On 29 July 2021 the OECD released the third edition of the Corporate Tax Statistics database. This database aims to broaden the range of data issued on corporate tax to assist in the study of base erosion and profit shifting (BEPS).
The updated statistics indicate that corporate tax is an important source of government revenues, but also reveal that multinational taxpayers are still engaging in of tax avoidance practices such as base erosion and profit shifting (BEPS).
Importance of corporate taxation
The data indicates that corporate income tax is an important source of tax revenues globally and especially in developing countries. Corporate income tax represents 19.2% of total taxes in Africa; 15.6% of total taxes in Latin America and the Caribbean; and 10% in OECD countries.
It is clear from the statistics over recent years that corporate income tax rates globally have decreased in the past twenty years, with an average combined rate of central and sub-central governments in the jurisdictions surveyed of 20.0% in 2021, compared to an average of 28.3% in 2000. This reduction in the main rates may be evidence of tax competition that is depriving governments of revenue as they struggle to keep their tax rates competitive. This illustrates that the proposed global minimum corporate tax will be important in placing an agreed limit on corporate tax competition.
Two pillar plan on tax challenges of the digital economy
The international corporate tax data shows the importance of the two-pillar plan put forward by the OECD/G20 Inclusive Framework on BEPS to update international tax rules and make sure that multinational enterprises pay the correct amount of tax in the jurisdictions in which they are performing business operations.
Under the two-pillar solution to address the tax challenges from the digitalisation of the economy, Pillar One would allocate some taxing rights over the profits of multinational enterprises to the markets where they have performed business operations, even if they do not have a physical presence in those market jurisdictions. Pillar Two would introduce a global minimum corporate tax rate that could be used by countries to protect their tax bases.
Country by Country Reporting
The data on country-by-country (CbC) reporting gives aggregated information on the activities of around six thousand multinational enterprises operating in more than 100 jurisdictions globally. The CbC reports result from action 13 of the OECD/G20 BEPS Project, which aims to update transfer pricing documentation and provide relevant information to tax authorities to enable them to perform more accurate tax risk assessment. The statistics allow tax authorities to gain a clearer picture of the global activities of multinational enterprises.
The latest statistics suggest that there is a continuing misalignment between the jurisdictions where profits are reported and the location where the real economic activities have taken place. There are differences in the profits, related-party revenues, and business activities of multinationals in investment hubs and in low tax jurisdictions compared to activities in other countries. Although there are some commercial considerations involved, this may also be evidence of profit shifting.
