The world's lowest corporate tax warns Hong Kong-the wave of international tax reform is coming! ｜01 Weekly

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Written by: Huang Yunna

2021-06-15 20:00

Last update date: 2021-06-15 20:00

Hong Kong citizens generally oppose "tax increases", and the SAR government is particularly resistant to changing the tax system or broadening the tax base; however, since the beginning of the month (June 5) of the Finance Ministers of the Group of Seven (G7) countries, they agreed to promote the "15% global minimum corporate tax". After the historic agreement, it not only means the end of the 30-year "global tax reduction cycle" and heralds the arrival of an international tax increase wave, but it is also expected to force Hong Kong, which has always been complacent about being a "low-tax paradise," to speed up its tax reform.

More importantly, the emergence of the "lowest global corporate tax" is exposing the serious injustices of the liberal capitalist system; therefore, in addition to discarding the old thinking of the "simple and low tax system", the Hong Kong government should also focus on reorganizing the logic of public finances. Only by realizing "wealth redistribution" and "sustainable development" can people share prosperity!

The emergence of "the world's lowest corporate tax" warns Hong Kong that it needs to abandon the old thinking of "simple low tax system".

(Reuters)

The world is about to enter the era of the "lowest corporate tax rate", but the SAR government seems to be unmoved. For example, the Financial Secretary Chen Maobo only responded lightly and pointed out that the authorities are now assessing and studying the impact on Hong Kong, and will strive to maintain a simple tax system to maintain competition. force.

At the same time, there are even more commentators who believe that, given that the G7 currently agrees to set the "global minimum corporate tax rate" at 15%, it is believed that this is for Hong Kong, which pursues the "two-tier profits tax system" and has a standard tax rate higher than the 16.5% recommended by the G7. , There is no impact for the time being.

But is the question really that simple?

Can the "simple and low tax system" still serve as the golden rule for Hong Kong's economy?

The answer is of course "no"!

Regardless of the laws of historical development and the logic of economic evolution, the world has changed and Hong Kong cannot remain unchanged.

Global public opinion generally describes the G7 consensus as a "historical agreement," and even believes that it is expected to pave the way for the global tax reform that has been negotiated since 2013.

For example, U.S. Treasury Secretary Janet Yellen once declared that if the "lowest global corporate tax rate" is negotiated and passed, it will end the "30-year global tax spiral downward competition to the bottom" and "ensure the middle class in the United States and the world. "Fairness with workers"; leaders of other countries have also responded, highly appreciating that the agreement not only effectively responded to the "global digital age", but also took a "historic step" towards "tax justice" and "social justice". .

G7 reached a historic agreement to promote the "15% global minimum corporate tax", which is expected to promote the reform of the international tax system.

(Flickr@G7)

Leaving aside the political game and interest considerations behind the incident, the formulation of the "lowest global corporate tax rate" is indeed of great significance.

Since ancient times, "taxation" has undoubtedly determined the basis for the existence and operating principles of the government. For a long time in the past, because there was no clear and rigid border between countries, there were no global companies doing business everywhere. , So the ruler does not have to bargain with other regimes for taxation; however, since the end of the nineteenth century, with the emergence of a large number of multinational corporations, the rulers began to worry: For those companies that have economic activities all over the world, what Which country has the power to levy taxes on them?

Over time, the tax issue has become an "international issue" that must be negotiated by different countries.

Exactly a century ago, in the ill-fated era of the League of Nations, under the dominance of Western powers, a set of "international taxation system" that has been used today was gradually established, requiring that multinational corporations only need to base their profits on the places where they own business entities. Pay taxes to the local government.

The problem is that with the development of the economy and the changes of the times, the traditional tax system that has failed to keep up with the times has been under impact

. It mainly includes three major factors such as competition and tax reduction in various countries, tax avoidance by multinational companies, and tax evasion in the digital economy:

First of all, it is the global loss of tax cuts caused by competition between countries.

In the 1980s, with the rise of neo-liberalism and the return of market ideas, many countries have adopted competitive tax cuts to attract foreign investment—that is, what Yellen refers to as “race to the bottom” (race to the bottom). to the bottom), for example, the then President Ronald Reagan’s corporate tax incentives, the deregulation of the then British Prime Minister Mrs. Daizoer, and even the decentralization of powers and profits under the background of China’s reform and opening up, have all led to a sharp drop in global corporate income tax, among which developed countries have reduced The largest amplitude.

The "great shrinkage" of income tax directly affects the reduction of government revenue and public expenditure.

According to the "G7 Reached Historic Agreement, Major Changes in the Global Taxation System: Why?" Co-authored by Luo Zhiheng, vice president of the "Yuekai Securities Research Institute" in the Mainland, and Fang Kun, a macro analyst, a few days ago.

