Dokument
WHAT IS MOST IMPORTANT- PROFIT OR TAX ON PROFIT? (1)
Footnotes after the text
1 Introduction
Taxation of business activities has since long been a common form of raising revenue for states and communities. In old times without social and economic status for individuals and a primitive monetary structure, taxes could be raised mainly from artisans, farms and factories. The right to establish a factory was often dependent on the ruler's permission and an annual fee. Private persons were salaried in kind and had no ability to pay. Rulers of different powers demanded food, products and labour from their subordinates. Or checked how their rulings worked by travelling around their realms, visiting large and wealthy castles and mansions and consuming their products and services. The ruler preferred of course to visit the most prosperous sites offering the most comfortable living for him and his entourage. Whether the standard depended on current profitability or wealth accumulated from previous times was irrelevant. That profit as such is a precondition of wealth creation - or rather is equal or economically identical with net investment - was perhaps never contemplated. For that reason taxation was not closely related to profit; rather to what the estate could bear. Artisans, farms and factories were taxed according to different standards. Other forms of taxation were tithes, i.e., payments related to gross bases. "A tenth of the produce of the land, whether grain or fruit, is the Lord's, and is holy"(2), and "Honor the Lord with your wealth, with the firstfruits of all your crops"(3).
In short, the production or the possession of land was taxed.
With the emergence of modern society and rising economic standard, taxation of individuals' income became possible and practical. Simultaneously business activities demanding large capital formation began to be performed in companies with several owners. Legislation offered different forms of structures for reducing or eliminating the owners' private risk, PLC, Ltd, AS, GmbH, AB etc. Legal entities were regarded as separate units in their own right. As individuals - employees and self-employed entrepreneurs - were taxed for their net income, it seemed natural that also companies should be taxed for their income, i.e., their profit.
In most countries taxation of companies' profits(4) has been a common form of raising tax revenue for at least a century. In the United States a federal tax on corporation was introduced in 1909. It seems to have been a general opinion in the United States and other countries that companies, a creation of a construction regulated by the state, a vehicle for commercial and economic activities by cooperating shareholders and an independent legal unit, should be taxed. There was an argument that the tax was a fee on the privilege to make business without or only limited personal responsibility. The tax was also a way to control the companies as the tax was based on their annual accounts. In the beginning of the 20th century the emergence of large business trusts was a great problem in the US, and the tax could be used for controlling them.
In Sweden a general profit taxation of companies was introduced in 1861. An old taxation according to standard was abolished.
In this paper I discuss, or criticize, the idea of taxing business profits, for the following reasons:
a) the supposed equality between an individual and a company inasmuch as they are both legal entities andb) income of a company is comparable with the income of an individual.
2 Theoretical aspects
2.1 What is taxation?
The basic aim of taxation is to redistribute the result of a country's production between individuals. Another aim is to redistribute individuals' income over time. Everybody cannot keep the entire result of his labour for himself. Those who produce must leave part of it to those who for various reasons are unable to produce; e.g. children, students, sick, disabled and old people. Civil servants, whose employers cannot sell their services on a market, must also be provided for; e.g. government, parliament, authorities, defence, police, courts etc. With rising standards of living more and more needs must be catered for. To prevent the consequences of peoples' overestimating their future income, taxation can also be used for redistribution of individuals' income in time by public health and pension insurance arrangements. Taxation can be said to finance these individuals' drawing rights on present and future production of goods and services.
In the long run there cannot be taxation unless there are new products and services created. Taxation of existing assets is confiscation. That does not mean that assets cannot be used as a measure of living standard and ability to pay taxes, but sustainable taxation presupposes production. There is no other sustainable tax base than what is produced. We can provide ourselves only with what is produced. In a modern economy everybody's contribution is measured in an efficient way through the formation of wage structures. For that reason it is natural to use salary as a tax basis, although a salary tax has complicated and complicating effects on the economic society. Many people also have an income of capital from share dividends. All these taxes are based on production (GNP) and are consequently sustainable. Capital income in form of interest equals interest cost and is thus not an effective tax base, although it it is used for taxation in view of social justice.
Another way to describe taxes' role and function in the economic system is the enclosed picture of the Economic circuit:
H = Household sector, B = Business sector, S = State, L + C = Labour and Capital, W + D = Wages and Dividends, G + S = Goods and Services, P =Prices, I + G = Inheritance and Gifts, W + RE = Wealth and Real Estate, CG = Capital GainsThere is a flow of labour and capital from the household sector (H) to the business sector (B). In the opposite direction there is a flow of payments for labour (wages) and capital (dividends). The result of the production flows from the business sector to the household sector as goods and services, and the payment for it flows in the opposite direction. The purchasing power emanates from the wage and dividend payments. The flows of payments and the flows of capital and labour and goods and services are all dependent on each other.
There is a flow of semi-manufactures round and round in the business sector and a flow of payments in the opposite direction. Values are created successively in this circulation and definitely when the products leave the business sector. This implies that resources have been consumed at market value and in a process been transformed to consumers' products. If the transformation has been successful and the market evaluates the products higher than the consumed resources, profit has been created. Part of the profit remains with the companies as net investment, part of it is distributed as dividends to the shareholders. That means that part of the value of household wealth from ownership of business (shareholdings)has increased and part of ithas been exchanged for cash. The payment of dividends generally triggers taxation.
The part of the value-added consisting of labour remuneration is a sustainable and normally used tax base. Frequently it is used twice: as income tax for the employee as well as wage cost (pay roll) tax and social security contributions for the employer. A flow of about the same size is also used as a tax base if there is a general consumption tax (VAT), so the income base can be used three times.
Consumption can also be taxed by way of special goods' taxes and excise duties paid by the household sector or the business sector depending on the technique of collection,e.g. tobacco, alcohol, gambling and other vices, petrol, energy, environment pollution etc. Whether the taxes are sustainable or not depends on the tax rate; with a very high tax rate consumption expires - in other cases the tax can be seen as an extra consumption tax. The rationale for it is often to reduce or regulate undesirable consumption. A cynic would say that the reason for the taxation of tobacco, alcohol and gambling is not restriction of consumption; peoples' devotion to vices makes them perfect tax bases. Such consumption is price inelastic.
Taxes are also collected from the household sector as a consequence of actions or events there: inheritance and gift, possession of wealth and real estate. The bases for these taxes are theoretically - unlike all other mentioned tax bases - not inexhaustible. Realization of capital gains can also be taxed. Whether that tax base is exhaustible or not depends on the growth of the value of the asset.
Finally, profit in the business sector is also used as a tax base. In many countries a tax is levied on the profit, although distributed profit is also taxed as dividend income with the shareholders, creating double taxation problems very difficult to master.
In the diagram it is easy to see that business profit tax is only a surtax on household income tax or rather a prepayment of household income tax. The tax reduces what otherwise would have been paid to employees or shareholders and reduces the tax bases for salary and payroll taxes, consumption taxes and dividend tax. The tax will unconditionally be rolled over on other economic actors. How, on whom and when this tax incidence will work, will depend on current elasticities on the markets of goods and services, labour and capital and it will be impossible to measure, not to mention predict or regulate.
