Fundamental Reform of Corporate Income Tax.

174 Pages·2007·1.76 MB·English

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Fundamental Reform of Corporate Income Tax P
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Policymakers in OECD countries are concerned about whether they can maintain their current levels of y S
corporate income tax revenues and how they can create an attractive investment climate for domestic t
and foreign investors. They are also concerned about the distortions induced by their corporate income ud Fundamental Reform
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tax systems and are looking for ways to reduce corporate income tax complexity. These goals can be s

achieved through fundamental corporate income tax reform. of Corporate Income Tax
This report presents the recent trends in the taxation of corporate income in OECD countries and
discusses the main drivers of corporate income tax reform and evaluates the gains of fundamental
corporate tax reform. The corporate tax-induced distortions are discussed from a domestic and
international tax point of view. This study also considers tax revenue and tax complexity issues.
Countries can fundamentally reform their corporate income tax systems in different ways. Governments
might implement a full imputation tax system, a corporate allowance for corporate equity (or capital) tax
system, a shareholder allowance/credit for corporate equity tax system, an allowance for shareholder
equity tax system or a comprehensive business income tax system. Or, instead of taxing corporate income,
governments might implement a corporate cash-flow tax. In that case, countries might implement a
destination-based corporate cash-flow tax or an origin-based corporate cash-flow tax (the Hall-Rabushka
flat tax, the Bradford X-tax, and Zodrow and Mc Lure’s two-tier progressive rate cash-flow tax). These
fundamental corporate tax reform proposals are discussed in detail.
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No. 16
ISBN 978-92-64-03811-0 -:HSTCQE=UX]VVU:
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OECD Tax Policy Studies
Fundamental Reform
of Corporate Income Tax
No. 16
ORGANISATION FOR ECONOMIC CO-OPERATION
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Also available in French under the title:
Réforme fondamentale de l’impôt sur les bénéfices des sociétés
N° 16
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FOREWORD
Foreword
T
his Report analyses fundamental reforms of corporate income tax systems in OECD countries.
Corporate income tax reform has been on the political agenda in most OECD countries for many years
as policy makers are concerned about whether they can maintain their current levels of corporate
income tax revenues and how they can create a more attractive investment climate for domestic and
foreign investors. In addition, governments are concerned about the distortions induced by their
corporate income tax system and are looking for ways to reduce corporate income tax complexity.
This Report presents the recent trends in the taxation of corporate income in OECD countries
and reviews the reasons why countries would want to tax corporate income. It also discusses the
main drivers of corporate income tax reform in OECD countries. This analysis focuses on corporate
tax-induced distortions under current corporate income tax systems from a domestic and
international point of view. The Report also considers tax revenue and tax complexity issues.
Governments can fundamentally reform their corporate income tax systems in different ways.
If governments decide to continue to tax corporate income, they might consider implementing a full
imputation system, a corporate allowance for corporate equity (or capital) tax system, a shareholder
allowance for corporate equity tax system, an allowance for shareholder equity tax system or a
comprehensive business income tax system. These alternative corporate income tax systems are
presented in this Report.
Instead of taxing corporate income, governments might implement a corporate cash-flow tax,
which is sometimes referred to as a corporate tax of the consumption type. This Report discusses the
different corporate cash-flow tax bases and analyses their implications with respect to efficiency, tax
revenues and tax complexity. The taxation of financial services and transitional corporate cash-flow
tax reform issues are also discussed. The destination-based corporate cash-flow tax system and the
origin-based corporate cash-flow tax system (the Hall-Rabushka flat tax, the Bradford X-tax, and
Zodrow and Mc Lure’s two-tier progressive rate cash-flow tax) are presented in detail.
In addition to the theoretical analysis, this Report reviews the country experiences with
fundamental reform of the corporate income tax. The Report presents the allowance for corporate
equity tax system in Belgium and the allowance for shareholder equity tax system in Norway. The
different corporate cash-flow taxes in the OECD are presented as well.
