BEPS shifts focus to incentives to drive tax competition

London, 3 May 2017

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  • Countries grant business incentives to compete amid global tax reform
  • Eight countries reduce corporate tax rates to remain competitive
  • 46% expect a higher business tax burden due to enforcement and transfer pricing rules

Global tax reforms and sustained weak economic growth continue to disrupt the tax landscape, driving countries to introduce new or improved business incentives in order to compete. This is according to the EY Outlook for global tax policy in 2017, which combines insights and forecasts from EY tax policy professionals in 50 countries worldwide.

While the long-term trend for countries to pursue a low-rate, broad-base business tax strategy remains strong in 2017, implementation of the G20/OECD’s Base Erosion and Profit Shifting (BEPS) recommendations and draft legislation introduced by the European Commission are now compelling governments to seek alternative means of tax change to drive competition.

The report finds that, of the 50 countries surveyed, 30% intend to invest in broader business incentives to stimulate or sustain investment, with new or improved business incentives being offered in 27% more countries than in 2016. Twenty-two percent of countries plan to introduce more generous research and development (R&D) incentives in 2017, with new or improved R&D incentives now being offered in 83% more countries than last year.

Chris Sanger, EY Global Tax Policy Leader, says:

“Governments are increasingly adopting incentives as a pragmatic means to compete amid coordinated change across the tax landscape. Incentives can encourage and sustain business investment, allowing governments to respond to the dual pressures of continued weak economic growth and the introduction of new measures and legislation in response to tax reform in Europe and globally.”

Corporate income tax rates set to attract growth

Countries are further seeking to stimulate economic activity and attract foreign direct investment by maintaining or lowering corporate tax rates. Eight of the 50 countries (16%) surveyed confirm that laws are now in place that will drive lower corporate income tax (CIT) rates this year. Seven of those are based in Europe (versus just three last year), including the UK, Luxembourg and France, suggesting that the epicenter of BEPS has moved into Europe and that countries in that region are reducing rates faster than countries elsewhere.

Only one outlying country, Chile, forecasts a known or anticipated headline CIT rate increase in 2017.

Global tax reform is driving an increased tax burden

The number of countries forecasting an increasing business tax burden continues to rise, with 22% expecting an overall increase in the CIT burden in 2017 (versus 18% in 2016). With countries continuing to respond to BEPS-related transparency and disclosure requirements (Action 13), the report finds that increasing tax enforcement and new transfer pricing rules are the main sources of tax burden-increasing changes among respondents (both 46%).

The report also finds that nine jurisdictions forecast a higher indirect tax burden, as the worldwide spread of value-added tax (VAT) and goods and services tax (GST) continues and technology is adopted more widely by tax administrations.

Sanger says: “Questions of growth and tax certainty remain top-of-mind for businesses in 2017, with issues including Brexit, potential US tax reform and elections across Europe and beyond continuing to accelerate change across the global tax landscape. Monitoring and assessing policy direction, as well as viewing both new and existing structures and transactions through a forward policy lens, is more important than ever for business leaders operating during this transitional time.”

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About the report

The seventh annual Outlook for global tax policy in 2017 combines the forecasts of EY tax policy leaders in 50 countries, as well as government proposals and known legislative changes. The full list of countries surveyed can be viewed here.

The Outlook also provides an overview of the key policy developments across 38 jurisdictions: Australia, Belgium, Brazil, Canada, China, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Hong Kong SAR, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Norway, Philippines, Poland, Russia, Singapore, Slovakia, South Africa, Spain, Switzerland, Taiwan, Thailand, United Kingdom, United States and Vietnam.

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