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Multinationals paying lower tax rates than before the financial crisis

A report published by the Financial Times has found that large multinationals are paying significantly lower tax rates than they were before the financial crisis.

Companies’ effective tax rates have fallen 9 per cent over the last decade, despite some efforts by politicians to tackle aggressive tax avoidance. The report also notes that government cuts to headline corporate tax rates only explain around half the overall fall, “suggesting multinationals are still outpacing attempts to tighten tax collection”. The analysis also notes that the longer-term trend is even more pronounced, with effective reported corporate tax rates falling nearly one-third since 2000, from 34 per cent to 24 per cent.

Commenting on the report, Professor Mihir Desai of the Harvard Business School has noted “there has been a lot of action and gestures that are very visible but the reality is different. Rate cuts and patent boxes [tax breaks for intellectual property] have been the dominant forces on corporate tax”.

The downward trend in corporate tax rates in the OECD contrasts with the increases in taxes in areas like consumption and personal income over the same period. According to KPMG, since 2008, the countries of the OECD have cut headline corporate taxes by 5 per cent while governments on average have increased personal taxes by 6 per cent.

Aggressive tax planning by corporations relies on exploiting mismatches between the tax rules of individual countries. Many of these mismatches can be removed, and it is disappointing to see apparently limited impact so far of the push by the OECD and G20 to simplify the rules that enable multinationals to minimise their global tax bills. While the tax affairs of several large firms such as Apple, Google and Amazon have been well-publicised, it is also worth remembering that for the majority of cases, comparatively paltry sums being paid in tax by these highly profitable enterprises are calculated on a basis that is entirely legal.

There is a need for a re-doubling of efforts in tackle “profit-shifting” and to agree Europe-wide minimum headline and minimum effective corporate tax rates. Social Justice Ireland recommends 17.5 per cent and 10 per cent respectively. (As an interim measure, we believe Ireland should set a minimum effective rate of 6 per cent. Were such a minimum effective rate in place in Ireland in 2017, corporate tax income would have been between €1bn and €2bn higher). National laws to implement the OECD’s 15-point action plan to cut aggressive tax avoidance — through so-called base erosion and profit shifting — are starting to come into force but it clear from this report that more needs to be done.