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Begin New Search Political Geography Global Focus Content Type Research Paper Author Matthias Bauer Publication Year within 5 Years

1. Unintended and Undesired Consequences: The Impact of OECD Pillar I and II Proposals on Small Open Economies

Author:
Matthias Bauer
Publication Date:
07-2020
Content Type:
Research Paper
Institution:
European Centre for International Political Economy (ECIPE)
Abstract:
Corporate tax laws vary significantly between different jurisdictions. Over the past four decades, governments globally competed for business activity by lowering statutory and effective corporate tax rates. Many governments provide special tax incentives for businesses to invest and expand employment. Special economic zones often grant full corporate tax exemptions to stimulate commercial development. Corporate income tax incentives for research and development activities are common across countries’ corporate tax codes reflecting governments’ desire to stimulate innovation and business development. While corporate tax competition is common government practice in the world economy, the OECD currently aims to curb international corporate tax competition. The OECD’s corporate tax reform proposals officially aim to address “corporate tax avoidance” and “unfairness in taxation”. The policy debate is driven by some governments’ motivation to increase revenues from taxes on corporate income. Economic impact assessments of the OECD’s current Pillar I and II proposals are still scarce. Individual governments have so far failed to conduct impact assessments or are hesitant to make their assessments available to the general public. The OECD’s secretariat expects additional tax revenues of 100bn USD annually, which are said to be evenly distributed among the 137 countries comprising the Inclusive Framework. The narrow focus on changes in governments’ revenues and the static nature of the OECD’s analysis is in various respects misleading. This paper highlights that the proposed reforms would shift taxing powers (tax sovereignty) and economic activity away from small open economies to the world’s largest countries, of which most (currently) apply very high statutory corporate tax rates. The implementation of Pillar I and II proposals would pave the way for a global tax redistribution framework transferring financial funds away from governments that embrace free international trade and investment to the many of the world’s worst-performing governments with respect to economic openness, acceptance of the rule of law, corruption, state interventionism, and the recognition of basic human rights (e.g. Argentina, Brazil, China, India, Indonesia and Russia). Conversely, the OECD’s proposed corporate tax reforms would punish the world’s best performing economies with regard to economic freedoms, trade and investment openness and the rule of law (e.g. Estonia, the Czech Republic, Ireland, the Netherlands, Slovakia, Slovenia, Switzerland, including small city and island states, such as Hong Kong, Luxembourg and Singapore). The reforms proposed by the OECD would have a significant impact on how much and where multinational enterprises would have to pay corporate income tax in the future. The proposed measures would therefore impact where large companies produce and invest in the future. Continued tax competition would contribute to a narrowing of international corporate tax rate differentials up to the 12.5% minimum tax threshold level proposed by the OCED. The narrowing of tax rate differentials between today’s high-tax jurisdictions, of which most are very large countries, and today’s low-tax jurisdictions would direct international and domestic investments and investment-induced tax revenues away from small countries. Estimates show that inward FDI in today’s high-tax countries would increase and outward FDI would decrease. In a symmetrical way, inward FDI in today’s low-tax countries would decrease and outward FDI would increase. Overall, the shift in effective taxing powers would undermine small countries’ relative attractiveness to international businesses and, on top of that, would induce domestic businesses to relocate to larger countries with the gravity of larger markets. Contrary to claims made by the OECD, the implementation of Pillar I and II proposals would not improve the global allocation of capital. Global trade and investment flows would still be subject to tax competition and prevalent trade and investment barriers. The OECD’s current proposals would likely incentivise the governments of large countries to maintain long-standing barriers to trade and investment. The economic gravity of large countries may even incentivise large country governments to erect additional barriers that would restrict market access for companies from small open economies. For small open economies that are home to research- and knowledge-intensive multinational companies, the OECD’s proposed tax reforms would undermine future investments in R&D, innovation and business model development, with adverse implications for existing research clusters, education systems and high value-added jobs. Policymakers should reconsider whether taxes on corporate income actually contribute to governments’ overall social and economic policy objectives, such as economic development, redistribution and fairness in taxation. Replacing tax systems that include taxes on corporate income by systems that rely more or exclusively on direct taxes on labour income, capital income and consumption (VAT/sales taxes) would increase transparency about the distributional effects of taxation and significantly improve governments’ tax manoeuvrability in response to citizens’ preferences for fairer taxation. A regime change towards greater use of VAT/sales taxes would also have a positive impact on global capital allocation. Companies would no longer have to pay attention to corporate tax rate differentials, while governments would have additional invectives to embrace foreign trade and investment, materialising in lower barriers to trade and investment and a more efficient allocation of global capital respectively.
Topic:
Government, International Political Economy, Business, Tax Systems, R&D, Corporate Tax, and OECD
Political Geography:
Global Focus

