policymakers, it is surprising that the tax hips. In addition, Dyreng et al. (2019) state
incidence is only rarely addressed in the public that a company’s ability to pass the economic
debate and hardly covered by media representa- burden of taxation to workers or consumers
tives. One explanation is that, as concluded from depends on its market position and competi-
an analysis conducted by Fuchs et al. (1998), the tive environment.
relation between value judgments and policy pre-
ferences for public economists is ‘much stronger’ It is generally difficult to quantify second and
than is the relation between the relevant econo- third-round effects, e.g. the tax incidence imposed
mic parameters and policy choices (for a similar on suppliers if a company passes on the tax cost
analysis, see also Mayer, 2000). upstream, with implications on these suppliers’
The political debate about the EU’s DST is customers, workers and owners. Generally, supp-
a case in point. As concerns the incidence of the liers, which are often less mobile than their custo-
DST, the European Commission and advocates mers, can only escape lower prices if they find
in the European Parliament entirely ignored tax customers that are willing to pay more for the pro-
incidence effects. Similarly, a recent discussion ducts and services they offer. Customers, which
paper prepared by the IMF (2019) merely devotes are usually relatively immobile, would have to go
one short, vague paragraph on incidence effects for alternative goods and services to avoid paying
resulting from special taxes on certain digital ser- more. At the same time, workers are usually the
vices providers: least mobile factor, making them the most vulne-
rable group with respect to the financial burden
The efficiency effects of digital services taxes of taxes on corporate income. Figure 3 outlines
are not clear cut. The digital service tax looks potential transmission channels underlying the
like a simple turnover tax, likely to be passed incidence of taxes on corporate income.
16 TIMBROFigure 3: Tax incidence effects and the impact of taxes on corporate income/revenues on workers, consumers,
entrepreneurs and investors
Tax applied on corporate profits (traditional CIT) or corporate revenues (EU DST proposal)
Company
Upstream pass on: Downstream pass on: Internal pass on: Internal/external pass on:
Company decides to Company decides to pay Company decides to pay Company decides to pay less
increase prices less to suppliers less to workers to owners and investors
• Lower personal income
• Higher cost for
for company owners
purchasing companies
• Higher cost for other • Lower wages and salaries • Lower capital income
(B2B), resulting in
companies (B2B), other • Job cuts for company owners
lower profitability lower
suppliers, resulting in • Lower rises in wages and (shareholders)
solvency, less investment
lower profability, lower salaries • Lower dividend payments
• Higher prices for final
solvency, less investment • Less purchasing power (shareholders)
consumers (B2C), less
• Lower returns on
purchasing power
investment
Burden direclty and indirectly borne by individual Burden directly borne by Burden directly borne by
consumers, individual company owners/investors individual workers (labour) individual investors (capital)
2nd round, 3rd round ... effects due to value chain pass on effects
Own illustration. CIT: Corporate income tax. DST: Digital Services Tax.
Much of the focus of the empirical litera- rise after the elimination of taxes on corporate
ture concerns the allocation of the corporate tax income, but, importantly, companies would gene-
burden between owners of capital, workers and rally have more means available to allow pay raises
consumers. Various studies take account of the over time.
openness and size of the economy, capital/labour Another often-cited mechanism is the negative
and product substitution elasticities inside a coun- impact of taxes on corporate income on invest-
try or across countries, and specific factors related ment. Corporate taxes can decrease investment,
to a certain sector or if there are alternative pro- which implies that the gains at firm level (and
ducts available (see, e.g., Clausing, 2012; Vasqu- economy-wide productivity) are lower. Accor-
ez-Ruiz, 2011). dingly, lower investment tends to reduce the mar-
Most of the literature on the economic inci- ginal productivity gain needed for wage increases.
dence of corporate income taxes focuses on the Again, it should be noted that the size and distri-
dimension of the burden that is borne by workers bution of the incidence that is borne by workers
(Fuest et al., 2015). Academic literature outlines to will vary according to many impact factors, most
a number of mechanisms through which a corpo- of which are company-specific, but also the degree
rate tax effectively reduces wages. It is highlighted of competition or market concentration rates.