Business tax is not indispensable. From the diagram you can see that tax on business profit not charged is not lost. Money and resources do not disappear in a black hole if the profits are not taxed.
2.2 Companies and individuals (households) in the economic system
Companies are set up to create goods and services in everybody's interest and for everybody's benefit. We need the products for our existence and survival, and we need the companies for their production. The companies have no other purpose. By producing in an efficient way, i.e., consuming resources of a certain value and creating values that mankind evaluates higher, the companies create what in accounting is called profit(5). Its efficiency is dependent on different limitations of the companies' freedom of action related to custom and practice and legislation. Of course, the companies' representatives must follow legal and other restrictions. The largest possible profit is not worth the social cost. A topical example would be limitations of liberties of actions of companies' dependent on the fight against climate changes. The reported profits, i.e., the rise in value of the companies' assets, equal - or are conceptually the same as - the net investment of the companies(6). To a certain extent the profit contains of financial deposits that - in case they are not used for dividends to the shareholders - will be used for investments in the future. The current consumption of resources is financed by current sales revenue. Existing investments (buildings, machinery, production facilities etc.) have in no part come into being unless profit has arisen. Profit = investment.
Business and household activities and their different functions in society are reflected in the national accounts. In 2020 Sweden's gross national product (GNP) was SEK 4,977 billion. Household consumption was 2,183 billion, public consumption 1,327 billion, and gross investment (production facilities) 1,233 billion, whereof public investment 244 billion and the private sector 989 billion. Net export, i.e., foreign consumption, was 230 and inventory growth 4 billion. Total consumption was thus just over 75 percent of GNP and gross investment a little less than 25. The quotas are stable over the years. If depreciation/reinvestment is estimated at 20 percent, net investment/net business profit would be SEK 790 billion. With a tax rate of the current 20,6 percent that would give a company tax revenue of SEK 163 billion. In 2020 the tax on business profit was SEK 143 billion, i.e., less than 7 percent of all taxes.
GNP is a measure of the economic activity in a country. Investments are added to salaries, although that implies a double calculation. In the long run investment will be depreciated and be a part of values (salaries) created in the future. But adding them together in the GNP tables gives a better picture of the present economic climate. In reality investment and salary are, however, opposite phenomena. Investment represents construction whereas salary representsconsumption. What was once produced will be consumed in the long run, and everything consumed has once been produced. This double calculation (acceptable in the description of the nations' economic activities) seems to have been accepted and adopted for the construction of the tax system.(7) In Swedish tax law this is completely evident. The wordings of the initial articles of the sections treating salary and other personal income on the one hand and business income on the other are exactly, word by word, the same mutatis mutandis.(8) It is completely clear that the legislator regards the two kinds of income as part of one unit, although they are not values that can be added on the same scale. It is indifferent to the legislator whether the income is derived from employment or business activities.(9) The Swedish legislator evidently does not see any difference between the activities of an individual and a company regarding the tax liability, although the result of the activities of a self-employed - after deduction of the tax from the amounting result - is directly available for his consumption. The company's result, contrariwise, can be used onlyfor investing (or paying dividends). The company has no ability to consume. To the protection of the interest of the shareholders and creditors there are even legal provisions against the exhaustion of the company's assets contrary to the articles of association. The Swedish legislation on association is even stricter and does in fact also prohibit loans to shareholders and interested parties. So, as long as the profits are kept with the company, they are inaccessible for private use. If they were used (contrary to law), they should of course be subject to tax with the recipients, which is the case in today's tax system in Sweden.
Net national product (NNP) is a measure corresponding to GNP minus depreciation of assets. Seen from the income side (NNI) it is equal to the total of business net profits and individual income. Business net profit equals performed net investment plus the value of monetary (cash, bank accounts etc) net holdings.
So, in fact taxing business income is the same as taxing investment. Business income tax should consequently be named investment tax. The inability to realize that company income tax is in fact a tax on investment enables the idea of stimulating investments during recessions by a special investment deduction. A tax system expressly aimed at taxing investments is intermittently supplemented by regulations to stimulate investments! The easiest way to stimulate investment would be to reduce the tax rate. Preferably to abolish company tax altogether.
Another consequence of the misconception of business profit being equal to income is the idea of taxing dividends. By paying dividend the companies or the shareholders are not engaged in creating new values. The dividend is simply and nothing more a transfer of an asset of the shareholders fortune from one pocket to the other; the value received by the shareholder is taken from the value of his shares. The value of his fortune is the same as before. This misconception has given rise to the eternal and insoluble problems of double taxation of company profit; not only is the company profit taxed, but the same amount (except company tax) is taxed as dividend "income" too. The solution to the problem is of course the insight that the company profit is not an income comparable to salary income. The origin of the dividend is, however, the new values created by the company which motivates its taxation. The taxation of the dividend could be made either on the company paying it, or on the shareholder receiving it. It is interminably much easier to tax the dividend than the profit. Another argument for taxing the dividend is, that it is not until the dividend has been paid that the income can be expended.
I believe that this lack of knowledge could explain the difficulty in understanding why company profit taxation is an anomaly that easily and to great advantage could be abolished. Even more important, why company taxation is also harmful and an obstacle to economic growth and the creation of human welfare.
2.3 Company taxation and investment and capital growth
If company taxation were abolished the required rate of return on investments would sink. That means that investments that are unprofitable today would be made. New investments induce an increase of salaries, sales and profits and of taxes on the bases mentioned. How salaries, dividends and consumption - and the taxes on the bases - would be affected is difficult to assess. In the short term, there are clear indications that investors bear company taxation, while in the longer term there is no reason that company taxation on the whole should affect the allocation of the results of production between investors and wage earners. Analyses of the economic effects of the abolition of company taxation suggest considerable gains for investment, for government finances etc. In our book(10) Erik Norrman has given account for established theoretical opinions on the economic consequences of company tax. Without the mathematical precision of his reasoning and disregarding the size of the consequences you can draw the same fundamental conclusion by the following reasoning.
By introducing a tax on the activities of companies you not only raise the required rate of return on investment and make marginal investments unprofitable reducing the general level of investment in the economy. You also trigger the companies' activities to minimize the new cost item. That includes investment and business decisions as well as blatant tax reduction actions. Also, lawyers, tax consultants and academics as well as tax authorities and tax courts and other official entities will be busy with a new task. Resources spent on it consume resources for activities that would otherwise have been spent on production in the companies and other activities in the private sector and on administration. Even if the companies did not react to the raised demand on rate of return on investments, a large number of highly educated professionals would be occupied in handling a new complicated tax. If the companies are successful in rolling over the new cost on salaries it would mean reduction of income and payroll taxes. If they pass it on to the consumers, that would lead to higher VAT and other consumption taxes. It is probably easier to increase prices than reduce salaries and fire employees. In Sweden taxes on salary income accounts for 700 billion SEK, taxes on salary cost 650 billion and taxes on consumption 670 billion. There would be a 2/3rd effect of reduction of income tax bases and a 1/3rd effect of rise of consumption tax bases. Depending on the average tax rates of the bases total tax revenue may be unaffected. This is of course an oversimplification, but together with the restriction on investment activities due to raised demand on rate of return, and the administration of the company taxation system it is highly unlikely that the tax will give any revenue at all.
