- Six countries look to drive competition by reducing corporate tax rates
- 37% forecast higher tax burdens as a result of digitally focused law changes
- Long-term trend for a low-rate, broad-base tax system set to reach tipping point
Global and US tax reform, and the adoption of numerous international tax policy changes in 2018, are providing a catalyst for countries to pursue tax competitiveness in new and innovative ways. This is according to the EY Outlook for global tax policy in 2018, which combines insights and forecasts from EY tax policy professionals in 41 jurisdictions worldwide.
Countries continue to look to stimulate economic activity and attract foreign direct investment by maintaining or lowering their corporate tax rates. The fall in the US rate of more than a third to a federal/state combined average of around 26% represents the biggest percentage reduction among all countries analyzed in the report, and sees the US rate fall below current OECD and G7 averages. Rate reductions in FY18 were also made by Argentina, Colombia, and Luxembourg for instance.
The long-term trend of having a low rate, broad base tax system that has been playing out for many years continues in 2018.
The report indicates that we may however be set to reach a tipping point in relation to this trend, with eleven jurisdictions (27%) forecasting a lower overall corporate income tax (CIT) burden in 2018 (vs. 20% in 2017), while seven (17%) forecast a higher overall CIT burden in 2018 (vs. 22% in 2017).
This year’s outlook also finds that research and development (R&D) and other business incentives are benefitting from governments’ drive to remain competitive, with 14 of 41 countries (34%) forecasting greater support for businesses in 2018.
Global tax reform may be driven further by comprehensive reform in the US
The findings indicate that US tax reform – combined with other converging developments including implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) recommendations, new EU anti-avoidance directives, and tax transparency and disclosure measures – will have a significant impact on multinational taxpayers in 2018, irrespective of whether they have US or non-US operations.
Marc Schmitz, Tax Leader at EY Luxembourg says: “The US tax reform package contains a whole spectrum of burden-decreasing measures. In response, it is probable that investor and corporate taxpayer behaviors will change in a number of ways, which in time could drive other governments – in particular the US’s closest neighbors and largest trading partners – to form corresponding tax policy measures.”
The report also highlights the breadth of change in relation to digital taxation, encompasses direct and indirect tax changes, redefinitions of Permanent Establishment and anti-avoidance measures targeting companies that may be data-intensive. Marc Schmitz continues by saying: “ We anticipate that the ongoing debate around digital taxation, together with a continuing desire for European tax harmonization and the desire for tax certainty, will increasingly drive organizations to view the world though a multilateral lens.”
The outlook for Luxembourg
Following the tax reform 2017, the current tax framework is still expected to undergo some significant changes in 2018 and beyond.
With regard to corporate income taxes, in addition to the decrease of the corporate income tax rate, the effort of the Government to sustain research and development, as well as digitalization of enterprises, will also find its way into the tax legislation by extending the benefit of the Investment Tax credit to the acquisition of software. The new intellectual property regime, endorsing the internationally agreed ‘nexus approach’ and providing for an 80% exemption of income derived from determined intellectual property assets, is expected to be enacted in 2018 as well.
But the Luxembourg tax environment will certainly mostly be impacted by the ongoing developments at international and European level: the law implementing the Anti-Tax Avoidance Directive (known as the ATAD) should be presented to Parliament in the forthcoming months, introducing additional measures to combat tax avoidance and profit shifting such as an interest deduction limitation rule or controlled foreign corporation rules into Luxembourg legislation. Other items like Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (commonly known as the MLI) and the ongoing discussions as regards taxation of the digital economy will, even if not (yet) legally enacted in Luxembourg, certainly be among the hot topics for the next months.
- Ends -
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About the report
The eighth annual The outlook for global tax policy in 2018 combines the forecasts of EY tax policy leaders in 41 jurisdictions, as well as government proposals and known legislative changes. The full list of countries surveyed can be viewed here.
The Outlook provides an overview of the key policy developments across 41 jurisdictions: Argentina, Australia Austria, Brazil, Bulgaria, Canada, China (Mainland), Colombia, Costa Rica, Czech Republic, Denmark, Finland, France, Germany, Greece, Guatemala, Hong Kong SAR, Hungary, India, Indonesia, Italy, Japan, Luxembourg, Malaysia, Mexico, New Zealand, Panama, Peru, Poland, Portugal, Russia, Singapore, South Africa, Spain, Switzerland, Taiwan, Thailand, Turkey, Ukraine, United Kingdom, United States and Vietnam.
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