that taxes on corporate income reduce the econo- Also, it is generally difficult to quantify second
mic surplus (rent) that is split between firms and and third-round effects, e.g. multiplier effects
workers. Simply put, as corporate taxes represent resulting from higher levels of aggregate demand
just another cost for businesses, taxes on corpo- in response to increases in wages.
rate income reduce firms’ disposable income. As a Firm-level studies are generally scarce, but
result, there is less revenue left from which incre- studies that focus on aggregates, e.g. regional or
ases in employees’ wages could be funded. This national aggregates of corporations and wages,
does not imply that all wages would immediately find that workers generally bear the largest share
Should unfairness be maintained in corporate taxation? 17of the burden, which is estimated to amount to 50 tive impact on wages, whereby the authors
to 70 per cent of the revenues raised from taxes ‘hardly observe any decline in nominal
on corporate income. Some studies find substanti- wages’, but find ‘slower wage growth in
ally higher tax incidence effects (for overshooting affected firms over time, leading to lower
effects see literature provided in Table 2 in Baert [wage] levels in the future’. In other words,
et al., 2019, p 22). taxes on corporate income contributed to
Fuest (2015) outlines that most empirical stu- wage stagnation in Germany.
dies focus the economic burden on workers, whe- • Industry characteristics and trade inten-
reby the results also suggest that workers’ wages sities matter: Larger and significant
decline by roughly 50 per cent of the additional effects are found for manufacturing and
corporate tax revenue raised. At the same time, construction sector firms. The authors
it is highlighted that the incidence on workers argue that ‘[o]ne explanation for the dif-
can only be observed within a period of one to ference to trade and service sector firms
four years after the tax change. Arulampalam et could be that the latter are able to shift
al. (2010), for example, identify a direct shifting part of the burden to their customers as
effect resulting from taxes on corporate income. their products and services are on average
They find that an exogenous rise of USD 1 in tax less tradable than manufacturing goods’.
would reduce the wage bill by 49 cents. Some stu- • Labour union-determined wages matter:
dies come to the conclusion that the economic The authors find larger negative wage
burden on workers is even more pronounced. effects for firms under collective bargai-
Felix (2017), for instance, finds that the decline in ning agreements.
wages in response to higher taxes is equal to more • Company size matters: The authors find
than four times the revenue raised by the corpo- that most of the incidence on wages results
rate tax. A comprehensive overview of related tax from incidence effects driven by small and
incidence literature is provided in Table 2 in the medium-sized enterprises (SMEs), which
Appendix. in 2017 accounted for more than 95 per
A recent study conducted by Fuest et al. (2018) cent of firms in Germany. The results
merits special attention because of its sensitive suggest that ‘workers in these compa-
political implications. The authors address the nies are more affected by local corporate
question of whether higher corporate income tax changes than employees of very large
taxes reduce wages in Germany. They study the firms’. They argue that large firms, which
causal relationship between workers’ wages and often have a presence in more than one
corporate tax changes for firms in 3,522 German jurisdiction, can exploit more tax avoi-
municipalities over a 20-year horizon, resulting dance opportunities than smaller compa-
in 6,800 relevant tax changes. Fuest et al. find nies. They show, for example, ‘significant
that workers bear about half of the total econo- wage effects only for single-plant firms,
mic burden resulting from a tax change, whereby while establishments in multi-plant firms
low-skilled, young and female employees bear show no wage response’.
a larger share of the tax burden. In addition, the • Workers’ skills and worker mobility
authors conducted a number of additional analy- matter: The authors find similar wage
ses and robustness tests. Their major findings can effects for medium and low-skilled wor-
be summarised as follows: kers, but no wage effects for high-skilled
individuals, implying that high-skilled
• German workers bear approximately workers are better equipped to ‘escape’
51 per cent of the corporate tax burden: the tax incidence from taxes on corporate
Taxes on corporate income have a nega- income. It is argued that, in Germany,
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