In view of the fact that collecting taxes from companies that are financed by employees, consumers and shareholders does not create more money for the treasury, the hole procedure appears to be a meaningless and resource consuming end in itself. I cannot see any reason why the procedure would give a larger production result and larger revenue for the treasury than taxing the individuals directly. Rather the contrary; the more complicated system and the more entities engaged the greater the risk of losses.
A crucial question in connection with the abolition of company taxation in one country is how other countries would react. Historical experience shows that it is likely that a substantial reduction in company taxation in one country will be seen by other countries as an aggressive act aimed at attracting capital from abroad.(11) In the worst case, other countries could introduce special rules aimed at penalizing companies investing in a country with no company tax. Whether this is a problem is unclear. Foreign companies may avoid the country as an investing country, because their home countries tax them for foreign low taxed income (CFC- legislation). You could, however, also see that effect as a protection of the country's companies from foreign competition without introducing import duties.
The fact that company taxes are withdrawn from states as a consequence of international tax planning does not necessarily mean that total tax revenues are reduced. There are only redistributions between tax subjects and states, and redistributions in time and between different kinds of tax. The tax which the companies don't pay is no loss to the world economy. Nobody eats coins and bills. The goods produced and services rendered have been produced, invested and consumed. The taxes not paid have "only" had the effect that the disposition of an expected share of created resources has not been handed over to the tax authorities but is kept within the business sphere. That could of course be troublesome enough; the states do not receive the taxes they had budgeted for, or other states have received "their" taxes, which creates political tensions between the states. Competition conditions are perturbed. In the worst case profits are hidden in offshore tax shelters.
However, the missing company taxes induce new investments through reduced requirements of rate of return. As was mentioned above the new investments generate in turnincreasing payments for labour and/or proceeds due to increased employment and/or increased share dividends, all being taxable items. With increased wage payments and share dividends also the base for different consumptions taxes will be increased. From where would the money to pay for the company tax have come if not from the accounts for salary costs, selling proceeds, and share dividends? From Heaven?
2.4 Principles of taxation: Ability to pay, interest, and equality
In taxation theory three principles are often put forward. Ability to pay has since long been one basic principle. The theory is based on John Stuart Mill's least offer-theory. The burden of tax should be divided between the citizens in a way that it implies the least offering to them. The principle supports the idea of progressive tax and tax exemptions for poor people.
There may be an argument that a person with higher income should pay a larger share of his income than a person with low income. In my opinion the principle explains rather why a tax subject ought not to be taxed. It is unbearable to see a person perish because he cannot support himself, and it is preposterous to tax a person in need of support. A person that cannot earn his own living should not pay tax. Whereas there may be valid political arguments shared by many for a progressive tax, this is an opinion, whereas not taxing poor people rests on principle. It follows, that no tax should not be levied on persons with very small incomes or high costs for basic needs. In my opinion there may be good arguments for a tax on very high incomes, but it is hard to see a principal support for it.
These arguments are not applicable on companies. A Swedish tax commission once declared that company tax could not be based on tax ability in the subjective meaning of the least offer principle but must be founded on the objective advantages that the companies were supposed to give the shareholders without their own efforts.(12) That points at the principle of interest (see below).
Frequently heard arguments for company taxation are that a profitable company is able to pay tax and that companies, like individuals, shall carry their fair share of the tax burden. Although the principle of ability to pay was formulated in times without large and incorporated businesses, it is still often presented as an argument also for taxation of legal persons.
A company, however, has no abilities or similar capacities or qualities. It has no other purpose than to gather economic resources to enable the production of goods and services in an economic efficient way (unless other aims are stated in the articles of association). A company has no other purpose than to produce, and if it cannot produce and create value it has no raison d'être. Companies lacking future prospects should be liquidated as soon as possible. That could sound cruel but if they were allowed to live on they would destroy existing values. And how could a company's ability to pay tax be decided on? Does a company with a share capital of 1 000 000 € and a loss have tax ability? And what about a company with 1 € in share capital and a profit of 1 000 000 €? The first company has too much capital (it is "rich"); it has evidently no use for it; it may even have received is through a capital injection. The other has much too little capital (it is "poor"); the profit and the benefit to society would have been much greater, hadn't it been so undercapitalized.
According to a supposed application of the principle of ability to pay, companies making losses, i.e., destroying existing values, are not taxed, whereas according to the same principle profitable companies, indispensable for the survival of mankind, are counteracted by a tax aiming at its very goal, being profitable. Preposterous.
The principle of tax ability has no relevance for companies.
Another basic principle for taxation is that of interest, i.e., tax should be paid in accordance with the taxpayer's interest of rendered public services. Although intended for individuals, the principle has in fact often been invoked also for the taxation of companies. The argument that companies should pay "their fair share of the tax burden" was heavily stressed when formal taxation of company profit was introduced in Sweden.(13) That argument may hold true as regards special services rendered by the authorities expressly for the company, but in that case the base for taxation should be the value of the service. Why should a company making a large profit pay more for a service than a company making losses?
Principally a tax based on the full value of services rendered by the authorities would in fact erase the base for making profit. Who owns the conditions that a company finds profitable to make use of? Until the company found use for them the conditions may have been unknown and of no economic value. A mountain in the wilderness may have no economic value until somebody finds gold there. Although states may claim rights to findings within its borders and charges fees for what is mined, value is created by the accomplishment of the explorer. If the state would charge the full economic value of the finding it would be of no economic interest.
A third principle for taxation is that of equality, which stresses the importance of equal consequences regardless of how transactions are performed. That principle is frequently run over in business taxation. Experience shows that business taxation is often circumvented or avoided by using different practical techniques. Business tax rules are by necessity extremely complex and open for different ways of acting, which gives results with different outcome after tax. Company taxation is even worse. An important reason for that is the division of the ownership of the activities in two layers, shares and physical assets, and division of activities in different legal units.(14)
None of the principles are applicable on business taxation. Companies are no taxpayers, but only units for efficient production.
2.5 Negative effects on economic behaviour
Company taxation causes a number of awkward and harmful economic effects. First of all, as really mentioned, it reduces overall investment in the economy because it is a tax directly and exclusively aimed at investment. It also affects the behaviour on micro level triggering a company to invest because of tax incentives rather than economic efficiency, which may cause economic disturbance.