What is the impact?

According to statistics, from 1980 to 2020, the arithmetic average of global statutory corporate income tax has fallen by 16 percentage points to 22.6%, while the arithmetic average of corporate income tax in G7 countries has fallen by 23.3 percentage points to 27.2%.

For those who believe in liberal capitalism, the tax rate reduction is definitely a good thing, because they tend to believe that the government is inefficient in spending money, so there is no need to pay too much tax, and a "low tax" system should be adopted to "harbour wealth in the people."

The problem is that although capitalism can amplify the kinetic energy of self-interest and stimulate economic potential, it also has structural flaws that are easy to stray. Alienation creates competition for interests and leads to more concentration of wealth. Take the lower tax rate as an example, the main benefit is only A few capitalists who can control the laws of capital, not the general public.

The emergence of "the world's lowest corporate tax" is precisely reflecting the serious injustice of the liberal capitalist system, making wealth mainly concentrated in the hands of a very small number of capitalists.

(Reuters)

Secondly, it is the tax avoidance problem of multinational corporations caused by global competition to the bottom.

When a country uses tax cuts to attract more actual investment or transferred profits, it will inevitably lead to a decline in the tax base of other countries or increase indirect tax incentives-this disguisely provides multinational companies with tax avoidance opportunities. The shift of profits from areas with high tax rates to areas with low tax rates has prompted companies to increase their investment in tax avoidance incomes. However, the ultimate impact is the global fiscal function failure and the disorderly expansion of capital, which intensifies the inequality in the distribution of capital and labor income, and makes society The overall welfare is impaired.

The Mainland "Bank of China Research Institute" earlier published an article "Impacts, Challenges and Recommendations of the "Global Lowest Corporate Tax Rate" Initiative", quoting United Nations estimates, it is estimated that the tax losses caused by the transfer of profits of multinational corporations in various countries around the world will reach 5,000 to 6,000 each year. According to a study by the Organization for Economic Cooperation and Development (OECD), the proportion of American multinational companies’ overseas profits booked in "tax havens" has also increased from 30% around 2000 to 60% in 2019; the International Monetary Fund ( The IMF's calculations even pointed out that the damage situation of developing economies is more prominent. For example, the long-term income loss of non-OECD economies from cross-border tax avoidance amounts to 1.3% of their gross domestic product (GDP), which is higher than that of OECD economies. 1%.

Finally, it is the increase in corporate tax avoidance in the era of the digital economy.

Chen Jibing, a well-known mainland commentator and deputy editor-in-chief of the "Shanghai Commercial Daily" recently wrote "Global tax reform atmosphere is getting stronger" to explain that with economic development and changes of the times, "intangible assets" such as "intellectual property rights" are important for high value-added service companies. In terms of importance, they are not restricted by their physical location, and they can easily transfer most of their profits to any place-especially after the rise of the Internet, sales activities do not need to rely on any business entity at all, in disguised form they have outstanding capabilities. The opportunities for multinational corporations to provide "legal" tax avoidance have also

spawned a number of "offshore centers" and "tax havens," which can be called "one of the most unique landscapes in the world economy in the twentieth century

.

"

Why is it "the most unique landscape"?

Chen Jibing said that because most "tax havens" allow multinational companies to declare profits earned elsewhere, thereby avoiding the actual tax payable, this creates a "spectacle"-Luxembourg, with a population of only 600,000, receives There is as much foreign direct investment as the United States; and Bermuda, which produces almost nothing, also has a huge amount of "foreign investment" every year.

Chen Jibing also quoted United Nations experts’ estimates, pointing out that there are currently more than seven trillion US dollars of global wealth hidden in the so-called “tax havens”; research by Gabriel Zucman, associate professor at the University of California, Berkeley, and others also show that in 2017, About 40% of the profits of global multinational corporations are transferred to "tax havens"; New York University School of Business Professor Scott Galloway published a study in 2018, showing that between 2007 and 2015, the giants of American science and Internet companies such as Facebook, Amazon, Google and Apple’s tax rates are only 4%, 13%, 16%, and 17%, which are far lower than the average tax rate of 27% for S&P 500 companies-which shows the terrible tax avoidance.

Zuckerberg's giant US technology Internet company Facebook paid a tax rate of only 4% from 2007 to 2015.

(Reuters)

It can be said that the reason why the "global minimum corporate tax rate" advocated by the G7 has attracted much attention

is that it may fundamentally subvert the international taxation principles that have prevailed for a century,

avoid the bottom-line tax rate competition of various economies, and prevent cross-border taxation. It is believed that the minimum tax payable for enterprise transfer will help governments stabilize their finances and reduce their debt burdens.

