3. Tax reforms before the COVID-19 crisis
This chapter provides an overview of the tax reforms adopted before the COVID-19 crisis in OECD countries as well as in Argentina, China, Indonesia and South Africa. It looks at the reforms coming into force or due to come into force in the second half of 2019 and 2020. It examines trends in each category of tax including personal income taxes and social security contributions, corporate income taxes and other corporate taxes, VAT/GST and other taxes on goods and services, environmentally related taxes and property taxes.
This chapter provides an overview of the tax reforms adopted before the COVID-19 crisis in OECD countries as well as in Argentina, China, Indonesia and South Africa. It looks at the reforms coming into force or due to come into force in the second half of 2019 and 2020. It examines trends in each category of tax including personal income taxes and social security contributions (Section 3.1), corporate income taxes and other corporate taxes (Section 3.2), VAT/GST and other taxes on goods and services (Section 3.3), environmentally related taxes (Section 3.4) and property taxes (Section 3.5). It should be noted that some of the reforms described in this chapter have been delayed in response to the crisis. More generally, the COVID-19 crisis should be seen as a significant intervening event and future reports will focus on the impact of the crisis on longer-term tax reforms.
The discussion in this chapter is primarily based on countries’ responses to the 2020 Annual Tax Policy Reform Questionnaire, which was completed by countries between January and February 2020. This annual questionnaire asks responding countries to describe their tax reforms as well as to provide details on their expected revenue effects and other relevant information, including the rationale for the tax measures (see Box 3.1).
At the Working Party No.2 on Tax Policy Analysis and Tax Statistics (WP2) meeting in November 2009, delegates from OECD countries agreed to start collecting more systematic information on the main tax measures adopted in each country. The motivation for this proposal was to provide consistent and comparative information on tax reforms to inform policy discussions in OECD and non-OECD countries.
At the November 2010 WP2 meeting, the following criteria were agreed for deciding whether a tax policy measure was sufficiently substantial to be reported in the questionnaire:
A significant change in a tax rate;
A change in the tax base that is expected to change revenue from that base by more than 5% or 0.1% of GDP; and
A politically important systemic reform.
Any central or sub-central tax policy measure that was implemented, legislated or announced in the previous calendar year which meets at least one of the criteria listed above must be reported in the questionnaire.
For each reform, the questionnaire requests information on the type of tax; the dates of entry into force, legislation or announcement; the direction of the rate and/or base change; and a detailed description of the reform. The questionnaire also asks for the rationale behind the reform and estimates of the revenue effects of the tax measures.
In the area of personal income tax (PIT), the report confirms that countries are continuing to lower the tax burden on personal income, with most of the countries that have introduced PIT reforms in 2020 opting to cut PIT rates and narrow PIT bases. The most common rationale for these reforms cited by countries is to support fairness, particularly for those on low and middle incomes. While this trend represents a broad continuation of PIT reforms in recent years, the focus on PIT rate cuts has intensified. PIT base narrowing measures have also been frequent and often targeted at families and low-income earners. Regarding the taxation of household capital income, limited changes have been introduced, involving both tax increases and decreases. These measures have included changes to the taxation of rental income as well as expanded tax reliefs to support small savers. Finally, the focus on SSC reforms has slowed compared with recent years, and most reforms have involved SSC reductions.
PIT and SSCs are major sources of tax revenues
PIT and SSCs are particularly significant sources of tax revenues in most countries. Together, they account for half of tax revenues in OECD countries on average. PIT accounts for 24% of tax revenues in the OECD while SSCs account for 27%. As shown in Figure 3.1, in 2018, PIT, SSCs and payroll taxes accounted for over 60% of tax revenue in the United States and Germany and about 40% in Israel, New Zealand, South Africa and Mexico. In the Slovak Republic, the Czech Republic, Slovenia and Lithuania, SSCs alone accounted for at least 40% of total taxation. In Denmark, Australia and the United States, PIT alone accounted for about 40% or more of total tax revenues. PIT, SSCs and payroll taxes represent a much smaller share of tax revenues in Chile (14%), Indonesia (22%) and Argentina (29%).
Note: 2017 data for Australia, Greece, Indonesia, Japan, Mexico and South Africa.
Source: OECD Global Revenue Statistics Database.
Over the past 50 years, SSCs have gradually overtaken PIT as the most important source of tax revenue in OECD countries. The sum of PIT and SSCs has remained relatively constant over time, at around half of tax revenue, but the mix has changed. PIT has gradually declined as a share of total revenue while SSCs have gradually increased (Figure 3.2). In 1965, SSCs comprised 17.6% of tax revenues on average while PIT accounted for 26.2% of total taxation. By 1995, they were about equal at approximately 25%. By 2018, SSCs represented 27.0% of total tax revenues on average, surpassing the PIT share of 23.9%.
Source: OECD Revenue Statistics Database.
Taxes on labour income declined on average between 2013 and 2019, after a series of increases after the global financial crisis
The average tax burden on labour income has been declining slowly but consistently in recent years (Figure 3.3). Between 2009 and 2013, the OECD average tax wedge – the total tax payments on labour income as a percentage of total labour costs – for single workers earning the average wage increased by one percentage point, from 35.5% to 36.5%. This largely reflected countries’ fiscal consolidation efforts at that time. Since then, the OECD average tax wedge has been declining steadily but slowly reaching 36.0% in 2018.
Source: OECD Taxing Wages Database.
Over the past 20 years, tax burdens have declined, particularly for families with children. In the early 2000s, the tax burden declined across family types. Between 2009 and 2019, in the years following the global financial crisis, average tax wedges rose modestly for many family types, for example for one-earner married couples with children and single persons at 100% of average earnings with no children. However, tax wedges declined for single persons at 67% of the average wage with children. Overall, tax wedges remain lower than in 2000 across family types despite modest increases in the past decade (Figure 3.4).
PIT rate cuts have intensified
PIT reforms are important tools for governments to achieve different policy objectives, including raising tax revenues, stimulating economic growth or enhancing the redistributive impact of the tax system. These reforms involve the upward or downward adjustment of PIT rates and the broadening or narrowing of PIT bases. These policy choices often involve a trade-off between equity and efficiency. For instance, while PIT rate increases on the upper income brackets strengthen progressivity and fairness, they might also reduce economic incentives to work, save and invest. This section looks at the PIT reforms that were recently introduced in OECD countries, Argentina, China, Indonesia and South Africa, beginning with PIT rate reforms followed by PIT base changes.
Source: OECD Taxing Wages Database.
Fewer countries have made changes to their top PIT rates compared to previous years
Of the countries undertaking top PIT rate reforms, three involved cuts while two involved increases (Table 3.1). This marks a decline in the number of top PIT rate changes compared to recent years. There are also fewer countries increasing their top PIT rates compared to previous years. For instance, in 2018, four countries reported top PIT rate increases, and in 2019, three countries raised their top PIT rates and Poland introduced a solidarity levy on taxpayers whose total income in the fiscal year exceeds PLN 1 million, levied at a rate of 4% on the excess of this amount.
Greece, the Netherlands and Sweden have lowered their top PIT rates. As part of its Annual Tax Plan 2020, the Netherlands is accelerating the introduction of its two bracket PIT (to replace the previous three bracket PIT rate schedule) by introducing it in 2020 rather than in 2021 as had previously been envisaged. As part of this reform, the rate of the top PIT bracket is decreased to 49.5% in 2020 from 51.75% in 2019. Sweden abolished its top PIT rate in 2020, which had previously added a 5% surtax on higher incomes above SEK 703 000. In Greece, the PIT rate on the highest income bracket for business, employment and farming income above EUR 40 001 is reduced modestly to 44% from 2020.
While several countries had increased top rates in recent years, only Chile and Turkey have done so in 2020, with both countries introducing a new highest income tax bracket with a PIT rate of 40%. In Chile, the previous highest tax rate was 35%. In Turkey, the new top PIT bracket applies to those earning over TRY 500 000 annually (the second highest bracket is 35%). The stated objective of both reforms is to raise revenues and enhance progressivity.
More countries are focusing on tax rate cuts targeted at low and middle-income earners
Similar to the top PIT rate reforms, non-top PIT rate reforms have involved more rate cuts than increases. Nine countries reported non-top PIT rate cuts and five reported non-top PIT rate increases in 2020. In 2019, there was a more even split between non-top PIT rate cuts and increases (four countries undertook non-top PIT rate cuts and three undertook increases). The current reforms are more closely aligned with 2017 and 2018 where most countries that undertook non-top PIT rate reforms introduced tax cuts targeted at low and middle-income earners (although these were small).
A few countries are increasing PIT rates on lower and middle-income brackets. Of the countries increasing non-top PIT rates, Lithuania increased the rate on its second PIT bracket from 27% to 32% in 2020. This PIT rate increase follows from a significant reform undertaken in Lithuania in 2019 when a new progressive PIT system was introduced to replace the previous flat-rate system. The Netherlands also increased its lowest rate modestly to 37.1% in 2020, up from 36.65% in 2019. In Iceland, it is proposed that the PIT rate on the middle bracket will be increased from 22.75% to 23.5% in 2021. In Greece, a number of previously proposed PIT reforms due to commence in 2020 were repealed including a previous proposal to cut the 22% PIT rate to 20% in January 2020. In Italy, the 20% substitute PIT rate for self-employed and entrepreneurs with incomes from EUR 65 000 to EUR 100 000 has been abolished. The regime, which had been due to come into force in 2020, allowed for the application of a different PIT rate than the ordinary progressive PIT rates.
Several countries are undertaking non-top PIT rate cuts to support low and middle-income earners. In Iceland, as part of the second phase of a three-phase PIT reform between 2019 and 2021, several non-top PIT rate changes are being introduced to reduce the tax burden on low and middle-income families. The lowest PIT rate bracket is reduced from 22.5% to 20.6% in January 2020; the middle-income bracket is 22.75% and the top bracket remains unchanged (although the threshold is adjusted for inflation). Furthermore, it is proposed that the lowest PIT rate will be further reduced to 17% in 2021. In Greece, non-top PIT rates are also being cut modestly in 2020 through several adjustments across the PIT rate schedule. A new lowest bracket is introduced with a PIT rate of 9% up to EUR 10 000 and the PIT rate has been reduced by one percentage point for incomes above EUR 10 000. Consequently, the new PIT rate schedule in Greece is as follows: 9% from EUR 0 – 10 000; 22% from EUR 10 001 – 20 000; 28% from EUR 20 001 – 30 000 and 36% from EUR 30 001 – 40 000 and 44% above EUR 40 001. In France, to support fairness, the first bracket of the PIT schedule is reduced from 14% to 11% from January 2020. Similarly, in Poland, as part of the Act on Personal Income Tax in mid-2019, the lowest PIT rate was reduced from 18% to 17% in October 2019. In Slovenia, the PIT rate is reduced modestly by one percentage point on both the second and third brackets to 26% and 33% respectively from 2020. In Germany, the solidarity charge, which amounts to 5.5% of the income tax, is proposed to be abolished for the majority of taxpayers and reduced for certain higher income earners from 2021. The rationale for the tax cut is to lower the tax on lower and middle incomes. In the Slovak Republic, for self-employed workers with incomes below EUR 100,000 per year, the PIT rate is reduced from 21% to 15%. In Denmark, the lowest PIT bracket is reduced slightly to 12.11% effective for 2020 and 2021. In Australia, a decrease in the 32.5% marginal tax rate to 30% in 2024/2025 was legislated.
PIT base narrowing reforms have continued
The trend among countries in recent years to narrow PIT bases has continued. A majority of PIT base reforms in 2020 have been aimed at supporting those on low incomes and families (Table 3.2). Overall, these measures are expected to reduce tax revenues. Of the countries undertaking PIT base reforms, 33 were base narrowing and three were base broadening. This policy preference for PIT base narrowing rather than base broadening follows the trend observed in recent years.
PIT base narrowing reforms have been aimed at supporting those on low incomes and families with children. Ten reforms involved increases in personal tax allowances, tax credits and tax brackets to support low-income earners and employment. Eight reforms were aimed at supporting children and other dependents. PIT base reforms targeted at supporting the elderly have been less frequent than in 2019. Four countries have expanded the scope of their earned income tax credits (EITCs) or other in-work benefits.
Personal tax allowances, tax credits and tax brackets
Many countries have increased the generosity of their general tax allowances and tax credits. These reforms, which are targeted at supporting low-income earners, are expected to increase after-tax incomes but also to reduce tax revenues.
In Australia, a number of significant reforms were introduced in mid-2019 to reduce PIT on individuals over the coming years. The stated objective of the reform is to make PIT lower, fairer and simpler. To increase tax relief for low incomes, a new ‘low and middle-income tax offset’ was introduced to provide tax relief of up to AUD 1 080 between 2018 and 2022. Entitlement to this new offset is in addition to the existing “low income tax offset”. From 2022, a new “low income tax offset” will replace both the current “low income tax offset” and the “low and middle-income tax offset”. This new “low income tax offset” will increase from AUD 445 to AUD 700. In addition, the top threshold of the 19% tax bracket will increase from AUD 37 000 to AUD 45 000 in 2022. Australia has also legislated an increase in the threshold at which the top marginal PIT rate is levied from AUD 180 000 to AUD 200 000 from the 2024–25 income year.
Five countries have increased their basic tax allowances. In Germany, the basic allowance has been increased modestly to EUR 9 408 in 2020 (it was EUR 9 168 in 2019 and EUR 9 000 in 2018). In Lithuania, with the similar objective of reducing the tax burden on low-income workers, the basic monthly tax allowance is increased to EUR 350 in 2020 and the authorities have proposed to increase it further to EUR 400 in 2021. Similarly, Slovenia increased the annual basic tax allowance from EUR 3 303 to EUR 3 500 in 2020. An additional tax allowance in Slovenia is also available for residents where taxable income does not exceed EUR 13 317 and the tax allowance for income from student work has been increased. In Finland, the basic allowance for earned income is increased to EUR 18 100 in 2020 from EUR 17 600 in 2019. In the Slovak Republic, the basic allowance for employees (and self-employed workers) is increased from 19.2 to 21 times the living minimum (of EUR 210) in 2020.
Several countries have narrowed the PIT base through increased tax credits. In the Netherlands, the general tax credit will be increased gradually over two years by EUR 80 in total starting in 2020. This adds to increases in the general tax credit in 2019. In Italy, tax credits increased in 2020 to reduce PIT on labour income and encourage consumption. In Iceland, on the other hand, the personal tax credit is decreased to ISK 655,538 annually, based on an adjustment for inflation and taking account of the decrease in the bottom rate.
In some countries, tax brackets have been shifted upwards. In Slovenia, the threshold for the highest income bracket, which has a rate of 50%, has been raised to EUR 72 000. In Ireland, the income ceiling for the Universal Social Charge (USC) in the second tax bracket, which has a tax rate of 2%, has been raised from EUR 19 874 in 2019 to EUR 20 484 from February 2020. In Finland, the temporary highest income bracket of the progressive income tax schedule (the so-called ‘solidarity tax’) will remain in effect until the end of 2023.
Children and other dependents
Greece, Germany and Canada have introduced several PIT measures aimed at supporting families and children. In Greece, the tax credit for those earning employment, pension and farm income has been increased for married persons with dependents but decreased for those on higher incomes from January 2020. In addition, a cut in child tax credits to start from 2020 has been repealed. In Germany, a number of family benefits increased in January 2020. For example, the tax-free allowance for parents with children will increase to EUR 7 812 in 2020, up from EUR 7 620 in 2019. In addition, the child benefit was increased to EUR 204 per month in mid-2019 (the amount depends on the number of children). In Canada, a number of measures are being introduced to support families and children throughout 2019 and 2020. In British Columbia, a new child opportunity benefit is introduced in late 2020 to be combined with the existing childhood tax benefit. In Ontario, a new tax credit for childcare is introduced which provides families with an income-tested refundable tax credit of up to 75% of eligible childcare expenses.
Other countries have increased tax deductions and credits for children and other dependents. In Portugal, the draft budget proposes an increase in the tax credits from 2020 for households with small children to EUR 300 and an additional EUR 150 for the second child onwards when there are two or more children under three years of age. In Lithuania, the child benefit will also increase from EUR 50 to EUR 60 and from EUR 70 to EUR 100 for larger families. In the Slovak Republic, the child tax credit for children up to six years of age was increased to EUR 45.44 in mid-2019. In Japan, the deduction of JPY 350 000 for single parents with a dependent child was reviewed. The deduction now applies regardless of the marital status or gender of the parents. In addition, the deduction for widows and widowers with dependents other than a child is set to remain at JPY 270 000, for those with taxable income up to JPY 5 million. In Ireland, the home carer tax credit, where one spouse (or civil partner) works in the home caring for a dependent person, is increased to EUR 1 600 in 2020, up from EUR 1 500 in 2019 and EUR 1 200 in 2018.
EITCs and other in-work tax benefits
A number of changes to EITCs and other in-work benefits were introduced in the Netherlands, Ireland, Finland and Italy. When designed correctly, such measures have the potential to improve labour market participation and reduce poverty. The number of EITC reforms has declined compared to recent years. In the Netherlands, to support employment, the maximum of the income dependent EITC will be increased gradually over three years by a total of EUR 285 starting in 2020 (this follows a previous increase of EUR 150 in 2019). In Ireland, for self-employed workers, the EITC is increased by EUR 150 to EUR 1 500 in 2020. This adds to a consecutive set of increases in recent years including in 2019 (when it was EUR 1,350), 2018 (EUR 1 150) and 2017 (EUR 950). In Finland, for municipal taxation, the deduction for earned income has been increased to EUR 1 770 in 2020, up from EUR 1 630 in 2019 and EUR 1 540 in 2018. In Italy, the monthly tax credit is increased from EUR 80 to EUR 100 for employees with an income up to EUR 28 000 from July 2020 (the measure is only for employees with a tax liability). In addition, Italy introduced a temporary non-refundable tax credit of EUR 600 for employees with PIT income above EUR 28 000 from July 2020 and the amount of the tax credit is gradually decreased for higher incomes up to EUR 40 000. The tax credit is due to be phased out by December 2020.
