Fighting tax pressures for privatisation

1. Fighting tax pressures for privatisation

2. Privatisations are unpopular, but… • opinion polls show a continous and clear majority against privatisations • a whole series of local referendums were won by grassroots‘ coalitions -> the key strategy to squeeze the public sphere is to create strong budget constraints -> campaigns for tax cuts are the most effective part of this strategy

3. Pressures for tax cuts • neoliberal ideology • international tax competition

4. Race to the bottom in corporate tax rates

5. Development of corporate tax rates (1995-2006) Aujean/Neale, EU commission 2006

6. KPMG (2004) KPMG (2006)

7. The importance of corporate taxation • outside of the anglo-saxon world corporation taxes do not contribute much to the total tax income of the state • nevertheless: corporate taxes have a crucial importance for the progressive income tax system • without the corporation tax: progressive income taxation can hardly be sustained

8. The back-stop function of the corporation tax rate for the income tax tax competition lower corporate tax rates competition corporations & other businesses shifting private income into corporations pressure on top marginal income tax rate less progressive tax system delegitimising public activities

9. country 1985 2005 Denmark 73% 59% Germany 56% 44,3% France 65% 56,1% United Kingdom 60% 40% Italy 65% 44,2% Japan 70% 50% Sweden 80% 56,6% US 50% 42,9% average (unweighted) 65% 49% top marginal income tax rate 1985 & 2005

10. If we want to reduce the pressure towards privatisation, we must halt internataional tax competition.

11. Strategies for solutions • National counter measures • reporting requirements for companies on taxes & profits by country • contolled foreign companies legislation • controls to track down evaders including information from banks, credit card companies, the domestic property market, airlines, border controls • International tax co-operation

12. International tax co-operation Corporate governance • transparency: Who paid what where? Who owns what? Private capital income • automatic information exchange on • interest, dividends, captial gains earned by foreigners • foreigners creating or becoming co-owners of corporations, trust and the like Corporate income • minimum tax rates, harmonisation of the tax base • in the long rung: international system to tax corporate profits

13. Progressive income taxation is our right! • Article first. • Men are born and remain free and equal in rights. Social distinctions may be based only on considerations of the common good. • Article 13. • For the maintenance of the public force, and for administrative expenses, a general tax is indispensable; it must be equally distributed among all citizens, in proportion to their ability to pay. • The Declaration of the Rights of Man and of the Citizen • Paris, 26th of August 1789

14. more information: www.taxjustice.netdownload the report „tax us if you can“ in 7 languagessign the international declaration for tax justice

15. Overview • the importance of corporate taxation • blurring boundaries between tax havens and the global financial system • options for tax co-operation

16. From the “race to the bottom” to the “race below the bottom”? • if this development continues it is well possible that labour will have to subsidies capital • “corporate welfare” might become higher than corporate taxes paid

17. Export processing zones Free trade zones • more than 3.000 EPZs compete for investment:

18. British Virgin Islands language English country status British dependency population 19.100 currency US$ capital controls none savings in banks about 7 Bill. US-Dollar investments in funds about 40 Bill. US-Dollar number of companies 302.300 normal taxation 1.400 no or reduced taxation 300.900 income of the state 127,3 Mil. US$ fees of the financial industry 63 Mil. US$ No membership in international organisations working on economic issues.

19. The importance of corporate taxation • outside of the anglo-saxon world corporation taxes do not contribute much to the total tax income of the state

20. Corporate income tax revenue in the old and new Member States, (% of GDP), 1995-2004 Aujean/Neale, EU commission 2006

21. The back-stop function of the corporation tax rate for the income tax tax competition lower corporate tax rates competition corporations & other businesses shifting private income into corporations pressure on top marginal income tax rate less progressive tax system delegitimising public activities

22. The importance of corporate taxation • outside of the anglo-saxon world corporation taxes do not contribute much to the total tax income of the state • nevertheless: corporate taxes have a crucial importance for the progressive income tax system • without the corporation tax: progressive income taxation can hardly be sustained or developed in developing or transition economies -> inequality resulting from the market process are difficult to correct

23. The race to the bottom in corporate taxes must be stopped to defend progressive income taxation.

24. Progressive income taxation is our right! • Article first. • Men are born and remain free and equal in rights. Social distinctions may be based only on considerations of the common good. • Article 13. • For the maintenance of the public force, and for administrative expenses, a general tax is indispensable; it must be equally distributed among all citizens, in proportion to their ability to pay. • The Declaration of the Rights of Man and of the Citizen • Paris, 26th of August 1789

25. Blurring boundaries between tax havens & the global financial system • tax justice debate in many countries: tax havens plus domestic tax issues • but: the whole global financial system has important “tax haven properties”: • low taxes on at least some forms of capital income of foreigners (no withholding or other source taxes) • limited international tax co-operation and information exchange • all major financial centres are used by foreigners to evade or avoid taxes: London, New York, Paris, Frankfurt, Singapur,... -> solutions must encompass the whole financial systems and not only fight tax havens

26. Strategies for solutions • National tax reforms adapting to or to profit from international tax competition: • dual income taxation • flat tax • free economic zones • targeted allowances for capital • National counter measures • contolled foreign companies legislation • controls to track down evaders including information from banks, credit card companies, the domestic property market, airlines, border controls • International tax co-operation

27. International tax co-operation Corporate governance • transparency: Who paid what where? Who owns what? Private capital income • automatic information exchange on • interest, dividends, captial gains earned by foreigners • foreigners creating or becoming co-owners of corporations, trust and the like Corporate income • different strategies

28. Some basic corporate taxation...

29. How transnational companies legally cheat taxes... precondition: fiscal separation • the right to tax profits of daughter companies is normally restricted to the source country • taxation is only possible if profits are repatriated • profits can be used for giving credit to other parts of the transnational Profits remain here! no repatriation mother daugther investment country of high taxation country of low taxation

30. How transnational companies legally cheat taxes... The basic principle: classic transfer pricing • 30-50% of world trade are intra-firm trade • internal prices can be manufactured • particularly easy: internal services, trade marks, patents Profits are allocated here! output/products daughter 1 daughter 2 too high payments country of high taxation country of low taxation

31. How transnational companies legally cheat taxes... Special case: thin capitalisation • many countries offer tax concessions for holding companies Profits are allocated here! credit daughter holding interest country of high taxation country of low taxation

32. Proposal I: The residence principle • universalising the residence principle in corporate taxation

33. The residence principle corporation tax on consolidated profits of the transnational Corporation tax on profits in country of the daughter imputation pays pays mother daughter investment country of high tax rates country of low tax rates

34. The residence principle... • offers an “umbrella” under which countries of daughter companies can tax • countries with dauther companies have an incentive to tax on the level of the mother company • can be applied unilaterally But: • creates incentives for shifting headquarters of mother companies • recent European Court of Justice rulings ease these relocations • is difficult to administer

35. Proposal II: Unitary taxation • harmonising the tax base through a “unitary taxation system” • the global or European profit of a corporation would be divided between states according to a formula based on indicators such as employees, turnover, value added,... • transfer pricing game would become unattractive But: • does not stop the competition in tax rates -> harmonising tax rates necessary • harmonising tax rates is difficult

36. What is to be done? • informing the public about tax injustice • putting civil society pressure on governments to • take unilateral action against tax evasion & avoidance • renegotiate bilateral tax treaties • co-ordinate with other governments to take co-ordinated action • frameworks: OECD, EU, UN • negotiate an “international convention for tax co-operation” • join: www.taxjustice.net • newsletter • E-mail list

37. Redistribution?