Whereas there is a tax on investment/profit, there are no or strictly limited rights to deduct losses from earlier taxed profits. The possibilities of loss deduction are often restricted by complicated provisions, e.g. demanding unchanged ownership, unchanged business activities. Loss carry back, i.e. repayment of taxes from earlier profitable years is often not permitted. Specialization and division of labour are, as already Adam Smith observed,(15) the driving force of efficiency and economic growth. The more specialisation and companies, the larger is the risk that some of them make losses. If they cannot recapture the losses, the tax burden on the total economy is increased.
Companies making losses (economic parasites) and destroying existing assets, do not need to pay tax, whereas profitable companies serving mankind´s needs have to pay extra for their successful efforts.
Profit is the return on capital. Profit is the rise of value of the company's asset, i.e. investment. Taxing profit means taxing investment. Whereas the cost of borrowed capital is deductible, no deduction is granted for the cost of equity capital. This implies higher cost for the company financing investment with equity capital and even double taxation of profit if dividends are taxable with the shareholders.(16) This has of course consequences for the financing of investments and an incentive to use loan rather than equity which makes the companies' solvency low. That, in turn, implies a high sensitivity to business fluctuations and interest changes and affects the stability of the whole economy.
In order to reduce the advantage for loan financing in EU the Commission has proposed(17) a directive on rules on a debt-equity bias reduction allowance (DEBRA). The proposition includes i) a right to deduct, under certain conditions, a notional interest on increases in equity and ii) a limitation of the deductibility of exceeding borrowing costs. Since small and medium enterprises (SMEs) usually face a higher burden to obtain financing it is proposed to grant a higher notional interest rate to SMEs.
The pro-debt bias of the tax rules is of course a consequence - and an intended consequence - of the taxation of business investment. When that consequence becomes too disturbing, the EU Commission suggests amendments rather than abolition, not realizing that the problem consists in the mere taxation of business profit. Of course, the Commission envisages problems with its proposal and the need for anti-abuse measures. Studying the proposition it is easy to agree.
2.6 Reasons for taxing company profit
2.6.1 Fiscal reasons
Taxing profit gives large revenue from a limited number of entities. As the tax affects all companies and in one way or another is rolled over on other economic agents the tax seems to be accepted even by the business society.
2.6.2 The piggy box argument
One argument often suggested against the abolition of company taxation is that it would make it possible for the share-holders to postpone taxation. Family held companies could be used as pension funds. That is of course an argument if you object to private saving. For a Swede the argument is relevant because Sweden taxes pension savings. On the other hand, nobody knows what tax rate will be applied when the saved money is to be consumed.
2.6.3 Tax evasion
Another argument is that the untaxed company profits could be transferred to tax exempt funds or trusts or could be transferred to foreign entities. The same problem exists, however, even when company profits are taxed.
2.6.4 International reactions
Abolition of company tax will for sure have international consequences. Countries will claim to be deprived of their fair share of the taxes. A low or zero-tax country will probably be accused of helping tax planning companies to avoid taxation in other countries. Nothing prevents, however, a low- or 0-tax country to exchange information about companies' profits and activities in the country of importance for taxation in other countries.
3 Practical aspects
3.1 Problems related to business taxation
This paper is not intended to analyse all legal, practical and technical problems of business taxation, but to concentrate on the fact that the idea of taxing profit/net investment is based on a fundamental misunderstanding of the concept of income and the supposed equality between individuals and companies. Business taxation is an anomaly and built on a misconception of a relation between net salary income and business profit and an obstacle for marginal investments. All the same, I will give some examples of different practical aspects, because they are immediate consequences of that misunderstanding. And the practical and legal complications are rapidly growing as a consequence of the ongoing globally inclusive work, BEPS (see below sec. 3.2), to reform the international tax system. Not only are the proposed regulations complicated and aimed to shift taxing rights from production to consumptions countries , they are also supposed to be implemented by more than 140 nations.
Business tax is unimportant fiscally, but extremely complicated and a risk for legal certainty and triggers tax planning.
3.1.1 Fiscally unimportant
To begin with, the fiscal importance of business taxation is limited, and must for inevitable reasons be so. As the numerical example above shows, the tax base consists of net investment in the business sector of an economy, i.e., around 20 percent of GNP. Because of its impact on investment decisions the tax rate must be rather low and dependent on tax rates in other countries. Presently the tax equals less than 7 percent of all taxes in Sweden, and the same small part goes for most countries. So, company tax is a small tax. However, it does not only give low revenue for the state, it also reduces the bases for other taxes. So, dependent on elasticities in the markets for goods, labour and capital the tax is passed on to prices, wages and dividends and reduces those tax bases. In the long run company tax will absorb the bases for other taxes and net revenue from company tax will be 0. Conversely, the abolition of company tax will reduce the level of rate of return on investments and stimulate investment activities. The remuneration to employees and shareholders will rise and so will consumption. All are tax bases that will grow. As mentioned above, company tax is only a prepayment of household taxes. Without a company tax they would have been paid by the households. So, there is Much Ado about Nothing.
The fact that the company tax does not give large revenue for the states does not mean that it is unimportant from several points of view. In large companies the tax to be paid can be very high in absolute terms. Combined with the fact that the calculation of the tax base of a large company can be extremely complicated, this makes the tax planning very profitable and creates great opportunities for tax experts. Well underpinned differences in opinions of consultants/companies and tax authorities can amount to billions of euros. That makes the tax a risk, both economically and as regards legal certainty. A tax dispute can also be a ground for unjustified suspicion from the public of fraud or aggressive(18) tax planning, something that excites people and can make the tax a commercial risk. Companies may even be forced to avoid certain ways of allowed behaviour or pay more tax than necessary due to the risk of public opinion regarding them as fraudulent.
3.1.2 Extremely complicated
The taxation of business is unavoidably extremely complicated. A striking exemplification from the Swedish tax legislation is the number of clauses, paragraphs and sections of the tax law. Business taxation is regulated in 36 chapters with more than 790 clauses. Income of salaries and pensions is regulated in 4 chapters with 119 clauses. Revenue from business is about 15 billion €, revenue from salaries and pensions 130 billion €. The collection of taxes on business is based on calculations by the companies in their tax returns which have to be individually scrutinized by tax authority experts, often through time and resource consuming tax audit. The payments of taxes on salaries and pensions are made by the employers and pension authorities automatically at the same time as the salaries and pensions are paid to the recipients. Business taxation is founded on the records of the companies containing millions of entries and contains innumerable provisions regarding tax exemption, non-deduction, reservations for risk and evaluation of assets and liabilities.
3.1.3 Tax planning
The complexity of business taxation creates fertile soil for tax planning - and the other way round: Tax planning has made the law complicated. The more complex, the more possibilities for tax planning. Tax planning tends to widen the scope of actions to reduce taxes and, unless tax authorities keep in line with companies and their advisors, the limits for accepted behaviour will widen until an accepted and long-lasting practice is questioned and the behaviour refused by the tax authorities. Common practice is inhibited, and business operations must be changed to the detriment of production efficiency. Of course, the endeavour to reduce taxes according to a very complicated and often ambiguous tax law may easily also lead to trespassing of the law. Or in some cases even intentional trespassing. That raises concern of the rule of law.