It is worth mentioning that although the United States has raised its arms in this agreement, the discussion of "the world's lowest corporate tax rate" is not new, and it was not initiated by the United States in the first place.

As early as 2013, in response to the international taxation challenges brought about by the digitalization of the global economy, the Group of Twenty (G20) has launched an action plan with the OECD to combat "base erosion and profit shifting" (BEPS), one of the tasks The focus is to study the establishment of a "global minimum effective tax rate", hoping to promote a consensus on international tax management, and publish the first phase of the research results in 2015, and at least 90 countries and regions including China have signed the "BEPS Multilateral Convention."

By 2019, the OECD proposed the second phase of the initiative, and released a "two-pillar" tax reform blueprint in October last year: the first pillar aims to redistribute taxation powers among countries through a new formulaic method, and the government no longer relies on it. Taxation is imposed on the physical location of the enterprise to prevent multinational science and technology enterprises from influencing the consumption behaviors of economic entities in the market country and earning profits without the need for entity registration in the market country; the second pillar is to ensure that large-scale enterprises operating transnationally Paying at least at the lowest level can promote the convergence of effective tax rates in different operating jurisdictions and prevent multinational companies from changing their registration places to avoid taxation.

The above-mentioned Yuekai Securities Research Institute's article analyzes that "the two pillars are interconnected and different from each other, and have different applicable scopes and influences"-the first pillar focuses on the location of taxation and affects large-scale digital companies with high profits. It may extend the impact to the distribution of taxation rights for consumer-oriented companies; the second pillar focuses on taxation standards, mainly involving large enterprises with profit transfers, and has a significant impact on taxation. For example, the OECD estimates that the implementation of the second pillar will promote Global corporate tax revenue increased by US$42 billion to US$70 billion, far higher than the US$5 billion to US$12 billion that the first pillar can increase.

Although the United States rallied in this agreement, the discussion of "the world's lowest corporate tax rate" is not new, and it was not initiated by the United States in the first place.

(Reuters)

However, the "global minimum tax rate" discussed by the OECD is set at 12.5%, while the "global tax rate negotiation" proposed by the United States this time is 21%.

It is undeniable that the high-profile statement of the United States will definitely help accelerate the promotion of the "lowest global corporate tax rate" and provide a "target basis" for countries to reach a consensus. However, it must be mentioned that Yellen's "righteousness" is generally seen by the outside world. The level of suspicion is high and selfishness is obvious, but it is to cooperate with the US President Biden's earlier federal government's $2 trillion infrastructure and tax reform plan, which includes raising the US corporate tax rate from 21% to 28%. Establish a 21% minimum overseas corporate tax rate, and abolish tax exemptions for income from countries that have not established a minimum tax rate.

As a result, after some bargaining, the G7 currently proposes to set the "global minimum corporate tax rate" at 15%, which will be handed over to the G20 and the OECD for discussion later. I believe the latter is the "main battlefield."

It is worth mentioning that since China, as a major member of the G20, has yet to make a statement on the "lowest global tax rate", many public opinions, including G7 leaders, believe that it may be quite difficult to convince China to agree.

It is undeniable that Chinese officials have indeed remained silent on the "lowest global tax rate", but China's corporate tax rate is as high as 25%. It can be seen that only 15% of the "lowest global corporate tax rate" can hardly affect its interests, so there is reason to believe that China will not propose Opposition in principle will actively participate in the discussion of implementation details and prevent the G7 from having the final say.

However, no matter what the final tax rate is,

countries have finally realized the unfairness of indulging low-tax competition and corporate tax avoidance. It is expected to end the 30-year-old "global competition and tax reduction cycle", and even promote the further reform of the international tax system, thereby driving the world. Local governments reflect on the rational use of public finances.

According to the above-mentioned analysis of the Yuekai Securities Research Institute, the international tax reform proposed by the G7 will bring three major changes to the global tax system:

First, there has been a shift in the regulatory attitudes of advanced economies towards global tax avoidance. It can be seen that combating tax avoidance has begun to become a demand for stabilizing the macro tax burden. It is believed that strengthening international tax supervision and protecting the tax base through international tax reform will become the policy focus of combating tax avoidance.

Second, the strategy of foreign policy will shift from beggar-thy-neighbors in the past period to multilateral cooperation. It is expected to reset global trade conditions and strengthen international macro-policy coordination, which can strive for a stable external environment for internal reforms in various regions.

Third, the global tax increase cycle may begin, because the current global government debt is high, debt servicing interest is increasing, and the pressure of interest payment costs has caused fiscal policy to require monetary policy to naturally maintain low interest rates, which hinders the normalization of monetary policy. Objectively speaking, only tax increases can maintain the independence and normalization of monetary policy, and help improve the government's macro-control capabilities and finance infrastructure and other government activities.

