The newly issued OECD Corporate Tax Statistics publication, and database, presents a number of key dimensions of countries’ corporate income tax systems, including tax revenues, tax rates and tax law provisions for R&D incentives, patent boxes, Controlled Foreign Corporation (CFC) and interest expense limitations as well as hypothetical investment effective tax rates based on depreciation rules. The publication also includes for the first time aggregated 2016 Country-by-Country Report (CbCR) tabulations for 26 countries, which was discussed in the July 11 2020 blog.
An important dimension that is missing from the Corporate Tax Statistics is the extent to which the corporate tax base and taxes are eroded by tax expenditures. The OECD has not published data on countries’ tax expenditures in the past ten years, except other directorates’ publication of fossil fuel and R&D tax expenditures.
Although certain tax expenditures are controversial in both their identification and quantification, most are obvious, and their quantification is straightforward for Finance Departments. An easy start for the next Corporate Tax Statisticspublication would be to simply present the total amount of tax credits that reduce corporate tax payments. Except for foreign tax credits, almost all other corporate tax credits are tax expenditures.
Many analysts attempt to measure the corporate tax base by dividing corporate tax receipts by the top statutory tax rate. This understates the corporate tax base for many countries, since tax credits significantly reduce corporate tax payments. In the case of the U.S., corporate tax credits were $129 billion, or 29 percent of pre-credit tax liability in 2016. Corporate tax credits (not including foreign tax credits) were also 26 percent of total US corporate tax expenditures in FY2019.
The 2020 Corporate Tax Statistics includes patent box tax rates for many countries. It would be useful to know how large the tax expenditures are for patent boxes relative to R&D tax credits. For example, in the U.S., the foreign-derived intangible income (FDII) tax expenditure, which reduces the corporate tax rate from 21% to 13.125% for certain patent-type income, has a tax expenditure of $7.5 billion compared to the R&D credit tax expenditure of $13.4 billion in FY2019. The OECD R&D incentive analysis and effective tax rate analysis do not include the effects of patent boxes.
Similarly, the Corporate Tax Statistics publishes the tax rules for CFC and interest expense limitations, but these do not reflect how important in terms of size of magnitude the provisions are. Some sense of the magnitude could be helpful to incorporate these provisions in average effective tax rate calculations. Knowing the specific details of these laws is important, but so is understanding the extent to which the anti-BEPS provision apply and their relative importance.
The OECD’s Corporate Tax Statistics publication has expanded in scope and relevance from its initial publication to the current version. Hopefully, next year’s publication will continue shedding new light on different dimensions of the corporate and international tax landscape. Another suggested addition is the 200x200 matrices of bilateral income/sales source/residence headquarter/affiliate tables constructed by the OECD for analysis of the digitalisation tax proposals, cited in the February 2020 Centre for Tax Policy and Administration (CTPA) Tax Talks webcast.
Tom Neubig