3.1.4 Extraneous costs
A trivial - but very common - matter of different opinions regards deduction for costs that has a questionable relation to the business activities. Extraneous activities are normally not allowed according to companies' articles of association, and costs for them should be non-deductible as they have not contributed to company income. But what are extraneous activities? It is up to the shareholders to accept the actions conducted by the board and management and to decide whether an activity has been necessary for the acquisition of income. Nonetheless, even if the shareholders accept the costs, tax authorities often deny the right to deduction arguing that they have nothing to do with the income generating business. There are for instance several lawsuits from the Swedish Supreme Administrative Court concerning the deduction for costs for sponsoring sport and cultural events(19) and contribution for climate compensation(20). Whether the courts disallow deduction for the costs or not seems very fortuitous, unpredictable, and difficult to understand. To me it seems embarrassing that the Supreme Administrative Court has to deal with and spend expensive resources on such trivial and petty matters. But it is necessary because of the legislation of business taxation.
An upcoming issue on the same theme is the nowadays globally idea that business companies have a social purpose,even beyond their economic ability to perform.(21) That means that any cost could be regarded as a business cost and prepares for a vast broadening of the concept of business cost and disputes concerning their deductibility. And when that opinion is widespread it may be commercially necessary to respect it. Will the tax authorities do?
3.1.5 Periodisation and loss deduction
The base for company taxation is the accounts, i.e., the continuous notations of entries in the ledger. For practical reasons the time period for the business activities has to be decided and for practical reasons this would normally be the calendar year or another 12-months period. That makes it an important issue to what time period an income or a cost is to be assigned? It also raises the question whether or not there is in fact a profit or a loss for a specific year. That depends on whether assets and liabilities are correctly evaluated. And as the future is uncertain, one can be absolutely sure that the reported result for a fiscal year would have been another had we known what happened next year.
This raises the demand for deduction of losses from profits taxed previous years. Such a possibility would seem quite self-evident, but in general most countries have limitations against such deductions. In Sweden the right to deduction of losses is dependent on whether there have been shifts in ownership of the shares. Recently the law was tightened so that loss deduction can be refused if the deduction could be seen as part of a tax avoiding scheme.(22) Other countries limit the right when the business activities have changed to a certain extent. It is obvious that the limits of application are very vague which creates difficulties in enforcement of the rules and induces time and resource consuming disputes.
In my opinion there is no reason why companies should lose their rights to loss deduction only because there has been a change in ownership or activities. Risk is an inherent property of business and temporal losses are normal or frequent happenings. In fact, such restrictions are outright detrimental to economic growth: take for instance an inventor who has worked for years with an invention and have had losses (only costs and no income). When the invention is ready for marketing the company needs more capital and a marketing expert, but then the company may lose its right to deduct the losses because of shift in ownership of the company's shares and will be taxed for the gross proceeds. Only if the legislation of accounting accepts balancing of the costs no loss has taken place, and the cost will be deductible when income arises. Consequently, the tax cost can depend on accounting regulation rather than tax law. Through the division of the economy in countless units, the risk that loss appears in one company is by mathematical necessity increased. Specialization, being one of the most important driving forces of the economy, is hit by an extra cost of tax.
3.1.6 Accounting practices
Business taxation is based the companies' accounts. Different countries may have different principles and regulations regarding accounting. To cope with the matter private organizations have come to lead the development of accounting practices. International Accounting Standards Board (IASB) and its American counterpart Financial Accounting Standards (FASB) decide on principle and rule-based standards, International Financial Reporting Standards (IFRS) respectively United States Generally Accepted Accounting Principles (US GAAP). The principles do not necessarily correspond to national tax law. Thus, courts may have to take decisions not based on formal legislation. That raises concern of security of law.
3.1.7 Transfer pricing
Companies can be wholly or partially owned by other companies, which brings about transactions between them. Pricing those transactions gives opportunities for tax planning, especially when the companies are active in different jurisdictions. Transfer pricing, that is finding a fair price for transactions between related companies, has become an important area of tax planning and the technique for finding the correct price has adapted almost scientific ambitions. A large number of scientific dissertations have been produced since 1979 when the OECD published the first guidelines Transfer Pricing and Multinational Enterprises. The guidelines were updated in 2017.(23) In principle the pricing of transactions between related companies shall equal the pricing between unrelated (arm´s length pricing), but the relationshipsbetween related and unrelated companies are typically not comparable. Many transactions between related companies would never take place between unrelated. But the tax system requires that the problems be solved. Special problems regard the treatment of intangibles.
It is important to perform a functional and comparability analysis --- based on identifying the intangibles and associated risks in contractual arrangements and then supplementing the analysis through examination of the actual conduct of the parties based on the functions performed, assets used, and risks assumed, including control of important functions and economically significant risks.(24)
Identifying the control of risk has become an important item in some recent tax court cases in Sweden.(25) The control of risk is by the tax authorities proposed to be shifted to the company acquiring the shares of another company holding the intangibles, even if the ownership has not been formally transmitted and royalties are paid to the company. An economic event is supposed to have taken place and should be taxed as income at fair market value. The companies argue that the courts and tax administration misjudge the meaning of the concept.
Also, different financial structuring of related companies by loans and equity capital creates great opportunities for tax planning. Large international companies are frequently accused of using transfer pricing for minimizing tax cost and depriving poor countries their fair share of the taxes. Whether this is a fact or not is unclear. To begin with there is no reason to believe that the tax that the companies do not pay would have been allotted to poor countries. Secondly, nothing prevents a country to independently decide on its own tax system. The country is free to use any tax base - turnover, salary, value of buildings, machinery, invested capital etc. - if it finds company profit inappropriate when claiming its "fair share" of the companies' total profits. Company profit tax is rather a deterrent to establishing a business in the country, as the tax rises the required rate of return on an investment.
3.1.8 The tax affects the companies' behaviour
The aim of companies is to produce goods and services. In a free economy and in the absence of taxes this will be done in the economically most efficient way in order to maximize profit and other aims to satisfy the owners. It has been argued above that in the absence of a company tax investments will be higher. But the tax does not only affect the business society at a general level. They may induce companies to act in an inefficient manner, taking tax consequences into consideration. Depreciation rules may stimulate uneconomic investments; capitalization may be affected by the fact that interest rates are deductible whereas there is no deduction for the cost of equity capital. Countries may treat equity and loan capital asymmetrically which may induce companies to create company structures that are not economically efficient had it not been for the tax consequences.
3.1.9 Legal security risk
The company tax is a legal security risk because nobody masters the whole system, and it is constructed by building blocks that are incompatible, immeasurable and in many cases impossible to construe logically. Court decisions are often unpredictable and can concern multimillion values.