Elderly and disabled
In 2020, PIT reforms to support the elderly have slowed. Supporting low-income older people continues to be an important policy rationale for age-related tax concessions (OECD, 2011[1]). A number of countries have undertaken PIT reforms to support low-income retirees in recent years. In 2020, two countries undertook such reforms. In Sweden, to reduce the tax burden on older workers, the basic personal allowance has been increased for people above 65 years of age from 2020. Finland is increasing the pension income deduction in both central and local government taxation in 2020 with the aim of reducing the tax burden on low-income taxpayers.
Two countries reported PIT measures to support the disabled. In Greece, taxpayers with certain disabilities are exempt from the solidarity surcharge from 2020. In Lithuania, the basic monthly tax allowance for disabled persons is increased to between EUR 600 and EUR 645, depending on the extent of disability from 2020.
Other employment and skills-related tax provisions
Several reforms were made to other tax provisions related to employment, skills and young workers. In Portugal, to support employment, the draft budget includes a partial exemption from PIT on employment income earned by certain young workers with income not exceeding EUR 25 000 from 2020 onwards. The PIT relief is applicable to a reducing fraction of taxable income in the first three years after completing education (30% in the first year, 20% in the second year and 10% in the third year). In Poland, PIT on employment income is exempt for those aged under 26 years age up to a limit of PLN 85 528 starting from August 2019. In Quebec in Canada, a tax credit for career extension is introduced to encourage experienced workers to remain in the labour market. In Estonia, to support employment, the compensation of employees’ public transport costs between home and work are not taxed as fringe benefits from 2020. In Turkey, non-taxable employer provided transport benefits have been expanded in 2020. In the Slovak Republic, certain daily allowances, such as business trips, are tax-exempt for employee salaries above 1.65 times the minimum wage from 2020, an increase from 1.3 times the minimum wage in 2019.
Tax reforms for the self-employed
Some countries reported PIT base reforms for the self-employed and unincorporated businesses. In the Netherlands, the allowance for the self-employed will be cut from EUR 7 280 in 2020 in consecutive annual steps until it reaches EUR 5 000 in 2028. In the Slovak Republic, to support the self-employed, the monthly exemption from PIT and SSCs for accommodation and transport costs are to be increased in 2020 and 2021 respectively. In addition in the Slovak Republic, a new category of taxpayers (‘micro-taxpayers’) will be introduced in 2021 under the Income Act, defined as individuals that generate income from business or self-employment activities not exceeding the threshold for VAT registration. These taxpayers will be entitled to several tax benefits including related to tax depreciation of movable property.
Other PIT deductions and credits
Regarding other types of PIT deductions and tax credits, a few base broadening measures were introduced. In the Netherlands, to simplify the tax system, the deductibility of education costs will be abolished from 2021 and replaced with a subsidy. The reform is expected to increase PIT revenues. In Finland, to increase tax revenues, the tax credit for domestic household expenses will be decreased in 2020. In Italy, the tax credit of 19% for certain personal expenses (such as expenses and mortgage interest on owner-occupied houses) is capped in 2020 at taxable incomes of EUR 120 000.
Changes to personal capital income taxation have been limited
Overall, changes to the taxation of household capital income have been limited. The two main rationales for the reforms to personal capital income cited by countries were to encourage savings on the one hand and to raise revenues on the other. Among others, reforms have included a mix of tax rate cuts and increases on rental income and expanded tax relief for financial income to support small savers.
Three countries have cut tax rates on personal capital income (Table 3.3). In Portugal, the tax rate on long-term housing rentals is reduced substantially from 28% to 10% starting January 2020. Similarly, in Italy, rental income is subject to a reduced 10% substitution rate from January 2020, under certain conditions (the rate had previously been proposed to be 15%). In Greece, to support investment, the tax rate on dividends is reduced from 10% to 5% for distributed dividends in 2020.
Two countries have increased tax rates on personal capital income. In Slovenia, the capital gains tax rate was increased from 25% to 27.5% for holding periods below five years. For holding periods greater than five years, the capital gains tax rate was increased to 20% between 5 and 10 years, to 15% between 10 and 15 years and to 10% between 15 and 20 years (for holding periods greater than 20 years, capital gains are exempt). In addition, in Slovenia, the tax rate on rental income was raised from 25% to 27.5%. In Chile, the increased 40% PIT rate (see above) is applicable to all types of ordinary income, including dividends and capital gains. In addition, dividends distributed to higher earners residents in Chile by companies under the Partial Imputation Regime are subject to an effective PIT rate of 44.45%. Finally, a new fixed 40% tax applies to disproportionate dividends (i.e. that do not correspond to the shareholder´s equity participation) that have no business or commercial justification and are distributed as a way to reduce the PIT burden of related-party shareholders (with family ties).
Some countries have introduced base narrowing measures (Table 3.4). In Argentina, the tax on certain financial income, including interest on fixed term deposits, government securities and corporate bonds, has been abolished from 2020. In Hungary, a tax exemption was introduced for interest income from retail treasury bonds to encourage households to buy these bonds. In Japan, the ’General NISA’ and ‘Installment-type NISA’ individual savings account programme, which provides certain tax-exempt benefits, was extended by five years. In Sweden, the coupon tax, which is withheld when a dividend is paid and no tax return is submitted, can be deferred in some cases under a new system introduced in 2020.
Two countries have reported measures broadening personal capital income tax bases. In Chile, a new one-year period limitation was introduced for the capital gains tax exemption on the sale of stocks or quotas in the capital market when the sale is made under a market maker agreement. In Finland, the deductibility of mortgage interest payments will be limited from 25% to 15% in 2020 and then further until it reaches zero in 2023.
SSC reforms have slowed compared with recent years
There have been fewer SSC reforms compared to previous years, and they have almost all involved SSC reductions, both through rate cuts and base narrowing. Overall, however, SSC reforms have been modest and SSCs remain high in many countries. In some countries, high SSCs have distortive effects and more comprehensive tax reforms will be needed to rebalance the tax mix towards less distortive and potentially more progressive taxes.
Changes to SSC rates have been limited
Three countries undertook SSC rate cuts in 2020, and one reported rate increases (Table 3.5). In Estonia, the rate of employer SSCs was cut from 33% to 20% for recipients of the parental allowance and disabled workers. In Hungary, employer SSCs were cut from 19.5% to 17.5% in mid-2019. In addition, with the stated objective of simplifying the tax system, employee SSCs, which currently consist of four separate items, will be integrated into a single SSC in mid-2020. In Sweden, a number of SSC reforms have been introduced with the aim of supporting employment and skills. For example, SSC contributions for new entrants to the labour market and younger workers have been reduced. Germany has undertaken a reform involving a mix of SSC rate increases and cuts. These reforms are introduced across the four types of social insurance in Germany: pension, unemployment, health and long-term care. The rationale for the reform is to reduce the tax burden on labour but also to address demographic requirements, for instance through the financing long-term care. Argentina was the only country to report an increase in SSC rates: a proposed SSC employer rate of 19.5% has been abolished and replaced with new SSC employer rates ranging from 18% to 20.4%, depending on the type of employer, with the objective of raising revenues.
Countries have continued to narrow employer SSC bases, but reforms have been limited
All SSC base reforms, with one exception, involved SSC reductions, generally focused on employer SSCs (Table 3.6). In Sweden, to support research and development (R&D), the tax relief on the total SSCs paid by companies for individuals who work in R&D was increased from 10% to 20% in 2020. In Slovenia, the holiday allowance, which is paid by employers to employees, will be exempt from SSC contributions up to 100% of the average monthly minimum wage. In Argentina, the monthly deductible amount for employers from the employer contribution base is increased to ARS 12 000 per employee in some sectors and will remain in place until 2022. In Lithuania, the SSC ceiling is reduced to 84 times the average monthly salary from 2020. In addition, Lithuania’s tax-free salary threshold is increased from 1.3 to 1.65 minimum wages from January 2020. In Ireland, the weekly income threshold for the higher rate of employers pay related social insurance (PRSI) is increased to EUR 395 in 2020 (previously it was EUR 386 in 2019 and EUR 276 in 2018). Base narrowing measures related to employees and self-employed SSCs and payroll taxes were also introduced. In Austria, where certain SSCs can be partly reimbursed, the maximum SSC reimbursement for low-income earners is increased from EUR 400 to EUR 700 annually. The maximum SSC reimbursement for retirees is also increased from EUR 110 to EUR 300. In Poland, to reduce the tax burden on micro-entrepreneurs whose income in the previous calendar year was less than PLN 120 000, the minimum monthly SSC base has been set at 30% of the minimum monthly salary (MMS, equal to PLN 2 600 in January 2020), compared to the standard minimum of 60% of the MMS. In Quebec in Canada, to encourage the employment and retention of older workers, payroll taxes are reduced for SMEs that employ older workers through a tax credit (by 50% for workers aged 60 to 64 and 75% for workers aged 65 and over).
Only one country broadened its SSC base, which represents a marked decline compared with recent years. In France, employers benefit from a general reduction in employer SSCs due on the remuneration of their employees earning less than 1.6 times the minimum wage. As of January 1, 2020, the parameters for calculating this SSC reduction have been modified and is now capped for employees benefiting from a specific flat-rate deduction for professional expenses.
The downward trend in statutory corporate income tax (CIT) rates is continuing. The most significant CIT rate reductions have generally been introduced in countries with higher initial CIT rates, leading to further convergence in CIT rates across countries. Many countries have also reinforced the generosity of their corporate tax incentives to stimulate investment and innovation. With regard to international taxation, efforts to protect CIT bases against corporate tax avoidance have continued with the adoption of significant reforms in line with the OECD/G20 Base Erosion and Profit Shifting (BEPS) project. The tax challenges arising from the increasing digitalisation of the economy are another major concern for many countries. Efforts to achieve a consensus-based multilateral solution to address those challenges are ongoing, but some countries have announced or implemented interim measures to tax certain revenues from digital services in the meantime.
Trends in CIT revenues have varied across countries
The CIT to GDP ratio and CIT revenues as a share of total tax revenues vary across countries. CIT revenues ranged from 1.0% of GDP in Latvia1 to 6.0% of GDP in Norway in 2018 (Figure 3.5). As a share of total tax revenues, CIT ranged from 3.2% of total taxation in Hungary to 22.5% of total tax revenues in Indonesia (Figure 3.6). Multiple factors can explain differences in revenues from CIT including statutory CIT rates, the breadth of the CIT base, the degree to which firms are incorporated, the phase in the economic cycle and the degree of cyclicality of the corporate tax system, as well as countries’ reliance on other taxes. These factors may have also contributed to the large differences in revenues between 2000 and 2018 observed in several countries including Chile, Greece and Finland. Figure 3.6 shows that CIT tends to represent a larger share of revenue in countries with significant natural resources and in emerging and developing economies. In the case of emerging and developing economies, total tax revenues are generally lower as a percentage of GDP and personal income tax revenues tend to play a smaller role than the CIT.
Note: 2017 data was used for Argentina, Australia, Greece, Indonesia and South Africa. No 2000 data were available for Indonesia and Mexico.
Source: OECD Global Revenue Statistics Database.
Note: 2017 data was used for Argentina, Australia, Greece, Indonesia, Japan, Mexico and South Africa. No 2000 data were available for Indonesia and Mexico.
Source: OECD Global Revenue Statistics Database.
On average, CIT revenues have held up as a share of GDP over the last two decades. Across OECD countries, after a peak in 2007 and a subsequent fall following the global financial crisis, CIT revenues have remained relatively stable since 2009 on average, slightly picking up from 2015 onwards. Average CIT revenues as a share of GDP are now back to a level slightly below their 2000 level (Figure 3.7). They seem to have been relatively unaffected by the progressive decline in statutory CIT rates, which is also shown in Figure 3.7, and discussed in the following section. Various factors may have contributed to this apparent paradox between declining CIT rates and relatively stable CIT revenues, including the rise in corporate profits, the broadening of CIT bases, the incorporation of businesses, and the decline in borrowing costs as a result of low interest rates.
Note: Combined statutory CIT rates refer to central and sub-central statutory CIT rates.
Source: OECD Revenue Statistics Database and OECD Tax Database.
There has been a steady and widespread decline in corporate income tax rates
Standard CIT rates
The decline in CIT rates has been a steady and widespread trend. Figure 3.8 shows the changes in the distribution of CIT rates between 2000 and 2020 across the countries covered in the report and highlights major shifts in the CIT landscape. In 2020, there were only two countries with CIT rates above 30%, against 23 in 2000. Meanwhile, the number of countries with CIT rates below 20% increased from two in 2000 to 11 in 2020. Overall, in the OECD, the average combined (central and sub-central) CIT rate has declined from 32.2% in 2000 to 23.5% in 2020 and OECD countries’ CIT rates have become slightly less dispersed (Figure 3.9).
From 2015 onwards, the decline in average CIT rates has been driven by high-tax countries. In Figure 3.9, three main phases in the decline of OECD statutory CIT rates can be distinguished. First, there was a rapid decline in the OECD average CIT rate from 2000 to 2008 from 32.2% to 25.4%, driven by decreases in countries with both high and low CIT rates. This decline was followed by a more stable phase where the average CIT rate remained relatively stable, at around 25%. Finally, starting in 2015, the decline in the average CIT rate started accelerating again, declining from 24.9% in 2014 to 23.2% in 2020. This decline has been driven by a decrease in countries with relatively high tax rates as indicated by the evolution of the 75th percentile, which dropped from 29.9% in 2014 to 27.2% in 2020. In the same period, countries with relatively low CIT rates remained constant in the majority of cases, with the 25th percentile remaining at 20%. The only exception was Hungary where the CIT rate was cut to 9% in 2017.
Source: OECD Corporate Tax Statistics Database, OECD Tax Database and OECD Annual Tax Policy Reform Questionnaire.
Source: OECD Tax Database and OECD Annual Tax Policy Reform Questionnaire.
CIT rate reductions have been particularly pronounced in G7 countries. G7 countries had significantly higher CIT rates than other countries in the early 2000s and, on average, experienced the strongest average CIT rate reduction between 2000 and 2020, amounting to 13.2 percentage points. In comparison, the average decline for OECD countries that are not G7 members was about 8.0 percentage points (Figure 3.10). With the exception of the United Kingdom, the combined statutory CIT rates of G7 members remain among the highest in the OECD (Figure 3.11). The non-OECD countries covered in the report (Argentina, China, Indonesia and South Africa) have also seen a decline in their CIT rates, but not to the same extent as OECD countries, and their CIT rates remain higher than the OECD average (Figure 3.10).
Note: The non-OECD average refers to the average of the four non-OECD countries covered in this publication: Argentina, China, Indonesia and South Africa.
Source: OECD Corporate Tax Statistics Database, OECD Tax Database and OECD Annual Tax Policy Reform Questionnaire.
Note: Statutory CIT rates as of January 2020
Source: OECD Corporate Tax Statistics Database, OECD Tax Database and OECD Annual Tax Policy Reform Questionnaire.
In 2020, reductions in standard CIT rates were introduced in Belgium, Canada (Alberta), France, Greece and Indonesia (Table 3.7). In Belgium, the standard CIT rate was lowered to 25% as part of the Corporate Income Tax Reform Act of 2017. In France, the standard CIT rate was lowered to 31% (except for companies with an annual turnover exceeding EUR 250 million), as part of a previously legislated CIT rate reduction, which is expected to progressively bring the CIT rate down to 25% by 2022. In Canada, the region of Alberta implemented the Job Creation Tax Cut, which provides for reductions in the general CIT rate from 12% to 8% over four years. The rate was reduced from 12% to 11% on 1 July 2019 and will be reduced by one percentage point on 1 January of each year until it reaches 8% in 2022. In Greece, from tax year 2019 onwards, the CIT rate has been reduced from 28% to 24%. Indonesia has accelerated the decrease in its statutory CIT rate, initially planned to start in 2021. Indonesia’s CIT rate is now lowered from 25% to 22% in 2020 and 2021, and will be further decreased to 20% in 2022. Overall, the CIT rate cuts introduced in 2020 have been more sizeable than in 2019, with an average combined CIT rate reduction across the countries that introduced CIT rate cuts of around 3 percentage points, compared to an average decrease of around 1 percentage point in 2019.
Standard CIT rate reductions are also set to come into force in 2021. In the Netherlands, the originally planned reduction of the CIT rate applying to income exceeding EUR 200 000, was partly reversed; the CIT rate was not decreased to 22.55% in 2020 as originally planned; instead it remains at 25% in 2020 and will be lowered to 21.7% instead of 20.50% in 2021. Argentina also revised its scheduled CIT rate reduction: the planned reduction of its CIT rate from 30% to 25% in 2020 has been postponed until 2021 (Figure 3.12). Argentina’s distributed dividend tax will also increase from 7% to 13% in 2021. In Sweden, the statutory CIT rate remains at 21.4% in 2020 and will be cut to 20.6% in 2021.
SME CIT rates
Reduced CIT rates for SMEs are common across OECD countries. A number of countries provide reduced CIT rates for SMEs, although the design of these reduced tax rates varies significantly. Some countries apply lower tax rates on the first tranche(s) of profits, regardless of total income levels; some have reduced CIT rates for corporations with income below a certain level; and others determine eligibility for small business tax rates based on non-income criteria (e.g. turnover or assets) instead of or in addition to income criteria.