Financial Secretary Chen Maobo must understand that "low tax rates" are not the golden rule for economic development, and Hong Kong cannot rely too much on relevant systems, (photographed by Zhang Haowei)

As one of the "tax havens," Hong Kong needs to speed up the pace of tax reform and cannot stick to the old thinking of "simple low tax system."

The British anti-avoidance organization "Tax Justice Network" compiled the "Corporate Tax Haven Index" (Corporate Tax Haven Index) rankings for 64 jurisdictions around the world, showing that the British Virgin Islands, Bermuda and the Cayman Islands have "tax haven scores" "All reached a perfect score of 100, and ranked among the top three in the world with 7.29%, 6.98% and 6.67% of "global tax avoidance shares". Hong Kong ranked tenth with 73 points and 3.62% of shares, and ranked in the "lowest corporate profits tax rate." And "lack of anti-tax avoidance mechanism" two indicators received full marks.

But under the "lowest corporate tax rate in the world", Hong Kong's good days may no longer be.

Some commentators believe that Hong Kong currently imposes a "two-tiered profits tax" on enterprises. The corporate income tax rate for profits less than HK$2 million is 8.25% or 7.5%, and the portion exceeding HK$2 million is levied at 16.5% or 15%. I believe Mainly aimed at multinational giants, the 15% "world's lowest corporate tax rate" has limited impact on Hong Kong.

However, according to the above-mentioned "Bank of China Research Institute" research estimates, the effective corporate tax rate in Hong Kong does not actually exceed 10%, which means that the minimum tax rate of 15% is higher than the current effective tax rate in Hong Kong, which may still affect relevant companies staying in Hong Kong to avoid taxation. Therefore, the Hong Kong government must not take it lightly.

As for the upcoming "global tax increase cycle", Hong Kong needs to actively follow international trends and actively participate in the promotion of the "lowest global corporate tax rate". It should also abandon the old thinking of "simple low tax system" and focus on reflecting on the significance of public finances. Reorganize the logic of rational use.

It must be known that "low tax rates" are not the golden rule for economic development, and Hong Kong cannot rely too much on relevant systems, otherwise it will be difficult to balance economic development and social needs, and it will continue to cause social injustice.

The argument of "hiding wealth in the people" of a low-tax system is becoming increasingly untenable.

(Getty Images)

"Hong Kong 01" has been tirelessly pointing out that the root cause of the SAR government’s "no way to spend money" and "no way to make money" lies in the long-term low tax policy of the government. On the one hand, the Hong Kong government constantly hypnotizes itself, thinking that there is very little money in its pockets. Therefore, I dare not spend money drastically. On the other hand, I dare not actively increase revenue because I am often criticized for "treasury flooding." They only pay attention to the balance of payments like "accountants" and have no intention of promoting large-scale reform projects. The passive and awkward situation simply failed to realize "wealth redistribution" and "sustainable development."

On the contrary, the authorities often regard tax as a "flood monster", and every time the "Budget" introduces rates and tax concessions that "the rich get more", they are completely against distributional justice, and they obviously favor the middle class and the rich. It has been implemented almost year after year, and the measures that are one-offs have been "construed" in a disguised form, and they have not played a distributional role.

At a time when the global tax system is about to undergo major changes, even the United States, which is known as the leader of free capitalism, has openly supported the "lowest global corporate tax rate" in disguised tax increase initiatives. What reason does Hong Kong have to turn a blind eye to the issue of tax reform?

More importantly, the emergence of the "lowest global corporate tax" is exposing the serious injustices of the liberal capitalist system. Therefore, in addition to discarding the old thinking of the "simple low tax system", and broadening the tax base based on the principle of "progressive tax" In addition, the Hong Kong government should also focus on reviewing the structural problems of capitalism, and then reorganizing the logic of public finances, so that everyone can share prosperity!

The above was published in the 269th issue of "Hong Kong 01" Weekly (June 15, 2021) "The World's Minimum Corporate Tax Warns Hong Kong's International Tax Reform Is Coming!"

".

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Highlights of the 269 issue of "Hong Kong 01" Weekly News:

[Cover report] The world’s lowest corporate tax warns of Hong Kong’s international tax reform wave!

The 14th Five-Year Plan has clear goals, Hong Kong is still trapped in the myth of social and economic planning

Drift in Hong Kong

Do tech giants dominate the world order?

"Military technology complex" becomes a new modern battlefield

Tax Avoidance at the G7 Summit Profits Tax Budget Chen Maobo 01 Weekly Report In-depth Report