According to our annual Global tax policy outlook, a publication now in its seventh year, jurisdictions continue to seek a competitive, “low-rate, broad-base” business tax environment in 2017 and beyond, continuing a trend that has been playing out for some years.
Over this long term, headline corporate income tax rates continue to fall and the number of countries forecasting an increasing business tax burden continues to outstrip those forecasting a reducing burden.
Unsurprisingly, many of the burden-increasing, base-broadening changes are direct results of the G20/Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) project.
But beneath the headlines, a new — and welcome — trend is forming. Tax incentives — those supporting research and development (R&D) activity and also broader business investments of both new and continuing forms — are becoming more popular with governments, in what can be seen as a “BEPS effect.”
Such incentives have always been used by policymakers to spur new or refreshed economic activity, which is a continuing policy goal for many countries. But today, the report says, this BEPS effect may be creating a rising tide of government support for more acceptable ways to deliver cutting-edge, competitive tax systems, which in turn provide opportunities for business to gain support for new or enhanced investments or research and development activities.
In essence, even as countries find their competitive instincts constrained by the new collective agreements to fight base erosion, they are looking for tried and tested (and acceptable) ways to secure foreign direct investment.
Consider the raw data: in the area of R&D incentives, for example, 20% more countries are reporting favorable incentives over 2016 data (when a consistent set of countries are compared). While that number may not be ground-breaking, the size and impact of some of the changes are significant. For example, in Japan — one of many countries making similar moves — the credit rate for R&D has increased by up to 75% due to a temporary measure.
Likewise, broader business incentives such as capital allowances or depreciation will also benefit from increased government investment in 15 of the 50 countries in the report.
Italy, for example, has extended until 31 December 2017 the 40% extra-amortization for investments in tangible new operating assets. Malaysia’s special reinvestment allowance (RA) program, meanwhile, provides for enhanced benefits for the three years of assessment 2016-18.
Interestingly, six of the nine countries tracked in the report (China, Italy, Luxembourg, Mexico, Norway and the United Kingdom) offering more generous broader business incentives are simultaneously offering more generous R&D incentives in 2017.
In effect, countries are making braver moves to spur investment, perhaps reflecting the sense of frustration with the lack of growth a full decade after the start of the global financial crisis.
A final area of focus in the Outlook report is that, as a result (again) of BEPS project activity, many countries are now actively assessing their patent or innovation box regimes for compliance with BEPS requirements, putting in place legislative measures to amend them where necessary.
In some cases, countries are also taking the opportunity to reflect on whether their boxes have met objectives, refining and improving them where necessary. In other cases — such as in Israel and Singapore — entirely new innovation or patent boxes are being created.
The resurgence of tax incentives is welcome news for businesses against a backdrop of increased funding costs, reduced treaty access, higher permanent establishment risk and a general perception (also shared by the OECD) that tax disputes will rise in the years ahead.
So is your business either aware of or, more importantly, taking advantage of this emerging trend? To help focus efforts, a new publication, “A rising tide for incentives”, is now available for download at ey.com.
It is reasonable to expect the trend of governments positively focusing on their incentives to continue, as pressure remains on tax competition to take an “acceptable” form. But it will not last forever.
This article is a summary of a new EY report into the changed, new or improved incentives in the 50 countries covered in EY’s 2017 Global Tax policy outlook. The report, entitled A rising tide for incentives is now available for download.