Source: OECD Annual Tax Policy Reform Questionnaire.
A few countries have reduced their SME CIT rates. In the Netherlands, as planned, the lower CIT rate that applies to taxable income up to EUR 200,000 was cut from 19% to 16.5% in 2020 and will be further reduced to 15% in 2021. To simplify its tax system and reduce the tax burden on SMEs, Hungary abolished the Simplified Business Tax (EVA) while reducing the rate of small business tax (KIVA) by 1 percentage point from 13% to 12%. The Slovak Republic has lowered the CIT rate from 21% to 15% for all corporations with a turnover below EUR 100 000 per year. In Portugal, the taxable income subject to the reduced CIT rate of 17% has been increased from EUR 15 000 to EUR 25 000 and, in the case of SMEs that carry out their activities in inland regions, the taxable income subject to the reduced CIT rate of 12.5% has also been raised from EUR 15 000 to EUR 25 000. In Poland, the definition of "small taxpayer" for CIT and PIT purposes was increased to include companies with revenues not exceeding the equivalent of EUR 2 million in the previous tax year (until 2019 this threshold was equal to EUR 1.2 million). This measure is aimed at bringing more companies into the SME regime.
Taxes on the financial sector
A few countries are introducing changes to financial sector taxes. Taxes on the financial sector gained attention in the aftermath of the global financial crisis. They are generally collected on top of ordinary corporate taxes and can be applied on different bases (e.g. bank deposits, capital assets, risk-weighted assets). The Slovak Republic first introduced a bank levy in 2012. The tax was initially introduced for a limited period and was expected to be repealed by 2020. However, the government approved its extension in November 2019, doubling the tax rate from 0.2% to 0.4% of banks’ liabilities net of equity. In Iceland, a bank levy was introduced in 2011 at a rate of 0.041% on financial institutions’ debt. In 2014, the rate was raised to 0.376% to finance the government’s household debt relief programme. This tax is scheduled to be lowered in four steps to reach 0.145% by 2023. In Sweden, a tax on the financial sector, which is scheduled to take effect in 2022, has been announced. Lithuania has introduced an additional CIT rate of 5% on top of the standard rate of 15% on the taxable profits of credit institutions.
Intellectual property regimes
Intellectual property (IP) tax regimes allow income from the exploitation of IP to be taxed at a lower rate than other income. IP regimes have been introduced in an increasing number of countries, and these usually involve a significant reduction in the tax rate applicable to IP-related income compared to the tax rate that would otherwise apply (Figure 3.13).
Source: OECD (2020), Corporate Tax Statistics Database.
A number of IP regimes were revised to comply with BEPS Action 5 and Poland introduced a new IP regime. Countries need to align their IP regimes with Action 5 of the OECD/G20 BEPS project, which aims at addressing harmful tax practices, including IP regimes where certain substance requirements are not met. In the past, IP regimes could be designed in a way that incentivised firms to locate their IP assets in a jurisdiction regardless of where the underlying R&D was undertaken. The modified nexus approach under Action 5 now requires that substantial economic activity is undertaken in the country offering the favourable tax regime and that the amount of income eligible for benefits in an IP regime is proportional to the amount of expenditures undertaken by the taxpayer to develop the IP. Action 5, which is a peer-reviewed minimum standard of the OECD/G20 BEPS package, has led many countries to align their IP regimes with these new requirements (see section 3.2.4). As noted in last year’s report, Poland introduced an IP regime for the first time, designed to be in line with the modified nexus approach. Starting from January 2019, under the Polish IP box regime, profits from qualifying IP are taxed at the preferential rate of 5%. Luxembourg replaced its previous IP regime, abolished in 2016, with a new one that is in line with the modified nexus approach. France also introduced a revised IP regime in line with the modified nexus approach as of 1 January 2019. The income benefitting from this regime is taxed at a 10% rate. In Switzerland, a significant tax reform, approved by Parliament and adopted after a referendum in May 2019, includes mandatory patent boxes at the cantonal level effective starting from January 2020 (Box 3.2).
In Switzerland, the Federal Act on Tax Reform and AHV (old age and survivors' insurance) Financing (TRAF) was approved in a referendum on 19 May 2019. The reform aims to maintain the competitiveness of Switzerland as a business location while securing jobs and tax receipts in the Confederation, cantons and communes. Mandatory measures of the TRAF entered into effect on 1 January 2020 at the federal level. Some of the cantonal measures are optional and cantons can tailor the majority of measures to their specific circumstances and needs within certain boundaries.
The tax reform brings the replacement of certain preferential tax regimes in line with a new set of internationally accepted measures. The central part of this package is the elimination of cantonal tax privileges for status companies (i.e. those that would benefit from the mixed, domiciliary, holding or principal company regimes, or the Swiss finance branch regime), which is compensated by the creation of patent boxes and the possibility for cantons to introduce additional deductions for R&D. Finally, it entails an increase in the cantonal share of federal direct tax revenues, a rebalancing of the national financial equalisation scheme, and increased AHV financing.
Abolition of cantonal tax privileges (mandatory)
The reform abolished the tax privilege of status companies that previously paid a reduced or null CIT at cantonal level. At the federal level, status companies continue to be subject to the regular CIT rate.
Patent box (mandatory)
The reform introduces a patent box regime intended to comply with OECD standards. Net profits from domestic and foreign patents and similar rights are to be taxed separately with a maximum reduction of 90% to be set at cantonal discretion.
Additional deductions for research and development (voluntary)
The cantons may give a higher weighting to R&D expenditure to promote research and development. The enhanced R&D deduction at the cantonal level can reach a maximum of 50% (on top of the 100% baseline tax deduction) of the effective qualifying expenses, at the discretion of cantons. The value of tax allowances will depend on the canton specific CIT rate.
Other business taxes
Poland has reduced the tax rate on the extraction of copper and silver by 15%. This measure aims to reduce the burden on businesses engaging in mining activities subject to the Law on Taxation of Extraction of Certain Metals introduced in 2012.
A new levy is charged on all Greek-owned fishing ships and boats, as well as tug boats, which operate in maritime transport or shipping services for a time period that does not exceed 50% of their total operating time. Lifeguard vessels that perform exclusively rescue and maritime relief operations are excluded. Depending on the type of boat, the duty is calculated based on the horsepower or length of the vessel.
Many countries have increased the generosity of their corporate tax incentives
Most countries have CIT base narrowing provisions that lower companies’ effective tax burdens. Corporate tax systems differ across jurisdictions with regard to provisions that affect the tax base. Forward-looking effective tax rates (ETRs) capture information on corporate tax rates and bases as well as other relevant provisions within a single framework, providing a basis to compare corporate tax systems across jurisdictions. In particular, effective marginal tax rates (EMTRs) measure the extent to which taxation increases the pre-tax rate of return required by investors to break even. This indicator is used to analyse how taxes affect the incentive to expand existing investments given a fixed location.
EMTRs can diverge considerably from statutory tax rates. When fiscal depreciation is generous compared to true economic depreciation or if there are other significant base narrowing provisions, the EMTRs will be lower than the statutory tax rate. On the contrary, if tax depreciation does not cover the full effects of true economic depreciation, effective taxation will be higher. The EMTRs reported in Figure 3.14 show the effects of fiscal depreciation and other allowances and deductions (e.g., allowances for corporate equity, half-year conventions, inventory valuation methods). These CIT base narrowing provisions lower corporate EMTRs compared to statutory CIT rates in the majority of countries, reflecting their positive effects on businesses’ incentives to expand investments. Certain CIT base narrowing provisions, in particular allowances for corporate equity (in Italy, Belgium, Portugal and Poland in 2019) and generous accelerated depreciation rules considerably reduce EMTRs, which end up reaching negative values.
Note: The results are based on the macroeconomic scenario with constant 3% interest and 1% inflation rates. The composite Effective Marginal Tax Rate (EMTR) is constructed as a weighted average across finance- and asset-specific EMTRs. It is a synthetic tax policy indicator measuring the extent to which taxation increases the pre-tax rate of return required by investors to break even on their investment. This indicator is used to analyse how taxes affect the incentive to expand existing investments given a fixed location (along the intensive margin).
Source: OECD Corporate Tax Statistics Database.
Countries have generally increased the generosity of their tax incentives through tax reforms affecting CIT bases. Several countries have increased the generosity of their CIT incentives to stimulate investment, innovation and environmental sustainability (Table 3.8). These measures will contribute to further reducing corporate EMTRs. Significant CIT base changes have also been introduced in Chile as part of its comprehensive 2020 tax reform (Box 3.3).
Chile’s Tax Modernisation Law (Nº 21.210) was approved by Congress on 29 January 2020. Its main provisions entered into effect retroactively on 1 January 2020. It is a comprehensive tax reform that aims to support investment and growth and to modernise the relationship between taxpayers and the tax authority, trough enhanced tax certainty and digitalisation. It also includes measures to strengthen the progressivity of the tax system.
Investment and growth
The reform implements the return to a single general Corporate Income Tax regime (which consists of a Partially Integrated System) and an enhanced fully integrated regime for SMEs. Under the Partially Integrated System, the CIT rate is 27% and shareholders receive a 65% tax credit for the underlying CIT paid. SMEs benefit from a reduced CIT rate of 25% and a full dividend imputation credit. The accruals based corporate tax regime has been abolished. Small businesses whose shareholders are liable to the PIT can now opt to be taxed under the PIT and no longer first under the CIT and then under the PIT. Given the implementation difficulties of the previous system, the 2020 tax reform reduces complexity and tax compliance costs and delivers greater tax certainty. Other measures supporting increased levels of capital investment are described in the Report (e.g., accelerated tax depreciation, faster reimbursement of VAT).
Enhanced tax certainty
The reform contains a range of measures intended to provide greater tax certainty to taxpayers. These include new transparency rules on administrative requests to the tax authority, new rules for the deductibility of business expenses and for the use of foreign tax credits. The reform also implements a domestic permanent establishment concept that is consistent with OECD standards. For the first time, a tax ombudsman is incorporated in Chile and an entirely new set of rules have been added to the taxpayers’ charter of rights. The taxable event of the Green Tax is amended, as the requirement of a minimum thermal power capacity of the polluting facilities is removed, focusing now on the volume of emissions (and new tax offsetting possibilities through effective mitigation measures are introduced).
Digitalisation
With the objective of facilitating and enhancing tax compliance, the tax reform further digitalises the relationship between taxpayers and the tax authority, including a new digital folder with historical taxpayer records and additional online filings for all types of taxes. It also implements mandatory electronic VAT receipts (in addition to the e-invoices established mandatorily in 2014), which are designed to simplify and modernise VAT procedures and further reduce VAT and income tax evasion. The reform also implements a new VAT simplified registration and compliance regime for non-resident suppliers to facilitate compliance on B2C digital transactions, in accordance with OECD Guidelines.
Strengthening the progressivity of the tax system
The reform will have the effect of modifying the Chilean tax structure. Once in full effect, the reform is projected to increase tax revenues by USD 2 204 million, of which more than 55% (USD 1 222 million) will be derived from high-income taxpayers. Many of these progressivity-enhancing measures are described in the Report (e.g. the new progressive property tax on high-value property added to the ordinary property tax; the highest income tax bracket with a top PIT rate of 40%). Additionally, the reform extended the residential property tax rebate for the elderly low-income taxpayers.
Increases in capital allowances
Several countries introduced (often temporary) measures increasing the generosity of their capital allowances. In Finland, new temporary measures were introduced to support investment in new machinery and equipment. For these assets, the rate of annual depreciation was increased from 25% to 50% until the end of 2023. Temporary measures were also introduced in Chile, where new or imported fixed assets acquired between October 2019 and December 2021 can be expensed for 50% of their value and depreciated at an accelerated rate the remaining part. More generous allowances were introduced in Araucania, a region in the south of Chile, where new and imported fixed assets can benefit from full expensing. In Australia, the threshold for the ‘instant’ asset write-off was temporarily increased from AUD 20 000 to AUD 30 000, and access was expanded to businesses with an annual turnover below AUD 50 million (up from AUD 10 million) prior to the COVID-19 pandemic. In Germany, the construction of new rented flats is encouraged through special temporary depreciation rules until the end of 2026. Immediate expensing was introduced in the Slovak Republic for micro taxpayer corporations (i.e. with yearly turnover below EUR 49 790). Under this provision, micro taxpayers can benefit from a 100% deduction of all tangible assets except cars costing more than EUR 48 000. Japan introduced a 30% depreciation (or, alternatively, a 15% tax credit) for investments in 5G-related equipment.
A few countries introduced more generous depreciation schemes to encourage the transition to environmentally friendly vehicles. In Italy, the deductibility of company vehicle costs was tied to carbon emissions such that deductibility decreases as carbon emissions increase. The Slovak Republic introduced a shorter two-year depreciation period for battery and plug-in hybrid vehicles, as compared to the usual four-year depreciation period generally applied to motor vehicles. In Greece, a 130% super deduction was introduced for corporate passenger car expenses with low (up to 50 grams of CO2/km) or zero emissions and a maximum retail price before tax of EUR 40 000, for expenses incurred for public transportation tickets, and for expenses related to the installation and operation of charging points for low-emission cars. Finally, in Iceland, eco-friendly business vehicles can benefit from accelerated annual tax depreciation.
Increase in the generosity of R&D tax incentives
Many countries incentivise business investment in R&D through tax incentives.2 R&D tax incentives have become a widely used policy tool to promote business R&D. The number of OECD countries offering tax relief for R&D expenditures increased from 19 in 2000 to 30 in 2019, with the design and scale of R&D tax reliefs differing across countries.3 As shown in Figure 3.15, up until the onset of the global financial crisis, the marginal rate of R&D tax subsidy estimated for large profitable firms4 on average increased across OECD countries. This trend stabilised around 2014, with average implied subsidy rates remaining relatively constant thereafter. Figure 3.16 compares the implied tax subsidy rates on R&D expenditures for large profitable firms across countries and years (2000, 2009 and 2019). In 2019, R&D tax incentives were particularly generous for large profitable firms in France, Portugal, Chile and Spain, with the largest increases in generosity compared to 2000 being observed in Chile, France, and Lithuania. These changes reflect the introduction of new R&D tax incentives and the increasing generosity of existing R&D tax relief provisions.
Note: Information on B-Index methodology can be found here: http://www.oecd.org/sti/b-index.pdf.
Source: OECD R&D Tax Incentive Database, https://oe.cd/rdtax, December 2019, Data and notes: https://oc.cd/ds/rdtax.
Note: Information on B-Index methodology can be found here: http://www.oecd.org/sti/b-index.pdf
Source: OECD R&D Tax Incentive Database, https://oe.cd/rdtax, December 2019, Data and notes: https://oc.cd/ds/rdtax
Germany implemented a new R&D tax credit to complement its business R&D support policies. This new incentive, effective in January 2020, is made available for a broad range of R&D activities, complementing Germany’s direct support measures (e.g. R&D grants, government procurement of R&D services) targeting specific R&D investments. It consists of a 25% R&D tax credit, applicable to R&D salaries and eligible contract research expenses up to EUR 2 million, and entails a maximum level of R&D tax support of EUR 500 000 per year per company. Funding is open to activities carried out in-house or by an external R&D service provider.5 In the case of expenses incurred for contract R&D activities, 60% of the overall expenses that are paid for such activities are considered eligible expenses. The R&D tax credit itself is not subject to taxation and is refundable when it exceeds the taxpayer’s tax liability.
In Ireland, the current R&D tax credit is to be enhanced for micro and small companies, subject to state aid approval from the European Commission. For these companies, the rate of the tax credit will be increased from 25% to 30%. As was the case previously, the measure can also support loss-making companies, since unused tax credits in any year are payable6 or may alternatively be carried back to the previous accounting period or carried forward indefinitely. An additional feature allows micro and small companies to claim credits for qualifying pre-trading R&D expenditures. Before a company begins to trade, the credit may be offset against VAT and payroll taxes. Additional measures to enhance R&D incentives for all companies have been introduced. In particular, the amount of a company’s qualifying R&D expenditure that can be outsourced to third-level institutions was increased from 5% to 15% to increase collaboration between companies and the education sector.
Other countries have increased the generosity of their tax incentives for R&D and innovation. In the Slovak Republic, the amount of deductible costs has increased. For financial years starting on or after 1 January 2019, the volume-based and incremental rate of the R&D tax allowance was retrospectively increased from 100% to 150%, while for fiscal years starting on or after 1 January 2020, these rates have been increased to 200%. Finally, the new R&D tax credit announced in New Zealand in 2018 became effective in July 2019, providing a refundable tax credit7 of 15% of eligible R&D expenditures with a minimum R&D expense of NZD 50 000 and a ceiling on total eligible R&D expenditure of NZD 120 million.
In Italy, the R&D tax credit that was available in 2019 has been modified and extended to apply to expenses in the innovation and design fields. The R&D tax credit is computed by taking into account eligible expenses incurred in the fiscal year 2020 and depends on two factors that will need to be multiplied to compute the amount of the tax credit. These two factors are the type of expense incurred and the type of activity. For expenses such as research labour costs and contract R&D, up to 150% of the actual expenditure is considered. For costs such as materials, technical expertise and depreciation expenses, 20% to 30% of the incurred costs is considered. The factor depending on the type of activity ranges from 12% of eligible expenses for R&D activities to 6% for design activities. The tax relief ceiling was decreased from EUR 10 million in 2019 to EUR 3 million for R&D expenditures and EUR 1.5 million for the remaining activities.8
Other tax incentives
In the United States, several existing business tax credits were further extended, mainly to promote environmental sustainability. The existing tax credits for biodiesel and renewable diesel, electricity produced from certain renewable sources and alternative fuels were extended. Also, to boost economic growth and support investment, existing tax credits for new markets, work opportunities and railroad track maintenance were extended.
