Cutting Through in the Global Corporate Tax Rate Debate

[dropcap]W[/dropcap]hile we see daily headlines about the perils of globalisation, in reality much of this debate is occuring at the surface level. For beyond any world leaders going tit for tat with tariffs, there are deeper economic goals being pursued in the public and private sector that illustrate the movement to a truly global economy remains strong. A key example of this is the recent reforms to the corporate tax rate across a number of nations.

With Barbados having announced last month it would cut the corporate tax rate, many feel the action taken in the nation’s capital of Bridgetown could create a ripple effect throughout the Caribbean, and kickstart a new era of tax reform, for better — or for worse. So, could region-wide corporate tax rate cuts benefit business and the people of the Caribbean as a whole?

THE BARBADOS PLAN

November saw the Barbados government announce it would seek to harmonise its domestic and international corporation tax rates. For some companies, this offered a reduction of up to 29% of their annual rate of taxation, as from 2019 Bridgetown will charge companies a tax rate on a scale from 5.5% to 1%. Though this harmonisation does offer a new clear-cut policy for Barbados’ business sector, the influence of the European Union’s OECD has been criticised as an unwelcome element in Bridgetown’s policy making.

While Barbadian Prime Minister Mia Mottley indicated the reforms were pursued with the goal of meeting OECD requirements against Base Erosion and Profit Shifting (BEPS), there’s worry the OECD’s role isn’t only set to impact Barbados, but could have a knock-on effect for nations around the region — ones who feel their only recourse to sustain the health of their business sectors is to lower the corporate tax rate.

Already there has been concern voiced from St Vincent and the Grenadines as its Minister of Finance, Camillo Gonsalves, said businesses could “flee”, shifting not just the location they choose to headquarter, but also taking jobs with them from his nation to Barbados.

It’s easy to understand in this economic climate why many politicians in charge of their nation’s treasury are tempted to speed towards a lowering of the corporate tax rate, so as to better secure existing business (and hopefully attract more, enticed by a lower rate). Though advocates for such reform may point to the success of nations like the Republic of Ireland and Singapore, who have small populations but have attracted sizeable investment due to their tax reform, new nations only now seeking to reduce their corporate tax rate will not be able to claim the same advantages as the pioneers.

While Barbados is the latest to pursue such a reform, with each successive nation taking that route, the risk can grow of diminishing economic returns. Put simply, trying to maintain existing jobs or enticing foreign investment with tax reform may not work in the way it once did.

For nations like Saint Lucia that have flagged the idea of harmonising their tax rates, there is a fork in the road upcoming, one that will require consideration not only of national economics, but the region’s relationship with the EU as a whole.

ONE SIZE DOESN’T FIT ALL

Nations across the region have faced immense political pressure from abroad following the Panama and Paradise Papers leaks, most notably seen by the EU featuring a number of local states in its first ever ‘tax haven blacklist’ in December  2017. Since then a number of local nations have signified their readiness to pursue reforms that address issues in their finance industries. But just the same as any EU blacklist that fingers Caribbean nations while failing to name EU tax havens is hypocritical, so too do critics cite the risk of a ‘race to the bottom’ that may come with continual lowering of corporate tax rates. In this area the EU’s shortcomings are well-documented.

Accordingly, a disconnect can quickly emerge in this global debate. Certainly, doing away with any crime (and the more odorous elements) of a financial sector can help tackle inequality. But, if there’s a continual reduction of the corporate tax rate globally — alongside the ongoing apparent failure of trickle-down economics to bear fruit — then by many measures, ‘progress’ in this era could amount to one step forward, two steps back.

THE US AND EU EXPERIENCE

Earlier this year the U.S. government passed legislation that saw a reduction in its corporate tax rate from 35% to 21%. While the pros and cons of this move for the American nation continue to be debated in Washington, it was held to be (in absolute terms) the biggest reduction in U.S. corporate tax history.

The impact of this cannot be overlooked. After all, if California separated from the United States, it would be an economic giant of its own. So much so that early 2018 saw it overtake Britain to become the 5th biggest economy in the world, independent of its membership in the United States. This shows how a vote in Congress and the stroke of a pen in the White House can fundamentally redefine the global playing field.

For those who point to the potential profitability of corporate tax reform, there is also the need to recognise the capacity for a nation’s lowered rate to be matched or outpaced in future by a bigger nation. Certainly, a smaller nation can still compete but must look to do so in anticipation of — and not reaction to — bigger economies.

REVIEW THEN REFORM

Underwriting this corporate tax debate is the reality of disruption. Just like a boat heading out of harbour and into ocean waters, a nation in today’s global economy must contend with completely differing conditions. Right now, the international business environment is in a period of change that is often inspiring, but at times brutal.

Corporate tax rates are being cut today on the presumption of greater profitability and investment tomorrow. This is despite the reality that a multitude of emerging factors such as cryptocurrency, citizenship by investment, and even the potential for online citizenship in nations like Estonia, are fundamentally changing the way business engages with consumers and taxation in the international arena. These trends won’t revolutionise the global tax sector overnight but have already begun to fray the edges of it.

For nations that can identify the opportunities of this new era with clear eyes, there is much to look forward to; those that misjudge conditions, place the ship of state at greater risk of a rogue wave. There’s no suggestion that defining a new direction in this environment is easy. Those who maintain that what worked for years should still work in the future, need to recognise that the speed and scale of business evolution globally is unlike anything we’ve ever seen prior, and is only set to speed up.

Observing the impact of corporate tax rate reductions in other nations over time is surely ideal for states that seek greater profits without risking the pitfalls.