State finances are weak, yet while many companies can afford to pay more rich countries have almost halved their corporate tax rates over three decades. OECD proposals for global tax coordination, which it aims to progress in 2020, could turn this tide suggest Deutsche Bank’s Corporate Bank Focus Research team
The world is saddled with both a debt problem and a corporate tax problem. State finances in developed countries are increasingly precarious, yet while many companies are enjoying robust revenue growth the headline tax rates that they pay has almost halved over the past three decades.
On both sides of the Atlantic that situation could now be about to reverse. Events in 2020 will determine whether what follows next is a slow reversal in the near 40-year trend of lower taxes, or a more abrupt change to the corporate landscape. US presidential hopeful Elizabeth Warren is among those arguing for higher corporate taxes, while incoming European Commission president Ursula von der Leyen has pledged to target firms that “play our tax system”.
A coordinated effort
A major feature of the next 12 months will be the Organisation for Economic Cooperation and Development’s continuing drive towards global tax coordination. The OECD is about to seek approval for its proposals, which are being worked on by over 100 countries and are based on introducing a minimum corporate tax rate as part of a globally coordinated regime. This could lead to corporates paying tax in each country where they are active, regardless of whether that includes a physical presence.
Some argue that actually implementing higher corporate taxes will prove too politically difficult, particularly in countries such as the US where gaining cross-party consent appears to be a sizeable challenge. While these concerns are valid, Deutsche Bank’s Corporate Focus Research team suggests that the general direction of travel is more important. Although 2020 might not actually mark the end of a “race to the bottom”, if momentum builds towards support for politicians who advocate higher corporate taxes and towards the OECD proposals we could still be at a turning point.
In their recently-published report ‘2020: An inflection point in global corporate tax?’, Deutsche Bank Analyst, Thematic Research, Luke Templeman and Global Head of Fundamental Credit Strategy and Thematic Research Jim Reid note that the pressures of global debt are intensified by low levels of economic growth.