Incentives for investments in small enterprises were introduced in Hungary, Chile and Japan. In Hungary, the development tax incentive allows companies to deduct up to 80% of their CIT in the year of investment and over the following 12 years. The minimum present value of investments required to obtain the allowance will be reduced in the case of SMEs, which makes the tax incentive more widely available. Also, investments in start-ups are incentivised through an increase in the maximum limit of tax allowances related to angel investments. Chile enhanced profit reinvestment incentives for SMEs with the introduction of a measure allowing a tax base reduction of up to 50% of reinvested profits. The maximum deduction allowed is of UF 5 000 (approximately EUR 165 000). Japan introduced corporate income deductions equivalent to 25% of the investment carried out in innovative start-ups.
Temporary tax incentives to improve productivity were introduced in Korea. From January until December 2020, tax credits granted for investments made in qualifying facilities were increased from 1% to 2% for large companies, from 3% to 5% for medium-scale enterprises and from 7% to 10% for SMEs.
In Mexico, tax incentives to specific regions are being reoriented. The tax relief granted to the Special Economic Zones (SEZs)9 was repealed. Going forward, tax policies will focus on fundamental projects targeting southern regions (e.g. the Mayan Train and the Isthmus of Tehuantepec) and on tax benefits available for activities in the northern border area.
In Japan, eligibility conditions for tax credits and tax allowances were revised to encourage large enterprises to increase salaries and investments. More specifically, large corporations where the average salary does not exceed that of the previous year and the amount of domestic capital investment does not exceed 30% of the depreciation expenses in the current year, cannot benefit from R&D tax measures and other tax credits. In addition, large companies where the average wage growth was less than 3% or domestic capital investment was less than 95% of the depreciation costs incurred during the financial year cannot benefit from the tax credit equivalent to 15% of the wage increase.
Indonesia has expanded the scope of its tax allowance regime to encourage investment. Indonesia’s tax incentive schemes, which were kept unchanged, include additional deductions, the accelerated depreciation of fixed tangible assets, the accelerated amortisation of intangible assets, as well as enhanced loss carry forward provisions (from five to ten years). The new rules have expanded the number of sectors eligible for the incentives and have removed many of the existing geographical restrictions on eligible investments.
Deductions for reinvested earnings in Portugal
Portugal has broadened the deduction for the reinvestment of retained earnings. The reinvestment of retained earnings (“DLRR – Dedução por Lucros Retidos e Reinvestidos”) is a tax incentive for micro, small and medium-sized companies that provides the right to a CIT deduction equivalent to 10% of the retained and reinvested earnings used for the acquisition of relevant assets.10 In the 2020 State Budget Law, the reinvestment period for retained earnings was increased from three to four years and the maximum amount of retained earnings that can be reinvested was raised from EUR 10 million to EUR 12 million. Intangible assets are also eligible if they are eligible for amortisation for tax purposes and are not acquired from related parties.
Notional interest deductions
The Italian allowance for corporate equity (ACE) was reintroduced. The Italian ACE consists of a notional interest deduction from the CIT base, equal to the net increase in new equity employed in the entity (i.e. the equity generated after 2010) multiplied by a rate determined every year. In its 2019 budget, the Italian government abolished the ACE, compensating its removal by introducing several measures aimed at supporting investment, including a reduced CIT rate for reinvested profits. With the elimination of the tax reduction for reinvested earnings, the ACE was reintroduced from 2019 and its notional return rate was decreased from 1.5% in 2018 to 1.3% in 2019.
Loss carryover provisions
Contrary to the trend observed in recent years, where countries were limiting loss carryover provisions, the Slovak Republic increased the generosity of its loss carry-forward provisions. The carry-forward period was extended from four to five years and the volume limit changed from 25% of accumulated losses to 50% of the tax base. For corporations in the category of micro-taxpayers (i.e. with turnover below EUR 49 790), a similar measure was introduced: the carry-forward period was extended from four to five years but no volume limits apply.
Fight against corporate tax avoidance
The past year has seen further progress on the implementation of the OECD/G20 BEPS package. The OECD/G20 BEPS package, which includes 15 Actions aimed at addressing tax planning strategies that artificially shift profits to low or no-tax jurisdictions, was delivered in October 2015. The BEPS package sets out a variety of measures, including four minimum standards (Actions 5, 6, 13 and 14), common approaches that will facilitate the convergence of national practices, and guidance drawing on best practices. Countries are carrying out the implementation of the BEPS package through the Inclusive Framework on BEPS, which brings together more than 135 jurisdictions.
As of March 2020, the provisions of the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) had taken effect for about 300 tax agreements. The MLI, concluded by over 100 jurisdictions in November 2016, allows jurisdictions to swiftly implement measures to strengthen existing tax treaties and protect governments against tax avoidance strategies that inappropriately use tax treaties to artificially shift profits to low or no-tax jurisdictions. The MLI includes measures against hybrid mismatch arrangements (Action 2), treaty abuse (Action 6), a strengthened definition of permanent establishment (Action 7) and measures to make mutual agreement procedures (MAP) more effective (Action 14). The MLI entered into force on 1 July 2018 and its provisions started to take effect from 1 January 2019. As of 15 March 2020, the MLI covered 94 jurisdictions11 and 43 jurisdictions had deposited their instrument of ratification, acceptance or approval. Overall, it covers over 1650 tax agreements, which will be modified by the MLI once its provisions take effect for each of these agreements. More jurisdictions are expected to deposit their instrument of ratification, acceptance or approval of the MLI in 2020.
BEPS minimum standards
The MLI has allowed significant progress on the implementation of the Action 6 minimum standard on treaty shopping. Action 6 calls for the adoption of treaty provisions to prevent the granting of treaty benefits in inappropriate circumstances and to put an end to treaty shopping. The 2019 peer review report, which was approved by the BEPS Inclusive Framework at its January 2020 meeting and which covers all comprehensive tax agreements concluded by each of the 129 jurisdictions that were members of the Inclusive Framework as at June 2019, shows substantial progress in the implementation of the Action 6 minimum standard. The peer review also confirms the success of the MLI, which has been the preferred tool of jurisdictions for implementing Action 6.
Significant progress has also been made on Action 5 in addressing harmful tax practices. Since the start of the BEPS Project, the Forum on Harmful Tax Practices (FHTP) has reviewed a total of 287 preferential tax regimes against the standard for harmful tax regimes. The results to date show that all IP regimes have been, with one exception, either abolished or amended to comply with the modified nexus approach, which requires that substantial economic activity is undertaken in the country offering the favourable tax regime and that the amount of income that is eligible for benefits in an IP regime is proportional to the amount of expenditures undertaken by the taxpayer to develop the IP. Where necessary, other changes have been made to comply with the standard (e.g., removal of ring-fencing features designed to attract investment while protecting the domestic tax base).
In addition to the review of preferential tax regimes, there was a review of the substantial activities factor for “no or only nominal jurisdictions”. After agreeing the new substantial activities standard for “no or only nominal tax jurisdictions” in November 2018, the 12 “no or only nominal tax jurisdictions” identified by the FHTP introduced the necessary domestic legal framework to meet the standard. The standard requires that for certain highly mobile sectors of business activity, the core income generating activities must be conducted with qualified employees and operating expenditure in the jurisdiction. The FHTP has now reviewed the new domestic laws of the 12 no or only nominal tax jurisdictions. For 11 of these jurisdictions, the FHTP concluded that the domestic legal framework is in line with the standard and therefore “not harmful.” Regarding the remaining jurisdiction reviewed by the FHTP (United Arab Emirates), the FHTP concluded that the legal framework was in line with the standard but with one technical point outstanding, and the jurisdiction is now in the process of amending the relevant law.
On transparency in tax rulings, the second pillar of Action 5, progress has been achieved towards the compulsory spontaneous exchange of information on tax rulings. So far, almost 18 000 tax rulings have been identified and close to 30 000 exchanges of information have taken place. Eighty jurisdictions have now successfully implemented the standard and have not received any recommendations for improvement.
In line with Action 13, the first automatic exchanges of country-by-country (CbC) reports started in 2018. Action 13 requires the ultimate parent entity of an MNE group to file a CbC report in its jurisdiction, providing information (on turnover, profits, employees, taxes paid, etc.) for each of the jurisdictions in which it operates. The tax administration of the country where the ultimate parent entity is a tax resident will then exchange this data with the tax authorities of other countries. As of January 2020, there were over 2 400 bilateral exchange relationships activated with respect to jurisdictions committed to exchanging CbC reports. These include exchanges between the 84 signatories12 to the CbC Multilateral Competent Authority Agreement, between EU Member States under EU Council Directive 2016/881/EU and between signatories to bilateral competent authority agreements for exchanges under Double Tax Conventions or Tax Information Exchange Agreements, including 41 bilateral agreements with the United States. Jurisdictions continue to negotiate arrangements for the exchange of CbC reports.
Action 14, which deals with the improvement of mutual agreement procedures (MAP), has also seen significant progress. Action 14 aims at improving mechanisms to resolve tax treaty-related disputes to make them more effective. The MAP peer review process is conducted in two stages. Under Stage 1, the implementation of the Action 14 minimum standard is evaluated for Inclusive Framework members. Stage 2 focuses on monitoring the follow-up of any recommendations resulting from the Stage 1 peer reviews. As of October 2019, six rounds of Stage 1 peer review reports covering 45 jurisdictions had been released. The OECD will continue to publish Stage 1 peer review reports in batches in accordance with the Action 14 peer review assessment schedule.13 In addition, MAP country profiles for more than 80 countries have been published to increase transparency of the MAP processes.
BEPS beyond minimum standards
Beyond the BEPS minimum standards, BEPS Actions 2, 3 and 4 have been rapidly adopted by a large number of countries. These actions include common approaches to neutralising hybrid mismatches (Action 2) and to limiting excessive interest deductions (Action 4) as well as best practices in the design of effective controlled foreign company (CFC) rules (Action 3).
For EU countries, the adoption of the recommendations under BEPS Actions 2, 3 and 4 was agreed by the EU Council. The Council adopted the Anti-Tax Avoidance Directive (ATAD) as amended by ATAD II requiring Member States to implement domestic legislation in accordance with the provisions of ATAD for interest limitation and CFC rules with effect from 1 January 2019 and anti-hybrid rules with effect from 1 January 2020 (with the exception of the reverse hybrid mismatch rule, which will apply from 1 January 2022). In January 2020, the European Commission issued letters of formal notice to selected jurisdictions under Article 258 of the Treaty on the Functioning of the EU, where these letters serve as the first step in an infringement procedure. In the second stage of the procedure, the Commission may send a formal request to comply with EU law if it concludes that a member state is failing to fulfil its obligations under EU law.
Progress has also been made outside of the EU. In particular, Mexico adopted a reform that took effect in January 2020 to bring its tax legislation in line with recommendations from the OECD/G20 BEPS project (Box 3.4). Chile also adopted changes that took effect in January 2020, introducing a new special anti-avoidance rule that prevents the application of a reduced (4%) withholding tax on interest paid to a foreign financial institution if the lender institution is not the beneficial owner of the interest payments. In addition, Chile included new substance requirements for an entity to be qualified as a foreign financial institution and therefore be entitled to the reduced (4%) withholding tax on interest.
Actions 8 to 10 contain transfer pricing guidance to ensure that transfer pricing outcomes are in line with value creation in relation to intangibles and other high-risk transactions. Through this work, the OECD Transfer Pricing Guidelines have been modernised, and a new edition was published in July 2017. In June 2018, guidance on the application of the transactional profit split method and additional guidance addressed to tax administrations on the application of the approach on hard-to-value intangibles were approved, and have been incorporated into the OECD Transfer Pricing Guidelines. The implementation of Actions 8 to 10 has varied across countries. For a number of countries, changes to the OECD Transfer Pricing Guidelines resulted in domestic laws containing a direct reference to the Guidelines. In other countries, changes have consisted of clarifications, rather than substantive modifications to transfer pricing practices. Many other OECD and Inclusive Framework countries have introduced new legislation or regulations to implement domestically all or part of the guidance developed under BEPS Actions 8 to 10 (e.g. Argentina, Japan, Italy, Poland).
As recommended by BEPS Action 11, significant work has been undertaken to improve the quality of available corporate tax statistics, which is a critical step towards strengthening the Inclusive Framework’s ongoing efforts to measure and monitor BEPS and the impact of the BEPS package. New data collection processes and analytical tools have been developed. A new dataset – the OECD Corporate Tax Statistics Database – was released for the first time in January 2019, with the second edition published in July 2020. The second edition includes anonymised and aggregated CbC report statistics for 2016, to provide a more complete view of the largest MNEs’ global activities and improve the statistical and economic analysis of BEPS.
Finally, many countries have indicated that they plan to introduce or expand mandatory disclosure rules, in line with BEPS Action 12. BEPS Action 12 contains recommendations regarding the design of mandatory disclosure rules for aggressive tax planning schemes, taking into consideration the need to avoid disproportionate administrative and compliance costs and drawing on the experiences of the increasing number of countries that have such rules. EU countries are required to implement the rules as part of the EU Council Directive 2018/822 of 25 May 2018 (also known as DAC 6). While not all EU member states adhered to the implementation deadline of 31 December 2019, it is expected that DAC 6 will be transposed into the domestic laws of EU member states in 2020, with mandatory disclosure rules entering into force no later than 1 July 2020. Non-EU countries that have adopted mandatory disclosure rules include Canada, Israel, Mexico, Norway, Russia, South Africa, the United Kingdom and the United States.
In Mexico, a tax reform was approved by Congress on 30 October 2019 and entered into effect on 1 January 2020. This box provides an overview of the numerous changes intended to bring Mexico’s tax legislation in line with recommendations from the OECD/G20 BEPS project.
Anti-hybrid mismatch arrangements
In order to address BEPS risks from hybrid mismatch arrangements, legislation was amended to follow the recommendations of Action 2 of the OECD/G20 BEPS project. In particular, the reform modified a rule that disallows the deduction of any payment if the same taxpayer can claim a deduction on the same payment in a different jurisdiction by reason of dual residency or if the same payment is also deductible for a related party. In addition, a pre-existing rule that disallowed the deduction of payments made between related parties to preferential tax regimes was modified in order to incorporate the recommendations of the Final Report on Action 2 related to deduction/no inclusion outcomes. Moreover, rules were introduced to disallow foreign tax credits based on recommendations 2.1 and 2.2 of the Final Report on Action 2.
Controlled foreign corporation rules
The pre-existing rules regarding controlled foreign corporations subject to preferential tax regimes were redrafted to adopt several of the recommendations of the Final Report on Action 3 of the OECD/G20 BEPS project and to further clarify the application of the rules. One of the most important changes was a new definition of control that now includes other types of control such as economic control, de facto control and control based on consolidation.
Interest expense deduction limit
To address tax base erosion taking place through the use of debt mechanisms, new interest deductibility limitation rules were implemented based on Action 4 of the OECD/G20 BEPS project. The deductibility of interest payments was restricted by disallowing any net interest in excess of 30% of EBITDA. Under specific circumstances, a ten-year carry forward is applicable to payments not deducted during a specific tax year. Furthermore, the reform introduced a de minimis exception as well as certain exemptions regarding specific industries (e.g. related to energy and water projects).
Permanent establishment
Following Action 7 of the OECD/G20 BEPS project, the definition of a permanent establishment (PE) in domestic law was modified to incorporate the changes made to Article 5 of the OECD Model Tax Convention. These changes address the artificial avoidance of a PE through commissionaire arrangements and specific activities that are excluded from the PE definition, among others.
Mandatory Disclosure Rules
Mexico introduced mandatory disclosure rules based on the Final Report of Action 12. The new legislation requires promoters and/or taxpayers to disclose specific tax schemes. The promoters are required to provide a reference number of the tax scheme (issued by the tax authority) to the users. The users are required to provide this reference number in their tax return. Promoters must also provide the tax authorities with a list of clients to whom they provided tax advice with respect to a reportable tax scheme. In certain cases, taxpayers are required to report their tax scheme directly to the tax authorities. The first disclosure returns are expected to be submitted in 2021 with respect to tax schemes that have tax effects in 2020 or in later years.
Mutual Agreement Procedure implementation
The second sentence of Article 25 (2) of the OECD Model Tax Convention says that any agreement shall be implemented notwithstanding the time limits in the domestic law of the Contracting States. In order to avoid any differences between the domestic law and their tax treaties, Mexico introduced a provision that says that the time limits in the Tax Code shall not affect the implementation of any agreement reached in a Mutual Agreement Procedure.
General Anti-Avoidance Rule
Mexico introduced a general anti-avoidance rule that says that legal arrangements without a business reason that create tax benefits should have the tax effects that correspond to those arrangements that would have been carried out to obtain the economic outcome expected by the taxpayer. The rule includes a procedure on how tax authorities can apply this provision.
Progress is being made towards a long-term multilateral solution to address the tax challenges arising from digitalisation
Efforts to address the tax challenges arising from digitalisation have been ongoing under the auspices of the Inclusive Framework. Digitalisation has led to the emergence of new business models and these changes have put pressure on some of the key principles underlying the international tax system. In January 2019, the Inclusive Framework agreed on a Policy Note that grouped proposals to address these tax challenges under two “pillars” and set out to examine them as a possible basis for consensus (OECD, 2019[2]) Pillar One examines nexus and profit allocation rules, and Pillar Two seeks to ensure a minimum level of taxation. Building on the note, the Inclusive Framework delivered a detailed Programme of Work in May 2019, which was endorsed by the G20 Finance Ministers and Leaders in June 2019. In January 2020, the Inclusive Framework at its plenary meeting reaffirmed its commitment to reach a consensus-based long-term solution by approving the “Statement by the OECD/G20 Inclusive Framework on BEPS on the Two Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy”.