This study has been prepared in the OECD Secretariat by Bert Brys, with the assistance of Erik
Vassnes. The Report draws on a study of “The corporate income tax: international trends and options
for fundamental reform”, which was prepared by Michael Devereux and Peter Birch Sørensen for the
OECD. This study also draws on input from Delegates to the Working Party No.2 on Tax Policy
Analysis and Tax Statistics of the Committee on Fiscal Affairs.
FUNDAMENTAL REFORM OF CORPORATE INCOME TAX – No. 16 – ISBN 978-92-64-03811-0 – © OECD 2007 3

TABLE OF CONTENTS
Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Part I
Setting the Stage
Chapter 1. Trends in the Taxation of Corporate Income in OECD Countries . . . . . . . . 19
1.1. Statutory corporate tax rates1982-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.2. Central and sub-central government corporate income tax rate . . . . . . . . . . 21
1.3. Statutory corporate income tax rates across different-sized countries
andacross regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.4. Top tax rate on dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.5. Corporate tax base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.6. Marginal effective tax rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
1.7. Average effective tax rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
1.8. Corporate tax revenues as a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . 29
1.9. Corporate tax revenues as a percentage of total tax revenue . . . . . . . . . . . . . 31
1.10. Lower tax burdens but no decrease in corporate tax revenues. . . . . . . . . . . . 33
1.11. Implications for the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Chapter 2. Why Levy a Corporate Income Tax? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.1. Reasons for taxing capital income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.2. Reasons for taxing corporate income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.3. Taxing capital income at the corporate or personal level. . . . . . . . . . . . . . . . . 45
Chapter 3. Fundamental Corporate Income versus Consumption Type
of Tax Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.1. Different types of accounting systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.2. Corporate income versus consumption type of tax reform . . . . . . . . . . . . . . . 50
Part II
Domestic and International Corporate Income Tax Issues
Chapter 4. The Main Drivers of Corporate Income Tax Reform in OECD Countries . . 57
4.1. Domestic efficiency considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
4.2. International efficiency considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.3. Tax incidence considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
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4.4. Tax revenue considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
4.5. Tax complexity considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Chapter 5. Integration of Corporate Income andPersonal Income Taxation . . . . . . . . 85
5.1. Full integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
5.2. Dual income tax DIT system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
5.3. Allowance for corporate equity ACE tax system . . . . . . . . . . . . . . . . . . . . . . . . 88
5.4. Allowance for shareholder equity ASE tax system . . . . . . . . . . . . . . . . . . . . . . 89
5.5. Comprehensive business income tax CBIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
5.6. Methods for integration of distributed profits alone. . . . . . . . . . . . . . . . . . . . . 90
Part III
Domestic and International Corporate Cash-Flow Tax Issues
Chapter 6. Corporate Cash-flow Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
6.1. The cash-flow corporate tax base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
6.2. Efficiency considerations at the corporate level . . . . . . . . . . . . . . . . . . . . . . . . 96
6.3. Efficiency considerations with corporate and personal level taxation. . . . . . 99
6.4. Tax revenue considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
6.5. Tax complexity and tax avoidance/evasion considerations. . . . . . . . . . . . . . . 103
6.6. Financial services/sector in the corporate cash-flow tax. . . . . . . . . . . . . . . . . 104
6.7. Transitional issues when replacing the corporate income tax
withacorporate cash-flow tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Chapter 7. Corporate Cash-flow Tax Issues inanInternational Context . . . . . . . . . . . 109
7.1. Origin versus destination-based corporate cash-flow taxes. . . . . . . . . . . . . . . 111
7.2. Destination-based corporate cash-flow tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
7.3. Origin-based corporate cash-flow tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
7.4. Transfer pricing issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Chapter 8. Corporate Cash-flow Tax Experiences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