3.1.10 Other aspects
The company tax creates the decried problem of company double taxation; profits are taxed twice - first in the companies and once again in the hands of the shareholders when they receive the dividends. If the shareholder is a company the profit can be taxed three times or more (chain taxation). Originally the motivation for double taxation was that companies were supposed to have higher tax ability than self-employed entrepreneurs, an opinion abandoned long ago.
The company tax is unnecessary. What companies need not pay in taxes will strengthen their capital base and/or raise the amount of salary and dividend payments, which are taxable.
The tax is immoral. The public is made induced that someone else pays their taxes, when in fact they carry the burden themselves when they pay for the commodities they buy or abstain part of their salary space that the employer keeps in order to pay the company tax. It is not until the company has delivered its annual financial report that you can see whether the company pays tax at all, or if the payments its customers have made have financed its tax liability.
As states and public authorities and agencies are not taxable subjects there is also a distortion of competition towards private companies' investments.
3.2 Ongoing and expected changes in international company taxation
3.2.1 Base Erosion, Profit Shifting. BEPS
Following the release of the report Addressing Base Erosion and Profit Shifting in February 2013, OECD and G20 countries adopted a 15-point Action Plan to address BEPS in September 2013. The Action Plan identified 15 actions along three key pillars: introducing coherence in the domestic rules that affect cross-border activities, reinforcing substance requirements in the existing international standards, and improving transparency as well as certainty. After two years of work, measures in response to the 15 actions were delivered to G20 Leaders in Antalya in November 2015. All the different outputs, including those delivered in an interim form in 2014, were consolidated into a comprehensive package. The BEPS package of measures represents the first substantial renovation of the international tax rules in almost a century.
Action 1 Tax challenges arising from digitalizationAction 2 Neutralizing the effects of hybrid mismatch arrangements
Action 3 Controlled Foreign Company
Action 4 Limitation on interest deduction
Action 5 Harmful tax practices
Action 6 Prevention of tax treaty abuse
Action 7 Permanent establishment status
Action 8-10 Transfer Pricing
Action 11 BEPS data analysis
Action 12 Mandatory Disclosure Rules
Action 13 Country-by-Country Reporting
Action 14 Mutual Agreement Procedure
Action 15 Multinational Instrument
3.2.2 Pillar One and Pillar Two
OECD has continued the work and launched in 2021 and 2022 further suggestions headed Pillar One and Pillar Two. More than 140 countries and jurisdictions, representing more than 90% of global GDP, have joined a Two-Pillar Solution establishing a new framework for international tax. EU member states reached an agreement in principle to implement Pillar 2 and the Commission presented on 22 December 2022 a proposal for a directive for its implementation in a way consistent and compatible with EU law.
Pillar One aims to ensure a more fair distribution of profits and taxing rights among countries with respect to the largest MNEs, which are said to be the winners of globalization. Tax certainty is a key aspect of the new rules, which include a mandatory and binding dispute resolution process for Pillar One but with the caveat that developing countries will be able to benefit from an elective mechanism in certain cases, ensuring that the rules are not too onerous for low-capacity countries. The agreement to re-allocate profit under Pillar One includes the removal and standstill of Digital Services Taxes (DST) and similar relevant, measures, bringing an end to trade tensions resulting from the instability of the international tax system. It will also provide a simplified and streamlined approach to the application of the arm's length principle in specific circumstances, with a particular focus on the needs of low-capacity countries.
Pillar Two puts a floor on tax competition on corporate income tax through the introduction of a global minimum corporate tax at a rate of 1a 5% that countries can use to protect their tax bases (the GloBE rules). Pillar Two does not eliminate tax competition, but it does set multilaterally agreed limitations on it. Tax incentives provided to spur substantial economic activity will be accommodated through a carve-out. Pillar Two also protects the right of developing countries to tax certain base-eroding payments (like interest and royalties) when they are not taxed up to the minimum rate of 9%, through a "Subject to tax rule" (STTR).(26)
The Swedish government has appointed a commission to suggest a legislation for the Swedish implementation of Pillar Two. The proposal of the commission was presented on the 7th of February and is now scrutinized by authorities, organisations, companies, academy, and others who can deliver opinions. A parliament bill is expected in the autumn 2023 and the law expected to enter into force by January 1 2024.
3.2.3 Swedish implementation
Some of the Action Plan suggestions have already resulted in legislation in Sweden.
E.g.- Exchange of information on advance rulings concerning cross border tax matters and transfer pricing.(27)
- Documentation of transfer pricing and country-by-country reporting. (28)
- Implementation of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. (29)
- New tax rules for the business sector. (30)
- Changes of rules concerning automatic change of information of financial accounts. (31)
- Implementation of Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms in the European Union. (32)
- Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries. (33)
- Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. (34)
- Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries.(35)
Action 4 of the BEPS Action Plan regards the deduction of interest cost. It has since long been an ambition also for the Swedish legislator to restrict the right to deduct interest cost when the transaction seems to be a part of a scheme for tax planning. The legislator has, however, had great difficulties in formulating acceptable criteria, and the courts and the EU Commission have had objections. (36)
Even without the new regulation there were great problems for Swedish companies, courts and authorities to apply the rules for deduction of interest cost. It has now with the BEPS inspired legislation become much worse.
3.2.4 Concern about the rule of law
One of the actions needs a special comment, Council Directive (EU) 2018/822. The action is often referred to as DAC 6. The directive requires that "cross-border arrangements" defined in Art 3 point 18 be reported by an intermediary or taxpayer to the tax authorities within 30 days.(37) In Sweden penalties for trespassing the obligation can amount to about 15 000 € for intermediaries and 7 500 € for taxpayers. The directive and its implementation in member states are intended to prevent the tax industry to invent new ways of circumventing tax legislation.
Of course, law must be obeyed. Everybody can agree on the necessity of laws against murder, robbery and theft. Social life would be unbearable if they were permitted. The actions are normally easy to define. Tax avoiding, tax evasion and tax crime are consequences of breaking rul8es of an artificially created idea. Taxation is of course necessary, but the concepts of tax subjects, tax objects and tax rules can take any form depending on the political efforts to tax certain individuals or organizations, types of income, consumption, behaviour or ownership. It is up to the law maker to decide on the rules. What can be subsumed under the rules shall be taxed according to the rules. What cannot be subsumed, should not. Nullum tributum sine lege. If the legislator fails to define the criteria, he shall bear the responsibility.
Economic life is constantly changing and what has previously not been normal can become normal. New ways of organizing businesses, staffing, products, services, means of payment, payment flows etc. are invented all the time. Adapting to the changes is necessary for companies to lead the economic development; hesitating can imply loss of competition. Any action may affect the tax liability. Within the frames of the law the companies and their consultants must have the right to search for a solution that minimizes the tax. When the underlying legislation, as shown above, is based on a misunderstanding of the role of company income in the economic system, the regulation is unacceptable. It is a deviation from the principle of the rule of law.
