Economic surveys and country surveillance

Economic survey of the United Kingdom 2007: Tax competition: How to remain competitive?

 

Contents | Executive summary | How to obtain this publication | Additional info

The following OECD assessment and recommendations summarise chapter 5 of the Economic survey of the United Kingdom published on 27 September 2007.

 

Contents                                                                                                                           

Globalisation increases the importance of raising tax revenues in the most efficient way so as to maintain competitiveness

Globalisation creates a tension between the need to spend on social safety nets and the need to maintain tax competitiveness, which may reduce revenues. This pressure has encouraged governments to make the corporate income tax system more efficient by cutting statutory corporate tax rates and broadening the base. As the two have offset each other, corporate tax revenue as a share of GDP has been maintained. The United Kingdom was ahead in the game of cutting rates, but has lost ground more recently. It will thus be important to continue with the strategy of broadening the tax base, while cutting the rate. However, there are likely to be limits as to how far this can go, because tax competition also plays out on the base. The United Kingdom’s system of worldwide taxation creates incentives for headquarters to relocate offshore. Thus the government should consider the case for moving to a dividend exemption system of corporate income taxation, which exempts foreign source dividend income from domestic tax. The government has recently published a paper to consult on this issue. Moreover, the complexity of the tax system has increased, in part reflecting a need to respond to increasingly complex financial and commercial structures. However, there is room for simplification.


Statutory corporate tax rates in international comparison
Combined rate, per cent(1)


 


1. Basic combined central and sub-central (statutory) corporate income tax rate. Aggregates are unweighted averages and EU10 covers the new EU member states.
Source: OECD (2007), Tax Database, www.oecd.org/ctp/taxdatabase and European Commission (2006), Structures of the Taxation Systems in the European Union.

 

The degree to which globalisation might undermine the ability to tax corporate income remains uncertain. The location of production is determined by many factors, among which the corporate tax regime is not necessarily the most important. To the extent that globalisation makes it harder to tax mobile factors of production, there may be room to shift taxation onto immobile ones. Property taxation is already high by international comparison, but there is room to raise value added tax (VAT) revenues. By European standards the standard VAT rate is relatively low and includes many exemptions. Thus, there is scope for broadening the base. More radical reform possibilities should also be considered, even though they all have advantages and drawbacks and few have been implemented in other countries.

 

 

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the United Kingdom 2007 is available from:

Additional information                                                                                                  

 

For further information please contact the UK Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Anne-Marie Brook, Åsa Johansson, Petar Vujanovic and Marte Sollie under the supervision of Peter Hoeller.

 

 

 

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