Pillar One aims to expand the taxing rights of market jurisdictions over certain defined business activities in exchange for improved tax certainty. For some business models, the market jurisdiction is the jurisdiction where the user is located. To achieve this result, a new taxing right would be created, largely unconstrained by physical presence requirements, focusing on large MNEs providing automated digital services or selling goods or services to consumers (i.e. consumer facing businesses). This reallocation of taxing rights would stem from a recognition that the profits from sustained and remote participation of a business in the economy of a market jurisdiction should give rise to some taxing rights in that jurisdiction. The amount of this reallocation of profits would be determined through a formula and based on the consolidated financial accounts of MNE groups.
Pillar Two is also referred to as the Global Anti-Base Erosion proposal or “GLoBE” proposal. It focuses on the remaining BEPS risks and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights, or where the payment is otherwise subject to low levels of effective taxation. The GLoBE proposal would be composed of four rules: a) the income inclusion rule; b) the switch-over rule; c) the undertaxed payment rule; and d) the subject to tax rule.
The technical work on various aspects of the two-pillar approach is underway in a range of Working Parties within the OECD. The objective is to deliver the key policy features of the Pillar One and Pillar Two solutions for a political agreement by the end of 2020. The Inclusive Framework also agreed to continue ongoing work on the economic analysis of the proposals (Box 3.5).
Recent economic analysis suggests that the proposed two-pillar solution would have a significant positive impact on global tax revenues. The revenue gains are broadly similar across high-, middle-, and low-income economies, as a share of corporate tax revenues.
The economic analysis and impact assessment of the Pillar One and Pillar Two proposals is being undertaken to inform key decisions on the design and parameters of the tax reform to be agreed by Inclusive Framework members. The analysis covers data from more than 200 jurisdictions, including all members of the Inclusive Framework, and more than 27,000 MNE groups. Assumptions in the preliminary analysis are illustrative, and do not pre-judge decisions to be taken by the Inclusive Framework.
The analysis shows that the Pillar One reform would bring a small tax revenue gain for most jurisdictions. Under Pillar One, low- and middle-income economies are expected to gain relatively more revenue than advanced economies, with investment hubs experiencing some loss in tax revenues. More than half of the profit re-allocated would come from 100 large MNE groups.
The analysis shows that Pillar Two could raise a significant amount of additional tax revenues. By reducing the tax rate differentials between jurisdictions, the reform is expected to lead to a significant reduction in profit shifting by MNEs. This will be important for developing economies as they tend to be more adversely affected by profit shifting than high-income economies.
The overall direct effect on investment costs is expected to be small in most countries, as the reforms target firms with high levels of profitability and low effective tax rates. The reforms would also reduce the influence of corporate taxes on investment location decisions. In addition, failure to reach a consensus-based solution would likely lead to further unilateral measures and greater uncertainty.
In the meantime, some countries have taken unilateral action on digital taxation. During the period covered by this report, a number of countries have explored, announced, or implemented digital services taxes (DSTs), typically defined as sectoral turnover taxes targeted at (or including) revenue from online activity, such as advertising services, digital transactions, or online and physical distribution of audio-visual content (OECD, 2018[3]) (Table 3.9). Some countries have also implemented or proposed other measures such as withholding taxes on digital services (Turkey), measures to provide for a digital permanent establishment (Indonesia), and taxes on advertising revenues (Hungary).
The DSTs that have been proposed or implemented have varying rates, from 3% (France) to 7% (Czech Republic). The bases of these taxes in many cases draw from the approach outlined in the draft European Commission Directive on DSTs (European Commission, 2018[4]) and sometimes take account of the guidance provided by the OECD Interim Report to Address the Tax Challenges of Digitalisation (OECD, 2018[3]). For example, the UK proposal covers social media platforms, internet search engines, and online market places, while the French proposal covers digital intermediary services and advertising services based on user data.
In many instances, countries have postponed the effective implementation of these measures pending the outcome of the work of the Inclusive Framework. For example, Hungary has reduced the rate of its advertising tax to 0% from 1 July 2019 through to December 31, 2022. France has suspended the collection of its DST for one year, pending a consensus-based solution at the OECD level in 2020.
Overall, this section shows continued stability in standard VAT rates and a mix of VAT base broadening and base narrowing reforms. The stabilisation of standard VAT rates observed across countries in recent years is continuing, with the exception of Japan, where the standard Consumption Tax (i.e. VAT) rate was raised, and China, where the standard VAT rate was lowered. Instead, the majority of VAT reforms were VAT base changes. The reforms aimed at broadening VAT bases and raising additional revenues focused primarily on the fight against VAT fraud and on ensuring the effective taxation of cross-border online sales. On the other hand, a number of countries have expanded the scope of their reduced VAT rates, effectively narrowing their VAT bases. The increase in the number of VAT base narrowing reforms, typically intended to encourage consumption and/or enhance equity, suggests a slight departure from trends in previous years, where the predominant objective of VAT reforms was to raise additional revenues. Finally, trends in excise duties show continuing tax increases, in particular on tobacco products and sugar-sweetened beverages.
Consumption taxes, in particular VAT, are a major source of revenue in most countries
Consumption taxes are a major source of revenue across the countries covered in the report. They ranged from 17.6% of total tax revenues in the United States (the only country in the report that does not have a VAT) to 53.3% of total tax revenues in Chile in 2018 (Figure 3.17). As discussed in previous editions of this report, consumption tax revenues tend to account for higher shares of total tax revenues in emerging countries. A 2018 OECD paper showed that in Africa and Latin America, VAT and other taxes on goods and services were by far the largest source of revenue as a share of total taxation (Modica, Laudage and Harding, 2018[5]), accounting respectively for 50% and 53% of total tax revenues on average. In comparison, consumption taxes accounted on average for 32% of total tax revenues in OECD countries in 2017.
Note: 2017 data for Australia, Greece, Indonesia, Japan, Mexico and South Africa.
Source: Global Revenue Statistics Database
Source: OECD (2019), OECD Revenue Statistics:1965-2018.
VAT is the largest source of consumption tax revenues. VAT accounts for more than 60% of total consumption tax revenues in 26 of the countries covered in the report. In the OECD, over the last 30 years, consumption tax revenues as a share of total taxation have remained stable but the composition of those revenues has changed (Figure 3.18). Excise taxes and other specific consumption taxes, which made up around 18% of total tax revenues in 1975 across the OECD, now account for less than 10% of total taxation on average. One of the explanations behind this decrease is that tax rates on imported goods were considerably reduced across countries, reflecting a global trend to remove trade barriers. On the other hand, the share of VAT in total tax revenues has grown substantially, from less than 9% in 1975 to slightly over 20% in 2017 on average across the OECD. Recent years have seen a stabilisation of VAT revenues in the OECD tax mix.
Nevertheless, the amounts and evolution of revenues collected from VAT have varied across countries. Across the countries covered in the report, VAT revenues ranged from 3.3% of GDP in Switzerland to 9.8% of GDP in New Zealand in 2018 (Figure 3.19). Regarding trends over time, three quarters of the countries have seen increases in their revenues from VAT as a share of GDP between 2000 and 2018, with the most significant increases recorded in Greece and Japan. There were some exceptions, however, most notably Ireland, which experienced the largest decrease in VAT revenues as a share of GDP between 2000 and 2018.
Note: The United States is not included because it does not have a VAT.
Source: OECD Global Revenue Statistics Database
Standard VAT rates have seen little change
Standard VAT rates have stabilised in recent years. Standard VAT rates in the OECD reached a record average level of 19.3% in 2015, after years of continuous increases (Figure 3.20). Raising standard VAT rates was a common strategy for countries seeking to achieve fiscal consolidation in the wake of the global financial crisis as increasing VAT rates provides immediate revenues without directly affecting competitiveness and has generally been found to be less detrimental to economic growth than raising direct taxes (Johansson et al., 2008[6]). Among the countries covered in the report, 12 now have a standard VAT rate equal to or above 22%, against only six in 2008 (Figure 3.21). However, the trend towards continuously rising standard VAT rates has come to a halt in recent years. This is explained by improvements in countries’ fiscal positions, but also by the fact that standard VAT rates have reached relatively high levels in many countries, limiting the room for additional standard rate increases.
Source: OECD Tax Database and OECD Tax Policy Reform Questionnaire
With the exception of Japan and China, standard VAT rates have remained stable. As mentioned in last year’s report, after several delays, Japan’s Consumption Tax rate increase from 8% to 10% entered into force on 1 October 2019. This Consumption Tax rate increase was accompanied by the introduction of a reduced rate of 8% for basic foodstuffs (see below). The other change in standard VAT rates occurred in China, where the standard VAT rate was lowered from 16% to 13%, following a decrease from 17% to 16% in 2018. The 10% reduced VAT was also reduced to 9%, while the 6% reduced rate remained unchanged. This reform followed successive waves of VAT reform in China since 2016, which have significantly improved the design of the VAT system (see Box 3.6).
Source: OECD Tax Database and OECD Tax Policy Reform Questionnaire
The Chinese government has introduced a series of VAT reforms over the past few years to align its VAT system with internationally accepted principles and adapt it to its level of economic development. Overall, these reforms have considerably improved the design and operation of China’s VAT system, in line with the principles embedded in the OECD International VAT/GST Guidelines.
On 1 May 2016, the “Business Tax-to-VAT Reform” was rolled out nationwide, replacing Business Tax on taxable services with a VAT. This reform was notably aimed at minimising the cascading effect of the Business Tax, which was not creditable for taxable businesses, by a VAT that provides for a right to deduct input VAT incurred by taxable businesses on their business inputs. On 1 July 2017, the 4-tier VAT rate structure of 17%, 13%, 11% and 6% was simplified and unified into a 3-tier rate structure of 17%, 11% and 6%.
In 2018, the Chinese government continued to deepen the VAT reform with three measures. First, from 1 May 2018, the VAT rates were lowered from 17% and 11% to 16% and 10% respectively, resulting in a 3-tier VAT rate structure comprising VAT rates of 16%, 10% and 6%. Second, the annual turnover thresholds of RMB 500 000 (EUR 66 800) and RMB 800 000 (EUR 106 900) applicable to small-scale VAT payers engaged in manufacturing and trading respectively were unified and increased to a single threshold of RMB 5 000 000 (EUR 668 400). Third, the scope of refunds of excess input VAT was extended. The existing scope of excess input tax refund for qualified sectors and enterprises was extended to qualified enterprises engaged in modern services (e.g. R&D) and advanced manufacturing (e.g. equipment manufacturing), as well as power grid enterprises. For these enterprises, one-off excess input tax refund was allowed.
In March 2019, the Chinese government announced further measures including a reduction of its “headline” VAT rates from 16% to 13%, and from 10% to 9% and a further expansion of the scope of excess input VAT credits.
A number of countries have expanded the scope of reduced VAT rates
Many countries apply reduced VAT rates to a wide range of products. Many of these reduced rates – e.g. on basic essentials, pharmaceuticals, education – are intended to enhance equity. Other reduced VAT rates are in place to achieve non-distributional goals, such as supporting labour-intensive industries, addressing environmental externalities or promoting access to cultural activities. Empirical evidence has shown, however, that such reduced VAT rates are often poorly targeted tools. Where they aim to reduce the tax burden on low-income households by targeting basic necessities, they generally end up providing greater benefits in absolute terms to richer households, even if they might benefit low-income households more in relative terms. Where reduced VAT rates apply to non-essential items (e.g. hotel and restaurant services, theatre, cinema), they tend to be regressive, benefiting the rich more both in aggregate terms and as a proportion of expenditure (Box 3.7).
With the exception of Chile, all OECD countries have one or more reduced VAT rates to support various policy objectives. A major reason for the introduction of a differentiated rate structure is the promotion of equity. Countries have generally considered it desirable to alleviate the tax burden on goods and services that form a larger share of expenditure of the poorest households (e.g. basic food, water). Countries also often decide not to tax medicine, health services and housing at high rates. Reduced VAT rates have also been used to stimulate the consumption of “merit” goods (e.g. cultural products and education) and other non-distributional objectives such as promoting locally supplied labour-intensive activities (e.g. tourism) and correcting externalities (e.g. energy-saving appliances).
In general, VAT exemptions, zero-rates and reduced rates are not a well-targeted tool to support low-income households. Reduced rates that are implemented in countries for the distinct purpose of supporting the poor (i.e. to address distributional goals) typically do have the desired progressive effect. For example, reduced rates for basic food provide in general greater support to the poor than the rich as a proportion of household income or expenditure. However, despite this progressive effect, these reduced VAT rates are a very poor tool for targeting support to poor households. At best, rich households receive roughly as much benefit – in absolute value – from a reduced rate as do poor households. At worst, rich households benefit vastly more than poor households. This result is unsurprising as better off households can be expected to consume more, and often more expensive, products than poorer households. Thus, while poorer households may benefit from reduced VAT rates on “necessities” the wealthier gain even more.
Targeted cash transfer programmes, if well-functioning, are a more effective tool to compensate poor households for the VAT they have paid. If poor households can be compensated directly through a cash transfer programme, it is more efficient and fair to tax all goods and services at the standard VAT rate and compensate the poor directly through cash transfers (and/ or reductions in personal income taxes, etc.), especially if the standard VAT rate is not particularly high. It should immediately be noted, however, that compensating all (and only the) losers of a reform through a transfer programme might in practice be very difficult to achieve. A number of jurisdictions operate or have recently introduced such targeted cash transfers to alleviate the VAT burden on poorer households and/or to replace reduced rates on basic essentials such as Canada (1991), Argentina (2020) and Colombia (2020)14.
With regard to preferential VAT provisions for social, cultural and other non-distributional goals, richer households benefit considerably more from VAT exemptions and reduced rates. Those tax provisions often provide so large a benefit to rich households that the reduced VAT rate actually has a regressive effect – benefiting the rich more both in aggregate terms and as a proportion of expenditure. For example, reduced rates on hotel accommodation and restaurant food benefit the rich vastly more than the poor, both in aggregate and proportional terms, in all OECD countries in which they are applied. Similar results, but of less absolute magnitude, are found for reduced rates on books, cinema, theatre and concerts.
Finally, VAT rate differentiation might not be the best policy instrument to correct negative externalities. VAT rate differentiation may improve efficiency if it means that the private marginal costs of an activity are brought closer to the marginal costs for society. However, VAT is a blunt instrument for addressing environmental externalities, as it may be hard to target the actual source of pollution.
Source: (OECD/KIPF, 2014[7]).
Reforms related to reduced VAT rates have accompanied changes to standard VAT rates in Japan and China. In Japan, in parallel to the increase in the standard Consumption Tax rate (see above), a reduced rate was introduced for the first time, set at 8%, for food items and beverages. In China, along with the decrease in the standard VAT rate from 16% to 13%, the 10% reduced VAT rate on retail, entertainment, hotels, restaurants, catering services, real estate, postal services, transport and logistics was reduced to 9%, while the 6% VAT rate remained unchanged.
A number of countries have expanded the scope of their reduced VAT rates for equity reasons (Table 3.10). South Africa introduced additional zero-rated items (e.g. white bread flour, cake flour and sanitary pads) to mitigate the effects on low-income households of the one percentage point increase in the standard VAT rate that took effect in 2018. Greece reclassified a number of basic foodstuffs, which are now taxed at the reduced VAT rate of 13%, and applies the super reduced rate of 6% to the supply of electricity and gas. The 13% VAT rate was also extended to infant food and other baby products, such as diapers and car seats, and to bicycle helmets. In Argentina, basic foodstuffs are temporarily subject to the zero VAT rate. In the Slovak Republic, the VAT rate was lowered on additional basic foodstuffs. In Germany, the VAT rate on feminine hygiene products was reduced from 19% to 7%, while Italy now applies a 5% VAT rate to compostable feminine hygiene products.
A few changes to VAT exemptions and reduced rates were introduced for environmental purposes. As part of a broader package of environmental measures (see Box 3.10 in Section 3.4), Germany reduced its VAT rate on long-distance rail travel from 19% to 7% to boost climate-friendly transport. Iceland introduced temporary tax reliefs to incentivise low-emissions transport. These measures include new VAT exemptions (up to a certain value) on bicycles, scooters, electric bicycles and light electric motor vehicles; the extension of existing VAT exemptions for electric and hydrogen vehicles until 2022-2023; a full VAT refund for the purchase and installation of home charging stations at residential properties; and a full VAT exemption on rentals of electric and hydrogen vehicles.
A few countries have expanded the scope of their reduced VAT rates to support specific industries. Hungary has reduced its VAT rate on accommodation services from 18% to 5%. The Czech Republic and Greece have reduced VAT rates on catering services. The Czech Republic has also lowered the VAT rate on hairdressing and clothing repair services. Portugal now applies the reduced VAT rate of 6% to assistance services by telephone to the elderly and chronic patients, as well as to admissions to exhibitions, zoos, parks, aquariums, museums and buildings of national interest. A number of EU countries (Austria, Czech Republic, Germany, Finland, Netherlands, Poland and Slovenia) have also reduced their VAT rates on e-publications, following an EU agreement in 2018 allowing member states to cut their VAT rates on e-publications to the reduced or zero rates applied to physical publications. A group of EU countries had already adopted similar VAT rate reductions on e-publications (OECD, 2019[8]).