Article 6 in the European Convention on Human Rights stipulates the Right to a fair trial. The privilege against self-incrimination is part of this right. The European Court of Human Rights has even held the right as a generally recognized international standard which lies at the heart of a fair procedure. This means that a person cannot be forced to assist the authorities in the investigation of his own crime. Performing an action of "reportable cross-border arrangement" is certainly not a crime. But the reportable action it is intended to be - if not criminal - against the intention of the tax law. And the intermediary or taxpayer is not yet before the court. To me, the obligation to report cross-border arrangements is, however, very close to an infringement of the privilege against self-incrimination; more so, as the obligation to report is supported by a penalty, and within a rather short time. A punishable ban of thought because the legislator is incapable to fully complete his task. Or is unaware of that profit taxation is based on a misconception.
3.2.5 DEBRA. Proposal for a EU COUNCIL DIRECTIVE on rules on a debt-equity bias reduction allowance, 2022/0154 (CNS)Debt Equity Bias Reduction Allowance (DEBRA)
Given the current tax framework allowing for a tax deduction of interest on debt, there is a persisting pro-debt bias of tax rules. This means that a company can deduct interests attached to a debt financing but not the costs related to an equity financing, such as the payment of dividends, thus incentivizing it to finance investments through debt rather than equity. This can contribute to an excessive accumulation of debts, with possible negative spill-over effects for the EU as a whole, should some countries face high waves of insolvency. The debt bias also penalizes the financing of innovation through equity. This issue has become more pressing, as the stock of debts of companies has increased significantly due to the economic crisis following the COVID-19 pandemic.
The Commission has therefore proposed to address the debt-equity bias in corporate taxation, via an allowance system for equity financing, thus contributing to the re-equitization of financially vulnerable companies. The proposal will incorporate anti-abuse measures to ensure it is not used for unintended purposes.
4 Conclusion
From the scope of the endeavours to create the perfect company tax system, you would expect business taxation to be one of the greatest problems and challenges to the world economy and even mankind. And yet, as said above, business taxation is based on a misconception of income being comparable to profit/net investment, raises little real revenue to the states, and as everybody can understand from the ambitious work by OECD, has extremely difficult technical and judicial problems to cope with.
The only aim for business companies is to - within the framework of a number of social, cultural, legal etc. restrictions - create value, i.e. consume in a production process resources of a value by the public appreciated lower than that of the public's appreciation of the result of the production. This activity is facilitated by an existing production structure, i.e., net investments accumulated during several decades in business companies, organizations, and authorities. The base for the company tax is those and future net investments (plus dividends) by the companies. In cases where the companies do not distribute their profits, net investment is the tax base.(39) How can the shortening of the lever for the material progress of mankind be defended? If you withdraw part of their profit from the companies the profitability of their investments will decrease, and the marginal investment will not be made. Employment and the salary total will be lower than otherwise, the profit and compensation to the shareholders would be reduced. Consumption would decrease. In short, everything to be shared by those who ultimately pay ALL taxes will be less, no matter whether the taxes formally are paid by individuals, companies or other organizations. To tax business companies' profits is only a way to hide who in fact pays for the tax. I the modern globalized world with companies present in numerous countries it is also a source for international tensions and fight for the tax base. Unnecessarily.
In the long run a new level of equilibrium between remunerations to capital owners and employees would be installed unaffected by a company tax. Everything would be as earlier except the problems and consequences related to the tax. The item "income tax" would disappear from the income statements. Companies would be deliberated from stumbling blocks and unexpected tripwires. Valuable expertise in the academia, courts, tax authorities, consulting firms etc. could find more useful occupation to serve mankind.
The abolition of corporate taxation would in general hardly give rise to any negative effects that could not be overcome. Piggy box? Is it negative that people save their profits using their companies as insurance companies? It would be a problem if - like in Sweden - pension savings are taxable. Even so, sleeping companies with balanced profits over a certain level could be taxed at a standard rate. The positive effects, on the other hand, would be many and almost overwhelming. The problems of the legal aggressive and international tax planning that are so upsetting to politicians and the public would disappear in a pinch. Who would then direct the income to a jurisdiction that taxes profits? Or rather, investment decisions would be made on business considerations only.
How could anybody argue for a taxation expressly aiming at the one and only phenomenon that produces values for the survival of mankind?
Stop calling business tax income tax and use the correct label: investment tax. Company profit taxation is based on a misconception of the concept of profit and induces a resource devouring self-destructive behaviour. It serves no revenue purpose. Of great economic interest to tax consultants and academics only.
Abolish company taxation.
Footnotes
1 I have been advised to put my ideas on business taxation in a comprehensive taxation context showing how different tax bases and taxes interact. I am hesitant to do so for a number of reasons. First of all: business taxation is based on misconceptions regarding economic matters, which is the basic reason for me to write this paper. Secondly, I want to focus on these fallacies and a discussion on the importance of all tax bases and their interactions and interdependence would need another format. One important fact as regards the abolition of company taxation is that it would not affect the utilization and construction of other tax bases.
I still find it worth a short comment in this footnote for one reason: The abolition of company taxation makes it possible to abolish also taxation and deduction of interest. As every receipt of interest is somebody else's interest cost, interest is no tax base. As a great part of interest income is paid to tax exempted recipients whereas most interest costs are born by tax subjects, interest is as a matter of fact a negative tax base and the taxation of it a loss for the Treasury. But interest taxation does not affect the abolition of company tax.
In short I would like to see a tax system based on housing and consumption, and consumption taxed both as a tax on household consumption (VAT) and on gross salary payments made by employers. Income taxation has negative consequences on the formation of the society's income structure and it would be a relief to see it abolished; whether a progressive tax rate really has a long run impact on income distribution can be seriously questioned. For social equality reasons a tax on very high incomes, say thirty times "normal" income, would be appropriate. Or a level hitting only persons belonging to the highest income decile. As regards housing tax everybody has a home, whether owned or rented, chosen according to his living standard. A tax on housing would hit the owner/tenant in relation to chosen standard. By tenancy the tax paid by the house owner will be charged on the rental. The tax would be impossible to evade and can be collected regardless of how the residence is used and whether the user is living there or even abroad.
2 Leviticus 27:30, TLB
3 Proverbs 3:9, NIV
4 I use the expressions "company tax" and "business tax", the latter being a more general expression referring to profit tax of either an individual or a legal unit.
5 Profit is typically not a heap of coins and banknotes or gold bars, but the balance between innumerable entries in the ledgers of costs and receipts and the ensuing change of value of the company´s net assets. Only in a company that has sold all its assets profit may be represented by money.
6 I treat the business society as one single business unit. In reality the business society is divided in thousands of separate units, why net investments in reality are to a great extent debt financed. But loans are to be repaid and that presupposes future profits. These net investments have no other purposes than ameliorate the possibilities to produce goods and services in the future. It is the value of these net investments that partly is handed over to the state in case there is a business tax.
7 My personal view is, however, that this aspect has never come to the mind of the legislator. In my career in the Swedish tax society, I have never heard I pronounced.
