Mandate and Summary
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Official Norwegian Report (NOU) 2014:13 1 Capital Taxation in an International Economy Chapter 1 Chapter 1 Mandate and summary 1.1 Mandate On 15 March 2013, the Stoltenberg II Government appointed a commission to review corporate taxation in Norway in light of international developments. The Commission was given the following mandate: “Background Supporting the production capacity of the mainland economy is important. A broad range of meas- ures must be employed to improve competitiveness and ensure the efficient use of resources. Norway has found that tax reforms can have a positive effect on the economy. Tax-system design and robust- ness play an important role. The closer integration of markets as a result of globalisation has motivated various countries to amend their tax rules. Internationally, there is a trend towards combining lower corporate tax rates with measures to prevent undesirable cross-border tax planning. The purpose of this review is to ensure that Norway maintains a robust tax system that is better equipped to deal with the international mobility of tax bases. The tax system must also contribute to the future financing of the welfare system and make it attractive to invest and create jobs in Norway. The emphasis of the 1992 tax reform was on equal tax treatment, broad tax bases and low rates, with a particular focus on corporate and capital taxation. These guiding principles were also followed in the 2006 tax reform. The theoretical foundation and close integration of different parts of the tax system have produced a robust, stable tax system and reduced tax-adjustment incentives. The positive features of the tax system are believed to have helped Norway to maintain relatively high overall tax rates compared to other countries without incurring higher economic costs. The 1992 reform followed an international trend of broadening tax bases and reducing tax rates. Norway went further than many other countries. The corporate tax rate was reduced from 50.8 per cent to 28 per cent. Distributional preferences were addressed particularly by the progressive taxation of labour and pension income and the retention of the wealth tax for individuals. In contrast, the main aim of the corporate and capital taxation design was to ensure efficient resource use. The difference between the tax rates on capital income and labour income, and the opportunities available to transform business income into capital income, necessitated further tax reform. The 2006 tax reform introduced the shareholder model, the partnership model and the self-employed model. Today, ownership income above an estimated risk-free return on invested capital is taxed either as personal income (self-employed model), or as ordinary income when paid to business owners (share- holder model and partnership model for participants in a general partnership, limited partnerships etc.) An evaluation of the 2006 tax reform has indicated that the reform has been successful, and that tax arbitration through the shifting of labour income into capital income has largely been eliminated. Reduced corporate taxes will make more investments profitable, but localisation decisions depend on many factors, including the government’s ability to implement a sound economic policy, proximity to markets, the openness of trading systems, access to skilled workers, cost trends, the institutional framework, the administrative burden and available infrastructure. Globalisation and greater mobility of tax bases increase the relative importance of taxes in investment decisions. Norway is a small, open economy in which capital flows relatively freely across borders. The required return on investments will thus be determined by the international capital market. The Norwegian corporate tax rate of 28 per cent has remained unchanged since 1992. At the same time, the average corporate tax rate in the EU27 has fallen from 35.3 per cent in 1995 to 23.5 per cent in 2012. The effective corporate tax rate (taxes paid as a percentage of the company's actual earnings), has also fallen, although not by as much because rate reductions have often been combined with base-broadening. Corporate tax as a share of GDP has fluctuated around 3 per cent in the EU27 in the same period. 2 Official Norwegian Report (NOU) 2014:13 2014 Capital Taxation in an International Economy Differences in corporate taxes between countries allow multinational enterprises (MNEs) to engage in profit shifting – using deductions and transfer pricing to shift profits from high-tax to low-tax coun- tries. For example, the part of an MNE located in a high-tax country may take out a loan to finance other parts of the MNE, while equity is concentrated in countries with low corporate tax rates. Transfer pricing includes the pricing of services and intellectual property rights in transactions within MNEs. For tax purposes, the price should be set at the estimated market price, i.e. the price two independent parties would set (the arm’s length principle), but this may be difficult to do in practice. The corporate tax base has also changed in many countries. More countries are combining reduced corporate tax rates with measures to prevent the tax base from being undermined by the international activities of companies. Several countries have also shifted the tax burden from income taxes to con- sumption taxes. “Tax Policy Reform and Economic Growth” (OECD 2010) discusses how shifting the tax burden between different taxes can promote increased growth and welfare. Subject to the proviso that the context of each country must also be considered, the study recommended that member states shift some of the tax burden from income taxation to less distortive taxes, such as taxes on consumption and property. The OECD argued that such a tax shift can be growth-enhancing in the long term. According to the report, it is first and foremost corporate taxes that are most harmful to economic growth. Changes in international conditions make it necessary to consider the Norwegian tax rules in gen- eral, and corporate tax in particular. Further details of what the Commission is to consider Norway wishes to maintain a robust tax system that generates high revenues for the public sector. Accordingly, and given that the tax base is more mobile as a result of globalisation, the Commission is to consider potential changes in the area of corporate tax. The Commission is also to examine whether the taxation of companies is well adapted to international developments. The Commission is to consider whether the corporate tax rate should be changed. A change in the corporate tax rate must be evaluated by reference to the rest of the tax system, in terms of both revenue and organisational structure. The different parts of the Norwegian tax system are tightly integrated, and the 28 per cent rate on ordinary income is applied in both personal and corporate taxation. The intro- duction of a uniform rate is believed to have reduced the possibility of tax avoidance associated with tax rate differences, and to have improved the stability of the tax system. A change in the corporate tax rate must be evaluated by reference to the tax system as a whole, and the relationship between personal and corporate taxation must be considered in context. In this connection, thought must be given to whether the systemic changes made through the 2006 reform (the exemption method, the shareholder model and the harmonisation of marginal tax rates for different types of income), can be maintained if the 28 per cent rate changes. The Commission must consider the effects of the proposed solutions, whether they will be robust and how undesireable tax planning can be avoided. The Commission is to consider the possibility of shifting income and deductions between countries in order to save tax, and assess measures to protect the Norwegian corporate tax base. The Commis- sion must provide an overview of the measures that have been implemented in other countries. The Commission must also consider whether the difference in the tax treatment of debt and equity held by foreign investors creates room for tax avoidance and, if so, consider counter-measures. The Commission is to examine the possibility of protecting Norwegian corporate taxation by treating debt and equity equally, either by removing the right to deduct interest expenses from corporate tax (re- ferred to as Comprehensive Business Income Tax - CBIT), or by granting companies deductions for the alternative return on equity (referred to as Allowance for Corporate Equity - ACE). Belgium and Italy have introduced variants of ACE. The exemption method excludes corporate dividends and gains from taxation. The exemption method does not apply to shares in companies registered in low-tax countries outside the EEA or portfolio investments outside the EEA. The Commission must consider whether the exemption method 2014 Official Norwegian Report (NOU) 2014:13 3 Capital Taxation in an International Economy offers possibilities for tax avoidance with respect to cross-border income from equity and, if so, consider the need for changes. The Commission is requested to discuss whether greater emphasis should be placed on less mobile tax bases. The overall taxation of real property in Norway is low, both compared to the taxation of other capital and compared to the taxation of real property in many other countries. The purpose of the report is not to consider the taxation of real property. The Commission may refer to a scenario that includes increased taxation of real property, but the emphasis should be on alternatives that leave property taxation largely unchanged. Guiding principles for the assessment The main purpose of the tax system is to generate revenue. Tax policies should be designed so that the costs of taxation are low. The tax system should stimulate effective use of resources and good in- vestment decisions. The tax base should capture actual income.