CUT­TING THROUGH IN THE GLOBAL COR­PO­RATE TAX RATE DE­BATE

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY ED KENNEDY, STAR BUSINESSWEEK COR­RE­SPON­DENT

While 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.

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%

Mia Mot­t­ley, Prime Min­is­ter of Bar­ba­dos

The Prime Min­is­ter of Bar­ba­dos, Mia Mot­t­ley has been fol­low­ing through on a strat­egy of cross-cut­ting eco­nomic re­forms since win­ning an ab­so­lute ma­jor­ity in last May’s gen­eral elec­tions

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