8.1. The UK North Sea Fiscal Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
8.2. The petroleum tax system in Norway. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
8.3. The regional tax on business activities in Italy . . . . . . . . . . . . . . . . . . . . . . . . . 117
8.4. Estonian corporate cash-flow tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Part IV
Fundamental Corporate Tax Reform in Detail
Chapter 9. Alternative Corporate Tax Systems inMore Detail . . . . . . . . . . . . . . . . . . . . 121
9.1. Full integration tax system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
9.2. The allowance for corporate equity tax system. . . . . . . . . . . . . . . . . . . . . . . . . 125
9.3. The allowance for shareholder equity tax system. . . . . . . . . . . . . . . . . . . . . . . 135
9.4. The shareholder allowance for corporate equity tax system. . . . . . . . . . . . . . 139
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9.5. The comprehensive business income tax system. . . . . . . . . . . . . . . . . . . . . . . 142
9.6. Destination-based corporate cash-flow tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
9.7. Origin-based corporate cash-flow tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Part V
Policy Conclusion
Tax revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Efficiency considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Tax complexity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Corporate cash-flow tax reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Fundamental corporate income tax reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Tax Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
List of boxes
3.1. Immediate expensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.1. The corporate income tax under the “new” view. . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.2. The corporate income tax under the “traditional” view . . . . . . . . . . . . . . . . . . . . . . 64
4.3. The corporate income tax under the “new new” view. . . . . . . . . . . . . . . . . . . . . . . . 70
6.1. The corporate cash-flow tax under the “new” view andthe“newnew” view. . . . 100
6.2. The corporate cash-flow tax under the “traditional” view . . . . . . . . . . . . . . . . . . . . 101
7.1. Origin versus source principle, destination versus residence principle . . . . . . . . . . 112
9.1. The ACE tax system under the “new” view and the “new new” view . . . . . . . . . . . 128
9.2. The CBIT under the “new” view and the “new new” view. . . . . . . . . . . . . . . . . . . . . 143
9.3. The ICBIT under the “new” view and the “new new” view . . . . . . . . . . . . . . . . . . . . 145
List of tables
1.1. Corporate income tax rate and GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.2. Corporate income tax rate across regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9.1. Profitability and effects of the deduction for risk capital . . . . . . . . . . . . . . . . . . . . . 133
List of figures
1.1. Statutory corporate income tax rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.2. Statutory corporate income tax rate: 1982-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.3. Central and sub-central corporate income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.4. Overall statutory tax rate on dividend income in2000 and2006. . . . . . . . . . . . . . . 24
1.5. Present discounted value of depreciation allowances. . . . . . . . . . . . . . . . . . . . . . . . 25
1.6. Present discounted value of depreciation allowances. . . . . . . . . . . . . . . . . . . . . . . . 25
1.7. Marginal effective tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1.8. Marginal effective tax rates: unweighted average over time. . . . . . . . . . . . . . . . . . . 27
1.9. Average effective tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
1.10. Average effective tax rates: unweighted average over time . . . . . . . . . . . . . . . . . . . 29
FUNDAMENTAL REFORM OF CORPORATE INCOME TAX – No. 16 – ISBN 978-92-64-03811-0 – © OECD 2007 7
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1.11. Taxes on corporate income as a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.12. Taxes on corporate income as a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . 31
1.13. Taxes on corporate income as a percentage of total tax revenue. . . . . . . . . . . . . . . 31
1.14. Taxes on corporate income as a percentage of total tax revenue. . . . . . . . . . . . . . . 32
6.1. Corporate cash-flow tax versus corporate income tax understraight-line
or declining balance tax depreciation over time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
9.1. Statutory and effective corporate tax rate in Belgium (2006) . . . . . . . . . . . . . . . . . . 132
8 FUNDAMENTAL REFORM OF CORPORATE INCOME TAX – No. 16 – ISBN 978-92-64-03811-0 – © OECD 2007