On the other hand, reforms narrowing the scope of reduced VAT rates were very marginal. In Ireland, the VAT rate for food supplements was increased from 0% to 13.5% as of 1 January 2020. Certain products, including some vitamins, minerals and fortified foods, will continue to be taxed at the 0% VAT rate. In Portugal, admissions to bullfighting became standard rated.
Finally, Poland introduced of a new VAT rate structure with the objective of simplifying and harmonising its VAT system. This new VAT rate structure is based on an updated classification of goods and services. The VAT rates on a number of goods and services were lowered from 8% to 5% (e.g. soups, tropical and citrus fruits, some nuts), from 23% to 8% (e.g. mustard, spices) and from 23% to 5% (e-publications). On the other hand, VAT rates on a number of goods were raised from 5% or 8% to 23% (e.g. lobsters, octopus and other crustaceans). The reform entered into force on 1 July 2020. Overall, the adoption of this new rate structure is expected to lead to a small revenue decrease.
Increases in VAT registration thresholds have continued
OECD countries have very different levels of VAT registration thresholds (Figure 3.22). The main reason for excluding small businesses (and this notion varies considerably across countries) is that the costs for the tax administration of having all businesses account for VAT may be disproportionate compared to potential VAT revenues and that compliance costs for small businesses may also be disproportionate compared to their turnover. On the other hand, a VAT registration threshold introduces competitive distortions between small businesses under and above the threshold. Thus, the level of the threshold is generally the result of a trade-off between minimising compliance and administration costs and the need to protect revenue and avoid competitive distortions.
A few countries have raised their VAT registration thresholds, continuing a trend observed in recent years. As of 1 January 2020, increases in VAT registration thresholds became effective in four countries. As mentioned in last year’s report, the Netherlands introduced an optional VAT registration threshold at EUR 25 000 of turnover from 1 January 2020. In Austria, the VAT registration threshold was raised from EUR 30 000 to EUR 35 000. In Germany, it was raised from EUR 17 500 to EUR 22 000. In Portugal, the turnover threshold for compulsory VAT registration was raised from EUR 10 000 to EUR 12 500. These countries’ thresholds remain relatively low or moderate in comparison to those in place in other countries (Figure 3.22).
Note: These thresholds still need to be validated by delegates of WP9.
Source: OECD Tax Database and OECD Tax Policy Reform Questionnaire
A few countries have introduced measures to increase VAT neutrality and support investment
As part of its 2019 package of VAT measures, China has expanded the scope of input VAT credits and is gradually establishing a refund system for excess credits (see Box 3.6). A VAT refund pilot scheme for excess input VAT credits is being introduced. Previously, most businesses were not able to claim refunds for excess input VAT. Instead, businesses were only able to carry forward the excess input VAT to offset future output VAT liabilities. The 2019 reform has also expanded the scope of creditable input VAT for real estate. VAT taxpayers can now claim input VAT credits for the purchase of real estate and construction services up-front and directly deduct it from output VAT. This means that taxpayers will no longer have to claim input VAT credits over a two-year period. The scope of input VAT credits is also being expanded by allowing taxpayers to claim input VAT credits against output VAT for domestic passenger transport services.
Chile is seeking to modernise its VAT refund procedures to enhance business cash flow and support investment. As part of its Tax Modernisation Bill, Chile has reduced the period during which taxpayers must maintain an input VAT credit balance before they can request a refund for purchases of fixed assets. The period is reduced from a minimum of six to two months. The response time for the Chilean tax administration to treat a refund request will be reduced from 60 to 20 days.
Greece has introduced an optional VAT suspension regime for newly developed real estate to encourage investment in the sector. From 1 January 2020 to 31 December 2022, building contractors may elect to be subject to the VAT suspension regime. Under this regime, VAT is not levied on sales of real estate, and contractors are not be able to deduct related input VAT. Once elected, the regime must be applied until the end of the period. However, real estate sales are subject to the real estate transfer tax.
Administrative improvements and anti-fraud measures have been an important part of countries’ VAT reforms
As described below, a significant number of VAT reforms have revolved around technical and administrative improvements to enhance tax collection and combat fraud. Some of these reforms reinforce taxpayers’ reporting obligations, including the use of Standard Audit Files for Tax (SAF-T) and real-time data transfers to tax administrations such as VAT invoice reporting. Other measures modify tax collection mechanisms to combat certain types of VAT fraud. These include split payments and the expansion of the domestic reverse charge mechanism to sectors subject to high risks of fraud. Finally, some of these reforms extend VAT accountability to other entities in the value chain (e.g. online marketplaces). Countries generally expect these measures to bring in significant additional tax revenues.
The VAT Revenue Ratios (VRR) suggest that there is still potential to collect additional revenue by improving the performance of VAT systems. The VRR provides a comparative measure of how the tax administration’s efficiency as well as exemptions and reduced rates affect VAT revenues (OECD, 2018[9]). The VRR is the ratio between the revenues actually collected from VAT and the revenues that could be raised if the standard VAT rate were applied uniformly to the entire potential tax base (i.e. all final consumption) and perfectly administered and enforced. Across the OECD, the unweighted average VRR has remained relatively stable at 0.56 in 2016, compared to 0.55 in 2015, and continues to vary significantly across countries (Figure 3.23). Even if the VRR should be interpreted with care and VAT revenue loss may be caused by a variety of factors, these estimates suggest that there is significant potential for raising additional revenues through base broadening and better tax enforcement in many countries.
Estimations of VAT fraud suggest that addressing non-compliance remains a key challenge. In the EU, the total amount of VAT lost because of tax fraud and tax avoidance, as well as bankruptcies, financial insolvencies and maladministration, was estimated at EUR 137.5 billion in 2017. This VAT gap represents a loss of 11.2% of total expected VAT revenues or VAT total tax liability (VTTL) (Center for Economic and Social Research, 2019[10]). In Australia, the GST gap was estimated at AUD 5.3 billion or 7.9% of the VTTL (Australian Taxation Office, 2018, cited in OECD, 2018). In Chile, the VAT gap was found to be around 16.6% of the VTTL (Servicio de Impuestos Internos, 2017, cited in (OECD, 2018[9])).
Note: In New Zealand, the very high VRR reflects partly the broad GST base as well as the fact that public services are taxed under GST. In the case of Luxembourg, its position as a financial centre and a hub for European e-commerce has strongly contributed to its high VRR (for a more detailed explanation, see OECD Consumption Tax Trends 2018).
Source: (OECD, 2018[9]).
Previous editions of this report have emphasised the expanding use of the domestic reverse charge mechanism to address fraud. The domestic reverse charge mechanism can be used to combat missing trader fraud. A key feature of this type of fraud is that taxpayers charge and collect VAT from their customers and disappear without remitting the VAT to the tax authorities.15 The domestic reverse charge mechanism – which applies in principle to supplies of specific goods and/or services between VAT-registered businesses established in the same country – aims at addressing this type of fraud by making the customer liable to collect the tax on supplies (instead of the supplier), which prevents the supplier from collecting VAT and disappearing with it. Previous editions of the report have shown that this mechanism was increasingly applied by EU Member States for goods that have been found to be particularly vulnerable to such fraud, often popular high-value goods that can easily be moved around (e.g. mobile phones, laptops, gold, etc.). Trade in certain intangibles, such as carbon credits, gas and electricity and green energy certificates, has also become particularly vulnerable to this fraud type.16 This year, Portugal was the only country to report a reform in this area, expanding the application of its domestic reverse charge mechanism to certain supplies in the forestry sector.
Another mechanism to reduce revenue losses from VAT fraud is through split payment. VAT split payments differ from the standard VAT collection method as the VAT charged by businesses on their supplies is not actually collected by the supplier but remitted separately and directly to the tax authorities. This is typically organised through the intervention of financial and/or payment intermediaries (e.g. banks, credit card companies, online payment service providers), which split the gross amount paid by the customer into a net amount and a VAT amount, remitting the latter to the tax authorities (OECD, 2018[9]). As with the domestic reverse charge mechanism, such a system removes the possibility for a supplier to collect the VAT from its customer without remitting it to the tax authorities. As reported previously, Poland introduced voluntary split payments in July 2018. As of 1 November 2019, it has started implementing mandatory split payments in areas that are particularly exposed to VAT fraud. The mechanism only applies to B2B transactions where invoices are above a gross amount of PLN 15 000.
To enhance VAT collection and combat fraud, some OECD countries are also reinforcing taxpayers’ reporting obligations. New SAF-T requirements are being introduced in Norway and Poland. SAF-T was developed by the OECD Forum on Tax Administration in 2005 to enable the transfer of accounting data from companies to tax authorities in a standardised electronic format. The main purpose was to allow tax authorities to conduct more efficient tax inspections. Since then, a number of countries have adopted (a form of) SAF-T (OECD, 2018[9]). In Norway, mandatory SAF-T reporting for businesses with a turnover above NOK 5 million became effective as of 1 January 2020. SAF-T files are to be sent to the tax authorities only upon their request. Poland has planned to incorporate VAT returns into a modified SAF-T file. The adapted SAF-T file will contain all the data included in traditional VAT returns, which means that taxable persons will not be required to submit separately VAT returns and SAF-T files.
Real-time VAT invoice reporting has become an increasingly popular tool to reduced VAT fraud and non-compliance. This typically includes two different elements: requiring businesses to maintain electronic accounts/electronic invoicing systems and the (near) real-time communication of all invoicing data to tax administrations. Previous editions of this report have reported on reforms introducing (near) live VAT invoice reporting in Italy, Hungary and Spain. In 2019, Italy extended its real-time e-invoicing requirement to include both business-to-business (B2B) and business-to-consumer (B2C) transactions. France and Poland have also announced the introduction of B2B VAT e-invoicing requirements in the next couple of years. In Chile, a first mover in the area of e-invoicing, mandatory electronic invoicing for B2C sales is expected to come into force in September 2020. Italy and Spain have also announced that, based on the information provided in e-invoices, they would introduce pre-completed VAT returns in 2020.
A few additional measures have been introduced to enhance compliance. Poland is introducing a “white list” of VAT taxpayers, which is an online register to help business entities quickly identify bona-fide contractors. From 1 January 2020, taxpayers may be subject to sanctions or joint and several liability for VAT purposes if they make payments to accounts of contractors that are not included in the list. Another measure to combat fraud was the introduction of a VAT receipt lottery in Italy. The provisions introducing the VAT receipt lottery, initially applicable as of July 2020, have been postponed to January 2021 due to the COVID-19 pandemic. Such lotteries have already been tested to reduce undeclared VAT on sales to consumers in countries including Greece, the Slovak Republic and Portugal (OECD, 2017[11]).
Countries are continuing to make progress in ensuring the effective taxation of online sales of goods, services and intangibles
The increasing digitalisation of the global economy has created considerable challenges for VAT systems worldwide. The rapid development of new technologies dramatically increased the ability of private consumers to engage in online shopping and the capability of businesses such as online marketplaces to reach customers globally without any physical presence in market jurisdictions. To the extent that the market jurisdiction has no right to tax under existing VAT rules or is unable to require foreign online sellers to apply and remit the VAT on supplies to consumers in its jurisdiction, this results in no or an inappropriately low amount of VAT being collected and in an uneven playing field between domestic suppliers, that have to charge VAT on sales to local customers, and foreign online suppliers.
To ensure the effective taxation of cross-border supplies of services and intangibles, many countries have already implemented the rules and mechanisms recommended by the OECD International VAT/GST Guidelines. The OECD International VAT/GST Guidelines have been endorsed as the international standard to ensure a coherent and efficient application of VAT/GST to international trade in services and intangibles. As mentioned in previous editions of this report, the elements of the Guidelines that have received most attention since 2016 are the recommended rules and mechanisms for the effective collection of VAT on business-to-consumer (B2C) supplies of services and intangibles made by vendors that have no physical presence in the jurisdiction of taxation. These rules and mechanisms are particularly relevant for the continuously growing volume of online sales by offshore vendors, made directly to consumers or through the intervention of digital platforms such as e-commerce marketplaces. The Guidelines recommend that the right to tax these supplies for VAT purposes be allocated to the country where the consumer has its usual residence and that the foreign suppliers of these services and intangibles register and remit VAT in the country of the consumer’s usual residence. The Guidelines also recommend the implementation of a simplified registration and compliance regime to facilitate tax compliance for foreign suppliers. To date, over 60 countries, including the overwhelming majority of OECD and G20 countries, have adopted rules for the application of VAT to B2C supplies of services and intangibles in line with the Guidelines. Many other countries have announced or are considering reforms to introduce these measures. Notably Mexico has started taxing foreign supplies of digital services and requiring foreign suppliers of digital services to register for VAT as of June 2020. Chile has also started levying VAT on cross-border B2C digital services and introduced a new VAT registration and collection mechanism for foreign suppliers as of June 2020.
Recent evidence suggests that the implementation of these measures is having a significant impact. The rules and mechanisms recommended in the Guidelines have greatly enhanced compliance levels, yielded substantial additional tax revenues for market jurisdictions, and evened the playing field between domestic suppliers and foreign online vendors. The EU, the earliest adopter of these principles, reported EUR 14.8 billion of VAT revenues collected from these measures in the first four years of their operation, with revenues showing a constant growth from EUR 3 billion of VAT revenue collected in 2015 to EUR 4.57 billion in 2018. In South Africa, the revenue collected through the application of the OECD principles and collection mechanisms amounted to over ZAR 5.4 billion in the 12 months since the expansion of its VAT regime for online sales of services and digital products in 2019, in line with the OECD standards, thus recording a remarkable growth compared to the previous five years during which ZAR 3 billion (approx. EUR 159 million) were collected in total. New Zealand collected NZD 357 million (approx. EUR 204 million) in the first two years of implementation of its regime for the collection of GST on services and intangibles (as of April 2017). Australia recorded total revenues of over AUD 1 billion (approx. EUR 615 million) of GST collected in the first two years of operating its GST regime for online sales of services and digital products (as of July 2017) and in the first year of its implementation for online sales of goods (as of July 2018; see below).
The OECD has provided guidance in the International VAT/GST Guidelines (the “Guidelines”) to jurisdictions wishing to collect VAT on cross-border supplies of services and intangibles (OECD, 2017). The Guidelines include recommended rules and mechanisms for the effective collection of VAT on business-to-consumer (B2C) supplies of services and intangibles (including digital supplies) by foreign suppliers. The Guidelines were complemented by further detailed practical guidance to support their effective and consistent implementation. Two reports providing such implementation guidance have been published. The report on Mechanisms for the effective collection of VAT/GST (OECD, 2017) focuses on cases where the supplier is not located in the jurisdiction of taxation. The report on The role of digital platforms in the collection of VAT/GST on online sales (OECD, 2019[12]) provides guidance on measures to enhance the efficiency and effectiveness of VAT collection on online sales of goods, services and intangibles by involving digital platforms in the collection and compliance process.
Digitalisation is also pushing governments to revise their VAT rules on cross-border trade in low-value goods. In the past, most countries introduced VAT relief regimes for imports of low-value goods, as the costs of collecting VAT on those items were often likely to outweigh the VAT actually collected. At the time when most of these relief regimes were introduced, online shopping did not exist and the level of imports benefitting from the relief was relatively small. However, there has been a significant and rapid growth in the volume of imports of low-value goods subject to these VAT relief regimes. This has resulted in large potential VAT revenues not being collected and growing risks of unfair competition for domestic retailers that are required to charge VAT on their sales to domestic consumers. It also creates an incentive for domestic suppliers to relocate to an offshore jurisdiction to sell their low-value goods free of VAT.
A number of countries are now removing or considering the elimination of VAT relief regimes for imports of low-value goods. It is no longer considered acceptable in an increasing number of countries that a significantly and continuously growing volume of goods from online sales is imported without VAT as a consequence of the VAT exemption for imports of low-value goods. These reforms follow on from the work carried out by the OECD in the context of BEPS Action 1 on “Addressing the Tax Challenges of the Digital Economy”. The Final 2015 BEPS Action 1 Report notably concluded that the efficiency of VAT collection on imports of low-value goods could be increased considerably if online vendors of these goods, or digital platforms that facilitate these sales, were required to collect the VAT from their customers and remit it to the tax authorities via a simplified registration and compliance regime. This was expected to limit or remove the need for customs authorities to intervene in the revenue collection process for imports of low-value goods. This lowers the cost of collection of VAT on low-value goods considerably, and allows customs authorities to allocate their resources and capacity to their other key roles.
Countries have introduced or are considering reforms in this area. Australia was the first OECD country to implement a reform to collect GST on imports of low-value goods in July 2018. New Zealand introduced a similar reform as of December 2019. The threshold at NZD 400 below which no GST was collected on imported goods was removed as of that date. New Zealand GST is to be collected and remitted by offshore suppliers for imported goods valued below NZD 1 000 (i.e. the de minimis threshold for customs duties). For goods imports below this threshold, foreign suppliers are required to register, collect and remit GST if their annual sales to New Zealand consumers are above NZD 60 000. For imports above the NZD 1 000 threshold, normal customs procedures for the collection of GST, customs and any other duties continue to apply. Similarly, Norway has removed its VAT exemption for imported goods valued below NOK 305 and introduced a simplified scheme for sellers and online marketplaces to register and remit VAT. The EU is also planning to remove its low-value consignment relief of EUR 10-22 in 2021. All these regimes include a liability for digital platforms such as e-commerce marketplaces to collect and remit the VAT on the imports of goods that were sold by online vendors through their platform. The platform is viewed as taking the role of a ‘store’ with an offering of different supplies and in many cases act as the sole point of contact with the end consumer. The OECD released a report in 2019 providing detailed guidance for the implementation of these measures to make digital platforms liable for the VAT on sales made by online traders, along with other measures that include data sharing and enhanced cooperation between tax authorities and digital platforms (OECD, 2019[12]) (Box 3.9).
