Brigitte Alepin and Louise Otis are editors and two of the co-authors of Winning the Tax Wars, published in December, 2017, by Wolters Kluwer.
The 40-per-cent cut in corporate tax rates in the United States could usher in a new era of across-the-board tax exemptions for multinationals. Such a radical measure may also be powerful enough to lead to complete tax exemption for multinationals as states attempt to lure capital investment through ever smaller tax rates.
The question then: Are we already in the middle of a tax war? Early warnings of this were already seen a few years ago, when global corporations – namely Starbucks, Apple and Amazon – were found to abuse taxation structures to limit the taxes they were paying to the British government. Such conditions contribute to a situation where excessive poverty is caused by massive wealth that pays little or no tax.
Between 1980 and today, the statutory tax rates of multinational corporations have dropped to 23 per cent globally, from an average of 38 per cent, before the U.S. tax reform.
In addition, since the beginning of the century, some regions of Africa and Asia have fought tax wars resulting in negative tax rates, with the goal of attracting capital investment.
The Trump tax reform presents a significant challenge for Canadians: It is a blow to the competitiveness of our tax system compared with that of the United States.
Tax rates for Canadian multinationals are currently 26 per cent; with the Trump reform, U.S. rates will drop to 21 per cent (plus state tax of 3.5 per cent on average) from 35 per cent.
Of course, multinationals, both Canadian and American, do not pay these statutory rates because they reduce them through multiple tax strategies. However, before tax cuts favouring U.S. multinationals, the Canadian tax regime had the advantage.
Because of agreements between Canada and various tax-haven countries, it is possible for a Canadian multinational to significantly reduce its tax bill. Until now, such agreements gave a significant advantage to Canada in comparison with the United States, which imposed a 35-per-cent tax when income was repatriated.
However, with the Trump administration's reform, the tax regime adopts the territorial taxation system under which U.S. multinationals will generally be exempt from repatriation tax.
The reform also affects the $2.6-trillion retained in offshore accounts by U.S. multinationals, lowering the repatriation tax from 35 per cent to 8 per cent and 15.5 per cent, depending on the type of assets.
To encourage businesses to use tax savings at home, the Trump reform subsidizes the purchase of equipment for up to 21 per cent of the acquisition cost by implementing accelerated depreciation measures. Capital gains will also be taxed less, to the detriment of the Canadian system.
As other countries follow suit, the result will be a reduction in corporate tax rates across the world. It is happening already: Australia has announced its intention to respond to the Trump reform by lowering its tax rate to 25 per cent from 30 per cent. France also plans to cut its tax rate to 25 per cent by 2022 from 33 per cent. Britain will slash further, to 17 per cent by 2020 from 20 per cent.
Fiscal wars caused by excessive international tax competition are difficult to end because any solutions are hindered by a powerful "race to the bottom" dynamic. Among the solutions is co-operation through international tax co-ordination.
As a precautionary measure, governments should consider other forms of taxation that are more effective than income taxes in a globalized world, such as wealth taxes, consumption taxes, a minimum global tax, etc. And citizens must continue to speak out in the public arena, because tax issues concern them first and foremost.