2. Europe’s Quest for Technology Sovereignty: Opportunities and Pitfalls

Author:
Fredrik Erixon and Matthias Bauer
Publication Date:
05-2020
Content Type:
Research Paper
Institution:
European Centre for International Political Economy (ECIPE)
Abstract:
Covid-19 and its broader implications have highlighted the importance of Europe’s digital transformation to ensure Europeans’ social and economic well-being. It provides important new learnings about Europe’s quest for “technology sovereignty”. While the debate about technology sovereignty is timely, the precise meaning of sovereignty or autonomy in the realm of technologies remains ambiguous. It should be noted that the political discussions about European technology sovereignty emerged far before the outbreak of the Coronavirus. The European Commission’s recently updated industrial and digital policy strategies “institutionalised” different notions of sovereignty, reflecting perceptions that more EU action is needed to defend perceived European values and to secure Europe’s industrial competitiveness. Often the political rhetoric reflected perceptions that Europe is losing global economic clout and geopolitical influence. It was said that dependency on technological solutions, often originating abroad, would require a European industrial and regulatory response. Against this background, the Corona crisis provides two important lessons for EU technology policymaking. Firstly, during the crisis digital technologies and solutions made European citizens stronger. Technology kept Europe open for business despite the lock-down by enabling Europeans to work from home, receive essential home deliveries, home schooling, online deliveries and to use online payments, etc. In addition, Europe’s citizens became more sovereign with respect to accessing information and data that helped track and contain the spread of the virus. Secondly, the crisis tested Europe’s resilience and perceived dependency on (foreign) technology solutions. Early developments indicate that Member States’ homemade solutions did not fare better than existing European and international solutions. A few national and EU IT solutions failed while existing European and global solutions, from cloud infrastructure to communications, payments to streaming services, all continued to work well. Politically, however, the crisis could be used to justify more EU or national government interference in Europe’s digital transformation. Indeed, for some the debate about European technology sovereignty is largely about designing prescriptive policies, which paradoxically risk reducing Europeans’ access to the innovative technologies, products and services that helped Europe through the crisis. Policies taken into consideration include new subsidies to politically picked companies, or new rules and obligations for certain online business models. Policy-makers advocating for such policies tend to ignore critical insights from the Covid-19 crisis and failed industrial policy initiatives, including sunk public investments and protracted subsidies for industrial laggards. In a time of economic hardship, the EU and national governments should be wary of spending even more taxpayer money to replicate existing world-class technology solutions, that in most cases are used in combination with local technologies, with “Made in EU” services of inferior quality and reliability. Moreover, due to different levels of economic development and differences in regulatory cultures, prescriptive technology policies would exclude many Member States from utilising existing and new opportunities that arise from digitalisation, slowing down economic renewal and convergence. The EU cannot be considered a monolithic block that thrives on a unique set of prescriptive technology policies. Before the Corona pandemic, initiatives towards European technology sovereignty were mainly pushed by France and Germany, fed by concerns over their companies’ industrial strength in times of growing economic and geopolitical competition. Industrial and technology policies favoured by the EU’s two largest countries will have a disproportionately negative impact on Europe’s smaller open economies, whose companies and citizens could be deprived from cutting-edge technologies, new economic opportunities and partnerships on global markets, undermining these economies’ development and international competitiveness. Any EU-imposed technology protectionism along the lines suggested by some policy-makers in large EU Member States would leave the entire EU worse off. It would disproportionately hurt countries in Europe’s northern, eastern and southern countries more than the large countries whose economies are generally more diverse than Europe’s smaller Member States. It would, however, make sense for the EU to agree on a shared definition of “technology sovereignty”. Different interpretations could cause serious policy inconsistencies, undermining the effectiveness of EU and national economic policies. Anchored in technological openness, technology sovereignty can indeed be a useful ambition to let Europe’s highly diverse economies leapfrog by using existing technologies. To become more sovereign in a global economy, Europeans need to focus on becoming global leaders in economic innovation – not just in regulation. If anchored in mercantilist or protectionist ideas, technological sovereignty would make it harder for many Member States to access modern technologies, adopt new business models and attract foreign investment – with adverse implications on future global competitiveness, economic renewal and economic convergence. Policymaking towards a European technology sovereignty that benefits the greatest number of Europeans – not just a few politically selected “winners” – should aim for a regulatory environment in which technology companies and technology adopters can thrive across EU Member States’ national borders. The European Single Market has deteriorated in recent years and significantly during the crisis. The new von der Leyen Commission has now repeatedly called for a strengthening of the Single Market. Becoming a world leader in innovation requires a real Single Market in which companies can scale up, with as few hurdles as possible, and then compete globally. It should be supplemented by pro-competitive policies and incentives for research and investment. Brussels cannot set the global standards in technology policymaking alone. Europe’s policy-makers should aim for closer market integration and regulatory cooperation with trustworthy international partners such as the G7 or the larger group of the OECD countries. It is in the EU’s self-interest to advocate for a rules-based international order with open markets. International cooperation should be extended beyond trade to include cooperation on technology policies, e.g. artificial intelligence. Regulatory cooperation with allies such as the USA is essential to jointly set global standards that are based on shared values. Both the EU and the US have much more to gain if they prioritise such alignment, to advance a shared vision for a revamped open international trading system, in a world increasingly influenced by regimes with fundamentally different views on state intervention and human rights. Anchored in technological openness, the EU and the US can promote technology sovereignty that allows for development and renewal elsewhere in the world.
Topic:
Industrial Policy, International Political Economy, Science and Technology, Sovereignty, European Union, and COVID-19
Political Geography:
United States, Europe, and Global Focus