Against the backdrop of the continuously strong growth of online trade to final consumers, the Final 2015 BEPS Action 1 Report on Addressing the Tax Challenges of the Digital Economy recognised that digital platforms may significantly enhance the effectiveness of VAT/GST collection given their important role in generating, facilitating and/or executing online sales.
In its 2019 report on The Role of Digital Platforms in the Collection of VAT/GST on Online Sales, the OECD provides further detailed practical guidance to tax authorities on the design and implementation of a variety of solutions for enlisting the platforms economy, including e-commerce marketplaces and other digital platforms, in the collection of VAT/GST on digital sales. It complements earlier work carried out on the Mechanisms for the Effective Collection of VAT/GST.
The report observes that electronic marketplaces and other digital platforms that facilitate online transactions between buyers and sellers play a central role in online trade. Evidence suggests that about two-thirds of all cross-border e-commerce sales of goods are made through online marketplaces. This reality presents significant opportunities for a more efficient and effective collection of VAT/GST on online sales of goods, services and intangibles, particularly sales to private consumers. Against this background, the report includes detailed guidance on measures to make digital platforms liable for the VAT/GST on sales made by online traders through them. This is complemented with other measures that include data sharing and enhanced cooperation between tax authorities and digital platforms. The report also sets out a range of measures beyond possible VAT obligations for digital platforms that tax authorities can implement to further enhance the effectiveness of VAT collection on online trade.
This report was developed through an inclusive process, involving representatives from OECD members and a large number of partner countries as well as through the active engagement of the business community. It was endorsed by the representatives from over 100 jurisdictions and international and regional organisations as well as from the business community at the fifth meeting of the Global Forum on VAT in Melbourne, Australia in March 2019.
As of 1 January 2021, online marketplaces in EU countries will be responsible for charging and remitting VAT on sales from non-EU sellers using their platforms under certain conditions (for goods up to a value of EUR 150 and where the seller uses fulfilment centres). However, some countries have already introduced domestic measures, in particular imposing new recordkeeping obligations. In Austria, as of 2020, platforms are to provide tax authorities with transactional data from third parties on their platforms, while France is now requesting online marketplaces to verify the VAT status of foreign sellers using their platforms.
Excise duties have continued to be raised
Excise taxes have been a powerful tool to raise revenues and encourage behavioural change. Excise taxes can cover a wide range of products, but the ones that are common to all countries and raise significant revenues for governments are excise duties on alcohol, tobacco and hydrocarbon oils. In recent decades, governments have increasingly used these taxes not only to raise revenues, but also to influence behaviours and deter harmful consumption. This sub-section covers non-energy excise duties (for energy excise duties, see Section 3.4).
Taxes on tobacco products are particularly high. The relatively low price elasticity of demand, the small number of producers and high consumption levels initially made tobacco products particularly attractive targets for excise taxation to raise revenue. In light of the negative health consequences of tobacco use and the effectiveness of tobacco taxation in reducing tobacco use (World Health Organization, 2015[13]), tobacco taxation has also increasingly been used as a tool to reduce tobacco use. As a result, in 2017, the total tax burden on cigarettes was above 50% of the consumer price in almost all OECD countries and reached 80% or more in eight countries (OECD, 2018[9]).
Excise duty increases, especially on tobacco products, have continued this year. Increases in excise duty rates on tobacco products have been reported in Denmark, Estonia, Finland, Hungary, Ireland, Lithuania, Poland, Slovenia and South Africa. As in previous years, increases in excise duties have been more popular for tobacco than alcohol. Increases in excise duties on alcohol were reported in Lithuania, Poland and South Africa. On the other hand, Estonia and Latvia introduced a decrease in the excise duty rate on some alcoholic beverages.
Soft drinks continue to be an area of interest for countries, with new taxes being introduced and existing taxes being raised. Previous editions of this report have confirmed the increasing popularity of taxes on sugar-sweetened beverages, with many countries introducing such taxes in recent years (e.g. Ireland, Portugal, South Africa, United Kingdom). This trend is continuing. Italy introduced a new consumption tax on soft drinks of EUR 10 per hectolitre for finished products and EUR 0.25 per kilo for products prepared for use after dilution. The tax, initially applicable as of October 2020, has been postponed to January 2021 due to the COVID-19 pandemic. Poland is considering a new sugar levy, but examination in Parliament has not started yet. The proposal consists of a levy on beverages with added sugar or other sweeteners, as well as caffeine and/or taurine, and another levy on alcoholic beverages sold in packages of up to 300 ml. Most of the revenues collected through these taxes would go to the National Health Fund to improve healthcare financing. In addition to these new taxes, Finland and South Africa have both raised their taxes on soft drinks.
Other taxes on specific goods and services have been introduced
In Chile, a new contribution was introduced to promote regional decentralisation and incentivise the expeditious issuance of administrative permits for investment projects. A new one-time contribution will be levied on investment projects carried out in Chile exceeding USD 10 million and that require permits from the Environmental Impact Evaluation Service. This contribution will be levied after the investment project has obtained all the permits and begun operations and will be equal to 1% of the acquisition value of fixed assets associated with the investment projects on the part that exceeds USD 10 million, payable in five yearly instalments. The contribution will be fully deductible from the CIT base. Funds will be used to promote regional decentralisation.
Turkey introduced a new accommodation tax and Hungary expanded its tourism development contribution to accommodation services. Turkey’s new tax is levied on accommodation services rendered by hotels, resorts, guesthouses, and other accommodation service providers, as well as all other services provided in those accommodation facilities (such as food and beverage, entertainment services, use of pools and similar areas). The accommodation tax rate will be 2% and the tax will be declared and paid on a monthly basis by accommodation service providers. The basis of the accommodation tax is the total value of payments for services (excluding VAT). The accommodation tax will enter into force in 2021. Similarly, Hungary extended the application of its tourism development contribution, applicable to restaurant services since 2018, to accommodation services. This reform was introduced in parallel to the VAT rate reduction on accommodation services (see above).
Overall, this section shows that environmentally related tax reform have continued at a slow pace in 2020. While the number of reforms increased compared to 2019, they were concentrated in a few countries and their scope generally remained limited. Most of the reforms were related to energy use, but transport fuels were not the focal point as opposed to previous years. Instead, changes were made to carbon taxes and taxes on electricity consumption. There were also fewer energy tax cuts compared to last year. Tax reform in the transport sector, aside from energy use, was limited to vehicle registration tax adjustments and tax reductions for vehicles running on alternative fuels. Reforms related to taxes on waste and plastic have also increased this year, but their overall number remains limited.
Germany
Germany is introducing a broad package of environmental measures, which go beyond environmentally related taxes. The package of measures includes an increase in the national aviation tax rates, a VAT reduction for long-distance rail travel and tax incentives targeted at increasing buildings’ thermal insulation and energy efficiency (including for smaller-scale modernisation measures such as the installation of new energy-efficient windows or the insulation of roofs and walls).
Furthermore, a national ETS system (nEHS) covering the transport and heating sectors will be introduced in 2021 and complement the EU ETS. The revenue will be used to finance climate-related as well as social measures such as the reduction of electricity levies, increased commuter allowances and housing subsidies.
Netherlands
The Coalition Agreement of the new Dutch government (2017 to 2021) includes a number of environmental tax policy changes. Dutch climate and energy policy actions are driven by the national commitment to implement the UN Paris Climate Agreements of 2015. Moreover, as a member of the EU, the country must abide by EU agreements on emissions reductions. The EU ETS covers electricity and industrial companies and allow prices to fluctuate based on supply and demand. The Dutch government has decided to introduce a minimum carbon price of EUR 12.30 per tonne of CO2, increasing to EUR 31.90 per tonne of CO2 in 2030. If the EU ETS allows prices to fall below this threshold, the difference will be levied in the form of a national-level carbon tax.
In addition to the carbon price floor, the Netherlands will promote environmental sustainability by shifting the tax burden from electricity to natural gas to better account for the carbon content of fuels. Additionally, the tax rate on landfilling and waste incineration was increased with plans to broaden the base to include sewage sludge and renewable waste. There is also a parallel reallocation of the tax burden from households to enterprises, with increased rates of the surcharge for sustainable energy for the higher brackets of electricity consumption and higher energy tax credits per electricity connection. These are examples of how environmental tax reform can promote equity. Furthermore, a new tax on air travel tickets was announced for 2021, but preference would be given to an EU-wide tax on air tickets. Last but not least, the Netherlands plans to introduce a carbon tax in the industry sector in 2021. The model they are working on is a tax on emissions above a diminishing tax-free base at a relatively high tax rate. The objective is to generate a strong incentive to reduce carbon emissions and at the same time limit the tax burden to prevent substantially damaging the competitiveness of national industry sectors.
Source: OECD Annual Tax Policy Reform Questionnaire
Countries differ in the degree to which they rely on environmentally related taxes to achieve climate objectives. Environmentally related taxes are defined as any compulsory, unrequited payment to general government levied on tax bases deemed to be of particular environmental relevance. They encompass all taxes that are likely to have a strong environmental impact – regardless of the reason why they were introduced – and cover a broad range of areas, including agrochemicals, energy, road use, vehicles, waste, water abstraction and water pollution. Among these, energy taxes, in particular fuel excise and carbon taxes, are particularly effective tools to curb climate change. Germany and the Netherlands are two countries that are stepping up their climate efforts with varying degrees of environmental tax policy reform components as showcased in Box 3.10.
Environmentally related tax revenues vary widely across countries and continue to be dominated by taxes on energy use
Revenues from environmentally related taxes in 2017 varied significantly across countries, ranging from 0.7% of GDP in the United States to 4.5% of GDP in Slovenia (Figure 3.24). Between 2000 and 2017, environmentally related tax revenue measured as a share of GDP fell in about half of the countries covered in the report and remained stable in eight of them. Iceland, Denmark and Ireland experienced the largest decreases in revenues as a share of GDP. Revenues rose in eleven countries, with particularly sharp increases in Greece, Slovenia, Latvia and Estonia. The former three are now among the four countries exhibiting the highest environmentally related tax revenues as a share of GDP. On average17 across the countries covered in the report, environmentally related taxes raised revenue amounting to 2.3% of GDP in 2017, a level comparable to those reached in 2010 and 2000 (2.4%).
Note: Data for Australia and the United States are from 2016 (not 2017). Data for Israel and Korea are from 2014 (not 2017). Data for China are from 2012. Transport data for South Africa are from 2015. Indonesia missing.
Source: OECD Database on instruments used for environmental policy, http://stats.oecd.org/.
Taxes on energy use accounted for more than 50% of total environmentally related tax revenues in all countries except China (48%) in 2017. On average, energy use taxes yielded 72% of environmentally related tax revenues. Taxes on energy use are principally fuel excise, as well as carbon taxes where applicable. They also drive changes in revenues from environmentally related taxes measured as a share of GDP over time in most countries. This is because high energy tax rates in the long run may lead to behavioural changes that result in a decrease in fuel demand – particularly transport – thereby reducing tax bases and potentially the revenues stemming from them. A recent study on road transport in Slovenia investigates the balancing act of seemingly contradictory objectives: using environmentally related taxes to raise government revenues and, at the same time, steering behaviour towards reducing harmful activities (OECD/ITF, 2019[14]). Using scenario analysis and simulations for Slovenia to 2050, the analysis finds that a substantial decline of tax revenue from diesel and gasoline use in private cars is likely to occur, but gradually. A comprehensive and similarly gradual tax reform via taxes on distances driven and higher fuel or carbon taxes on fossil fuel use that accounts for their external costs could facilitate the smooth evolution of future tax revenues.
Motor vehicle taxes and other taxes on transport are the second largest component of environmentally related tax revenues. Mainly consisting of one-time registration taxes on motor vehicles and annual taxes on users or owners of vehicles, they range from 2% of environmentally related tax revenues in Estonia to 47% in New Zealand, and account on average for 24% of environmentally related tax revenues across the countries covered in the report. Before 2008, a few countries like Iceland, Ireland, Norway and Switzerland, collected most of their environmentally related tax revenues through motor vehicle and other transport taxes, but this is no longer the case.
Carbon price signals remain low and narrow
In 2018, nearly all carbon emissions from energy use in road transport were subject to a tax in the 44 OECD and G20 countries for which comparable data is collected by the OECD and which together account for 80% of carbon emissions from energy use (Figure 3.25). Effective tax rates surpassed those for other fuels and sectors by far and exceeded a low-end estimated climate benchmark of EUR 30 per tonne of CO2 for roughly 84% of emissions. However, this does not necessarily mean that road fuels are excessively taxed, as this low-end benchmark only takes into account climate costs. When other negative externalities are factored in (e.g. congestion, air and noise pollution, road accidents, use of urban space for parking), higher taxation of road transport fuels may be warranted. It is worth noting that carbon price signals can stem from policy instruments other than fuel excise and carbon taxes, namely Emissions Trading Systems (ETS), which sometimes cover additional greenhouse gases and emission sources, especially in electricity generation and industry.
Note: The countries included are the 36 OECD countries and Argentina, Brazil, the People’s Republic of China, Colombia, India, Indonesia, the Russian Federation and South Africa plus international transport.
Source: (OECD, 2019[15]).
Outside the road sector, carbon emissions are largely untaxed, which is disconcerting as 85% of energy-related CO2 emissions do not originate from road transport. Only 18% of non-road emissions were effectively taxed and a mere 3% were taxed above the low-end climate benchmark of EUR 30 per tonne of CO2 (Figure 3.25). Moreover, changes in tax rates between 2018 and 2015 were modest and did not modify the landscape significantly (Figure 3.26). Accounting for emissions trading systems would make the picture less bleak (OECD, 2018[16]), but the key message would remain the same.
Note: “Explicit” tax rates refer to explicit carbon taxes rather than fuel excise taxes in the legislation. The scale of the horizontal axis differs between Panel A and Panel B. Note that changes in average effective tax rates over time are also affected by inflation, exchange rate fluctuations, and changes in the composition of the energy mix. The comparison excludes 2015 rates for the United States and Canada as data on subnational taxes was not available for 2015. 2015 data for Colombia and Lithuania are missing because they were not yet covered in the previous vintage of Taxing Energy Use. Argentina is missing because no inflation data was available.
Average effective carbon tax rates are weighted by carbon emissions.
Source: (OECD, 2019[15]).
Momentum for carbon price signals via ETSs has been increasing. Emissions trading systems and carbon taxes can be equally effective and efficient, depending on the details of their design. As mentioned in Box 3.10, Germany will introduce a national ETS, covering the transport and heating sectors and complementing the EU ETS in 2021. In the Netherlands, the government has decided to introduce a national carbon price floor for emissions covered by the EU ETS including a price path (Box 3.10). Overall, however, ETSs remain a comparatively small component of carbon pricing: in 2015, ETSs accounted for approximately 6% of carbon price signals in OECD and G20 countries (OECD, 2018[16]). The extent to which countries deploy taxes or ETSs to price carbon emissions also varies significantly. The EU ETS, for instance, covers most emissions from electricity generation and industry, and intra-European flights. Allowances traded at approximately EUR 25 per tonne of CO2 equivalent at the time of writing and have risen substantially since 2017 levels as a result of reforms, including the Market Stability Reserve.
Overall, the energy tax landscape remains widely misaligned with key principles of environmental taxation. Figure 3.27 reveals in finer detail where CO2 emissions stem from and the associated effective carbon tax rates. Besides the pronounced difference between road and non-road sectors, the Figure highlights that industrial energy use remains mostly untaxed. Another issue concerns the lack of taxation on coal and solid fossil fuels across sectors (e.g. industry and electricity), when other less carbon intensive and polluting fossil fuels like natural gas are taxed. These inconsistencies show the need for efforts towards better aligning taxes with environmental costs.
Note: Tax rates applicable on 1 July 2018. The countries included are the 36 OECD countries and Argentina, Brazil, the People’s Republic of China, Colombia, India, Indonesia, the Russian Federation and South Africa plus international aviation and maritime transport included in off-road. Biofuels are marked with an asterisk as under the IPCC Guidelines for emissions from energy use, emissions from the combustion of biofuels are not included in the national total. The figure groups energy categories that represent less than 1% of the horizontal axis into “miscellaneous emissions”.
Source: (OECD, 2019[15])
Countries renew interest in energy taxes in 2020, shy away from reductions
Most energy tax reforms involved increases in fuel and carbon taxes (Table 3.11). After a break in 2019 when strengthening fuel and carbon taxation received attenuated attention, energy tax reforms were again more frequent than other types of environmentally related tax reforms. Six countries raised taxes on fuels. In Lithuania, where tax rates for diesel and gasoline were increased by over 7%. In Latvia, tax reform continued and tax rates on transport fuels were increased by 7% for gasoline and by 11% for diesel. South Africa raised the general fuel levy at a rate slightly below inflation. France is gradually phasing out the preferential tax treatment of diesel used for public works. The Netherlands increased the excise duty on diesel by one eurocent per litre. Sweden abolished the tax exemption for diesel in mining activities. In the transport sector, Finland increased the tax on transport fuels to counteract the effect of inflation by 2023. As announced in previous editions of this report, a carbon tax of EUR 7.42/tCO218 came into force in South Africa to help the country meet its Paris Climate Agreement goals. Ireland increased the rate of its carbon tax from EUR 20 to EUR 26 per tonne of CO2 and Sweden raised both the energy and carbon taxes on fossil fuels used for heating in combined heat and power plants (CHP). The Netherlands also reported plans to step up its carbon tax rates after 2020.
Electricity consumption tax increases emerged as a secondary but novel trend in 2020. Specifically, the Netherlands increased the sustainable energy surcharge, a levy on the supply of energy, for higher consumption brackets, shifting the burden from households to enterprises. Ireland also raised the rate of electricity tax for businesses. On a different note, Latvia introduced a new maintenance fee to raise revenues as part of a reform of the support provided to electricity producers.
Energy tax reductions were infrequent in 2020. Preferential tax rates for specific sectors are available in many countries (OECD, 2018[17]).They weaken the incentive for polluters to take part in a country’s overall emissions reduction effort. The low number of energy tax reductions for specific energy users, which effectively take the form of preferential tax rates, is thus a welcome improvement. Moderate oil prices may have also reduced the pressure to reduce road fuel taxes. As in previous years, Mexico is extending for another year the operation of a price smoothing mechanism for diesel and gasoline, which serves as a budget neutral buffer for international oil price fluctuations on the domestic market. The United States is extending tax incentives and credits pertaining to bio and alternative fuels. Poland reported in 2020 a big reduction in the electricity excise tax (from 20 to 5 PLN/MWh) that came into force already in 2019. The change came as a response to price hikes in the electricity market since 2018. The Netherlands is gradually lowering the energy tax rate on electricity in the first bracket shifting the tax burden from electricity to natural gas. It will also raise substantially the basic tax credit per electricity connection as a means of promoting equity and redirecting the tax burden from households to businesses. Electricity taxes often fail to differentiate across energy source, making all of them more expensive irrespective of the climate damage resulting from their use. Overall, in 2020 energy tax decreases did not contradict environmental objectives. This is a positive change compared to 2019, where a number of reforms involved extending preferential tax rates to specific sectors and postponing fuel duty increases (United Kingdom, Sweden) or cancelling them altogether (France) (Table 3.11).
Efforts to reduce the diesel discount in road transport and to index energy taxes to inflation are lacking. With existing equipment and technology, diesel results in higher emissions of harmful air pollutants and CO2 per litre compared to gasoline. To account for these externalities, diesel should in principle be taxed at higher rates than gasoline. However, Figure 3.28 shows that in road transport only three of the countries covered in this report (Mexico, Switzerland and the United States) tax diesel at higher rates than gasoline on a per litre basis. Additionally, no country that had not already done so previously attempted to automatically index tax rates to inflation, leading to falling real tax rates in the majority of cases.
Note: New Zealand is a special case because diesel vehicles pay distance-based road-user charges, which are not included because they affect different behavioural margins than energy taxes.
Average effective energy taxes are weighted by energy use.
Source: Adapted based on data from OECD (OECD, 2019[15]).
Transport and vehicle tax reform slowed down further in 2020
Changes to traditional motor vehicle taxes, namely recurrent vehicle and registration taxes, were rare in 2020 (Table 3.12). Ireland replaced the 1% surcharge on the vehicle registration tax for diesel passenger vehicles with a nitrogen oxide based surcharge, in an effort to tax more accurately the environmental and external health costs of diesel vehicles. The Netherlands abolished the full refund of car registration for taxis and Lithuania introduced a new pollution tax on vehicles registered or reregistered from 1 July 2020 to incentivise the replacement of its old and polluting fleet. Turkey revised its special consumption tax rates on motor vehicles downwards to encourage the purchase of new and less polluting vehicles.
Three countries have implemented changes to the taxation of alternative fuel vehicles. Ireland extended the registration tax relief for hybrid and plug-in hybrid vehicles for another year until the end of 2020. It also introduced a CO2 basis for calculating the rates of benefit-in-kind for company vehicles in order to encourage the use of alternative fuel vehicles as employer-provided cars. The Netherlands extended exemptions from registration tax until 2024 for zero emission vehicles. Poland reduced excise tax rates for hybrid-fuelled vehicles as of 1 January 2020. On the other hand, Israel announced the gradual elimination of the preferential tax treatment for hybrid, plug-in and electric vehicles with the aim of raising revenues and simplifying the tax system. Preferential tax treatment for electric vehicles can provide strong signals to switch to less polluting vehicles, although it depends on how clean electricity production is and the amount of revenue foregone can vary greatly with the design of incentives (German, 2018[18]). It is also likely to be regressive because low-income households are less likely to invest in expensive electric vehicles (Borenstein and Davis, 2016[19]).
Minor changes to the taxation of less conventional tax bases, such as air travel, were observed in 2020. Specifically, the Netherlands intends to tax airline tickets from 2021, although it would prioritise an EU agreement. Germany has increased the aviation tax rates in all three of its distance bands. Flights within the European Economic Area are also covered by the European Emissions Trading System, unlike other international flights, which are generally not subject to energy taxes or carbon pricing. However, the severe impact of the COVID-19 crisis on aviation travel may have an impact on recently proposed changes.
Finally, the Netherlands adjusted motor vehicle taxes to account for the new Worldwide Harmonised Light Vehicle Test Procedure (WLTP). The WLTP measures fuel consumption and CO2 emissions from passenger cars, as well as their pollutant emissions and is based on updated laboratory tests using real-driving data. The new test protocol is supposed to match road performance better than previously with the New European Driving Cycle (NEDC). Several countries (Finland, Ireland and Portugal) introduced similar measures in 2019.
Interest in other environmentally related taxes is increasing, but remains overall low
Environmentally related tax reforms related to other tax bases (e.g. plastic, chemicals or waste) typically attract little attention, but the number of reforms in this area increased in 2020 (Table 3.13). Denmark increased taxes on shopping bags and disposable tableware. Italy introduced a consumption tax on plastic packaging materials, exempting plastic medical devices and compostable plastics. The tax, initially applicable as of July 2020, has been postponed to January 2021 due to the COVID-19 pandemic. Iceland brought into effect a new tax payable by kilogramme of fluorinated greenhouse gases and adjusted by the global warming potential of the gas. The tax rate will double after the first year of implementation. Latvia raised the tax rates on several natural resources (e.g. sand). Sweden introduced new taxes on plastic carrier bags and waste incineration. Poland was the only country19 to reduce taxes in this category. It reduced by 15% the tax rate on the extraction of certain minerals like silver and copper to lower the tax burden on businesses.
Overall, there have been more changes reported in the area of property taxation compared to the previous years and reforms have predominantly involved tax increases. Previous editions of this report showed limited changes to property taxation in recent years, with some exceptions. This year shows an increasing number of reforms. In addition, while previous years showed a mix of tax increases and decreases, this year shows a clearer trend towards increases in property taxation, although there have also been some reforms aimed at decreasing property taxes. This year has also seen the introduction of new taxes, including new taxes on high-value immovable property in Chile and Turkey, and a planned tax on financial transactions in Spain.
Property taxes continue to be a small source of revenue
Countries impose a variety of taxes on property. The most prominent property taxes across the countries covered in the report are recurrent taxes on immovable property, which are typically a key source of revenue for local governments. Property transaction taxes and inheritance and gift taxes are also common. Very few countries impose a tax on some measure of total net wealth.
Property tax revenues remain low in most countries. In 2018, the amount of revenues collected from property taxes varied widely across countries, ranging from 0.1% of GDP in Indonesia to 4.1% of GDP in the United Kingdom. However, in a majority of countries, property taxes remain a small source of revenue. Trends in revenues in the last fifteen years have differed across countries but a majority have seen increases in their property tax revenues. Between 2000 and 2018, 23 countries reported increases in property tax revenues as a share of GDP, while 16 recorded revenue falls. The largest revenue increases in percentage points were recorded in Belgium (largely due to an increase in revenues from registration duties, driven by housing prices), Argentina and South Africa. On the other hand, Iceland and Sweden experienced the most significant property tax revenue falls in percentage points.
Note: 2017 data for Australia, Greece, Indonesia, Mexico and South Africa.
Source: Global Revenue Statistics Database.
Property tax reforms have been more significant than in previous years
There has been a marked increase in the number of property tax reforms compared to previous years. Table 3.14. shows that the vast majority of property tax changes introduced in 2020 were tax increases, through either increases in tax rates or tax base broadening measures. There have also been some measures aimed at lowering property tax burdens.
Italy and Germany are revising their immovable property tax systems. Italy unified its local property taxes, by abolishing the municipal service tax TASI (“Tributo Servizi Indivisibili”) and merging it with the IMU (“Imposta Municipale Propria”) local property tax. The sum of TASI and IMU rates will remain the same. Moreover, the IMU deduction from business income taxation has been increased up to 100% as for 2022 (instead of 70%). Italy also introduced an annual property tax on marine platforms for the extraction of hydrocarbons. Germany legislated an overhaul of its property valuation rules to comply with the requirements of the Federal Constitutional Court. Indeed, in its ruling dated 10 April 2018, the Federal Constitutional Court declared the way in which properties are valued for the purposes of real property tax to be unconstitutional, as the tax is calculated on the basis of property values that are decades old. The values determined in accordance with new law will be used to calculate the property tax from 2025 onwards. Overall, the reform is expected to be revenue neutral.
Changes to existing recurrent taxes on immovable property were also reported in France, Greece and Lithuania. Greece is reducing its property tax (ENFIA) by providing a tax rebate amounting to 30% for properties valued below EUR 60 000 and progressively decreasing to 10% for properties exceeding EUR 1 million. At the same time, the government abolished a property tax cut that was introduced by the previous administration and benefited property owners whose tax liability was below EUR 700. In France, the housing tax (“taxe d’habitation”) will be gradually removed between 2021 and 2023 for the remaining 20% of French taxpayers who still pay the tax. On the other hand, Lithuania is increasing its property tax by reducing the tax-exempt threshold for non-commercial property from EUR 220 000 to EUR 150 000. It has also increased the minimum tax rate for immovable property used for commercial purposes from 0.3% to 0.5%.
New taxes on high-value immovable property were introduced in Chile and Turkey. In Chile, a new progressive surcharge applies to taxpayers whose combined real estate fiscal value in Chile exceeds CLP 400 million (regardless of Chilean tax residency). The surcharge rate schedule is as follows: 0.075% for the part of the combined fiscal value of real estate properties that ranges between approximately USD 485 000 and USD 846 000; 0.15% for the part of the combined fiscal value that ranges from approximately USD 846 000 to USD 1 088 000; and 0.275% for the part of the combined fiscal value of real estate above USD 1 088 000. This tax entered into force on 1 April 2020 and is added to the ordinary real estate tax that is payable on a quarterly basis. Similarly, as of 2020, Turkey levies an additional property tax imposed on residential houses located in Turkey that are valued above TRY 5 million. The tax rates are progressive (between 0.3% and 1%) depending on the value of the residence.
Several changes were made to property transaction taxes, generally involving tax increases. The Netherlands increased the transfer tax rate for non-residential real estate from 6% to 7%. Similarly, Ireland raised the stamp duty on non-residential property from 6% to 7.5%. To increase fairness and limit tax avoidance, Ireland also introduced a new 1% stamp duty where a cancellation scheme of arrangement is used for the acquisition of a company (i.e. where the target company’s existing shares are not transferred but cancelled and directly reissued to the bidder). Argentina introduced a 30% rate on foreign currency purchases or any purchases of goods and services nominated in foreign currency and paid in local currency. In Spain, a draft law on the establishment of a financial transaction tax has been submitted before Parliament. The financial transaction tax would be levied at a rate of 0.2% on the acquisition of shares of Spanish companies with a market capitalisation exceeding EUR 1 billion, irrespective of the jurisdiction of residence of the parties to the transactions, provided that the companies are listed on regulated markets. On the other hand, Korea reduced its securities transactions tax to reduce transaction costs for stock trading and encourage investment and Poland reduced the rate of the tax on civil law transactions from 2% to 0.5% for loan agreements from 1 January 2020.
Finally, a few changes to taxes on net wealth and wealth transfers were reported. Regarding net wealth taxes, Spain extended the application of its wealth tax until the end of 2020. In Argentina, significant changes to the wealth tax were introduced. The tax rates to be applied to Argentine individuals were raised and now range from 0.5% to 1.25%. For assets held abroad, higher tax rates apply, ranging from 0.7% to 2.25%. For non-resident taxpayers, the tax rate applicable to assets located in Argentina was also raised from 0.25% to 0.50%. Finally, the tax rate on equity interests in Argentine companies was increased from 0.25% to 0.50% for both residents and non-residents. Norway increased its net wealth tax base by eliminating the special valuation provisions for shares of newly established companies. This measure eliminates the possibility to reduce the taxable values of unlisted companies via simple changes to company structure. Regarding inheritance and gift taxes, Denmark repealed the inheritance tax reduction for business owners. On the other hand, Ireland increased the tax-free threshold that applies primarily to gifts and inheritances from parents to their children from EUR 320 000 to EUR 335 000.
References
[19] Borenstein, S. and L. Davis (2016), “The Distributional Effects of US Clean Energy Tax Credits”, Tax Policy and the Economy, Vol. 30/1, pp. 191-234, https://doi.org/10.1086/685597.
[10] Center for Economic and Social Research (2019), Study and Reports on the VAT Gap in the EU-28 Member States: 2019 Final Report.
[4] European Commission (2018), Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services {SWD(2018) 81}-{SWD(2018) 82}, European Commission, Brussels, http://www.mef.gov.it/inevidenza/banner/170907_joint_initiative_digital_taxation.pdf (accessed on 27 April 2020).
[18] German, R. (2018), Vehicle Emissions and Impacts of Taxes and Incentives in the Evolution of Past Emissions. Report to EEA, European Topic Centre on Air Pollution and Climate Change Mitigation, https://acm.eionet.europa.eu/reports/EIONET_Rep_ETCACM_2018_1_vehicle_taxes.
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Notes
← 1. In Latvia, there was a decrease in CIT revenues reflecting a transitional period after a major CIT reform, which came into effect on 1 January 2018. Authorities expect a gradual rebound in CIT revenues when the transitional period is over.
← 2. This section draws on previous work by OECD Directorate for Science, Technology and Innovation.
← 3. For additional information on the design of R&D tax incentives and magnitude of government tax relief for R&D (GTARD) in OECD countries and partner economies, see https://oe.cd/rdtax.
← 4. Implied tax subsidy rates on R&D (1 minus B-Index) provide a measure of the notional R&D tax subsidy rate firms of different size (SMEs, large firms) and profitability (profitable, loss-making). The figures in the main text focus on large firms which account for the bulk of business R&D investment (see: http://www.oecd.org/sti/rd-tax-stats-tax-expenditures.pdf). For estimates of implied marginal R&D tax subsidy rates for the four firm scenarios (Large profitable, Large loss-making, SME profitable, SME loss-making), see OECD R&D Tax Incentive database (https://stats.oecd.org/Index.aspx?DataSetCode=RDTAX).
← 5. Contract research can be funded if the contractor (third party or affiliated company) is based in Germany or in any other EU/EEA member state.
← 6. Unused tax credits are payable in three instalments over a period of three years. For a description of the 2019 R&D tax incentive see: http://www.oecd.org/sti/rd-tax-stats-ireland.pdf.
← 7. Capped at NZD 255 000, and to qualify, firms must satisfy certain criteria, including an R&D intensity threshold (see http://www.oecd.org/sti/rd-tax-stats-new-zealand.pdf).
← 8. For a description of 2019 R&D tax incentive see: http://www.oecd.org/sti/rd-tax-stats-italy.pdf.
← 9. The benefits repealed include a 100% CIT exemption for the first ten years; instant asset write-off for new fixed assets during the first 8 years; a 25% additional deduction for expenses on training; a credit equivalent to 30% of expenses for R&D; a credit equivalent to a 50% of the health and maternity social security contributions for 10 years (and 25% for the subsequent 5 years).
← 10. The regime may not apply for the reinvestment of retained earnings in the fishing, aquaculture and primary agricultural production sectors.
← 11. On 15 March, the MLI covered 87 jurisdictions: 85 Signatories and 2 jurisdictions covered by their Parent State’s signature (Curacao and Hong Kong).
← 12. https://www.oecd.org/ctp/exchange-of-tax-information/CbC-MCAA-Signatories.pdf.
← 13. http://www.oecd.org/tax/beps/beps-action-14-peer-review-assessment-schedule.pdf.
← 14. See https://www.oecd.org/economy/surveys/Policy-note-on-the-introduction-of-VAT-compensation-for-vulnerable-households-in-Colombia.pdf.
← 15. This issue is particularly significant in the European Union, where there are no customs controls at the internal borders. Indeed, the B2B intracommunity supply of goods is VAT-free in the member state of origin and VAT is collected in the member state of destination according to a cross-border "reverse charge mechanism" where the customer in the member state of destination accounts for the VAT on the supply in its VAT return rather than paying the VAT to customs at importation. When the goods are used to make an onwards taxable transaction (e.g. a domestic supply of goods), the input VAT on this "acquisition" is entirely deductible and triggers no payment obligation. This deviates from the traditional design of a VAT, where the tax is collected through a staged collection process. Fraudsters have used this system to run "missing trader" schemes where the purchaser that has acquired the goods VAT-free resells the goods on the domestic market, collecting the VAT from its customer and vanish without remitting the VAT so collected. The same goods may be resold again several times through a network of companies across member states with a chain of VAT-free cross-border supplies, reverse charged acquisitions and resales with collection (and no remittance) of VAT creating a “carousel” fraud.
← 16. European Court of Auditors 2015 https://www.eca.europa.eu/Lists/ECADocuments/SR15_24/SR_VAT_FRAUD_EN.pdf.
← 17. Arithmetic (unweighted) country averages, unless otherwise specified.
← 18. Converted based on annual exchange rates. The statutory rate of the carbon tax in South Africa stood at ZAR 120/tCO2.
← 19. France extended tax incentives (tax income credit CITE) for efficiency improvements in buildings in a budget neutral manner.