8 The wording of 10 kap. 1 § income tax law (1999:1229) is:
Till inkomstslaget tjänst räknas inkomster och utgifter på grund av tjänst till den del de inte ska räknas till inkomstslaget näringsverksamhet eller kapital.
To income under section salaries is assigned income and expense due to employment unless they shall be attributed to business activity or capital
The wording of 13 kap. 1 § is:
Till inkomstslaget näringsverksamhet räknas inkomster och utgifter på grund av näringsverksamhet.
To income under section business activity is assigned income and expenses due to business activity.
And it does not matter whether the income is derived trough a legal person,
because according to 13 kap. 2 §
[f]ör juridiska personer - - - räknas inkomster och utgifter på grund av innehav av tillgångar och skulder eller i form av kapitalvinster och kapitalförluster till inkomstslaget näringsverksamhet, även om inkomsterna eller utgifterna inte ingår i en näringsverksamhet enligt 1 §.
[f]or legal persons --- income and expenses due to holding of assets and liabilities or in the form of capital gains and capital losses are attributed to income under section business activity, even if the income or the expenses are not part of a business activity according to 1 §.
9 The legislators' opinion would hold true if the business were conducted in the form of sole proprietorship, where the result of the activities accrues to the owner. But in that case, it is rather a question of taxation of an individual deriving consumption capacity regardless how that is done.
Drawing rights on future investment acquisitions.
10 Norrman, Erik & Virin, Niclas, "Slopad bolagsskatt - analys och konsekvenser" (Abolished company tax - analysis and consequences), Stockholm 2007.
11 Presently, as an outcome of the OECD-induced campaign against Base Erosion, Profit Shifting (BEPS), there is a plan for an international agreement of a minimum tax rate of 15 percent.
12 1918 års inkomstskattesakkunniga (1918 tax committee.)
13 If the companies did not pay dividends to their shareholders the state would be deprived of its "reasonable right" to tax. (SFS 1855:6 BF § 35, BevU 1853-54:4)
14 A recent illustrative Swedish court case (HFD 2022 ref. 32) treats a transaction between a parent company and its subsidiary. The subsidiary had huge losses, but the parent guaranteed its obligations. The parent had claims on the subsidiary that the subsidiary could not pay. The estimated value of the claim fell short of its nominal value. The parent wrote off the claim. The market value of the abstained claim was regarded by the court as a tax-exempt contribution, but the difference between nominal and market value was taxed as income. The court claimed that "the depreciation of a debt raises the debtor's ability to pay tax and an income is received to the same extent". The decision was appealed to the Supreme Administrative Court which changed the verdict finding the contribution tax exempt. Had the parent company made a formal share emission that made it possible for the subsidiary to pay back the nominal debt, no taxation of "income" would ha occurred. The case is an illustration of what I regard as false applications of the principles of ability to tax and equality and how highly competent tax courts can draw diametrically opposing conclusions in principal matters.
15 An Inquiry into the Nature and Causes of the Wealth of Nations. Book I, Chapter 1. London 1776.
16 The problem of double taxation has been treated in different ways. During the second half of the 20th century share holders were in some countries granted a tax reduction in relation to the tax the companies' had paid on their profits. This imputation system was abolished as it was not compatible with EU law.
17 COM(2022) 216 final
18 "Aggressive" is a term frequently used in the public discussion of tax planning. Nobody has ever been able to define the border between aggressive and non-aggressive tax planning.
19 RÅ 2000 ref. 31, I and II. Case I. A company's sponsoring of the Royal Opera. The court analyses different aspects of the cost. Is it a donation and what are the characteristics of a gift? Is it a cost necessary for the acquisition of income? Is there any quid pro quo? If so, to what value? Is there any relationship between the sponsor's business activities and the contribution? After a lengthy discussion the court finds that the company is entitled to deduct half (sic!) of the costs. Case II. A company called Falcon had paid for a campaign for saving the peregrine falcon from extinction. Deduction was allowed. In both cases the sub-instances had denied deduction. I think the Swedish author August Strindberg would have characterized the analyses in the cases as buttonology. See August Strindberg, 1907, The island of the blessed, chapter 9.
20 HFD 2014 ref. 62 and HFD 2018 ref. 55
21 ESG. Environmental, Social, Governance steering criteria. See Larry Fink, BlackRock Inc. "We believe that companies that take into consideration environmental, social, and governance (ESG) risks and opportunities are better positioned to deliver long-term value." According to Google Black Rock is the world´s largest asset manager, owning assets worth $10 trillion (30 July 2022).
22 Prop. 2021:93
23 OECD,Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.2017.
24 Ibid p. 246 sec., 6.4. Another case of buttonology (see footnote 20).
25 Stockholm Court of Appeal, 4775-4777-19, Panopticon AB.
26 The Swedish Parliament has in an opinion (utlåtande 2021/22:SkU12) made objections against the proposition because the EU commission has not made a consequence analysis. Therefore, it is difficult do decide if the rules go beyond what is necessary to achieve its aim. Does it violate the principle of subsidiarity?
27 En lag om tilläggsskatt för företag i stora koncerner (SOU 2023:6). Law of top-up tax for companies belonging to large enterprise groups.
28 Prop. 2016/17:19 Utbyte av upplysningar om förhandsbesked i gränsöverskridande skattefrågor och förhandsbesked om prissättning.
29 Prop. 2016/17:47 Dokumentation vid internprissättning och land-för-land-rapportering på skatteområdet.
30 Prop. 2017/18:61 Multilateral konvention för att genomföra skatteavtalsrelaterade åtgärder.
31 Prop. 2017/18:245 Nya skatteregler för företagssektorn.The legislation included restrictions of deduction of negative balance of interest.
32 Prop. 2018/19:9 Ytterligare ändringar vad gäller automatiskt utbyte av upplysningar om finansiella konton och några andra skattefrågor
33 Prop. 2018/19:143 Genomförande av direktivet om skattetvistlösningsmekanismer inom EU
34 Prop. 2019/20: 13 Genomförande av regler i EU:s direktiv mot skatteundandraganden för att neutralisera effekterna av hybrida missmatchningar
35 Prop. 2019/20:74 Genomförande av EU:s direktiv om automatiskt utbyte av upplysningar som rör rapporteringspliktiga gränsöverskridande arrangemang
36 Prop. 2020/21:111 Genomförande av bestämmelsen i EU:s direktiv mot skatteundandraganden för att motverka omvända hybrida missmatchningar
37 A first amendment to the law came in 2009 (prop. 2008/09:65). The law was sharpened in 2013 (prop. 2012/13:1). The EU Commission questioned in 2014 if the new rules were in accordance with the principle of freedom for establishment. The Swedish government argued that they were. The law was changed again in 2019 (prop. 2017/18:245) to implement Action 4. The government withheld its previous opinion. If the rules were regarded as a restriction, it could anyway be justified and the restriction is proportional. The law was amended with lengthy and complicated rules for the definition of the concept of interest and the concept of negative balance of interest necessary for the implementation of the rules based on the EBITDA concept.
In four court cases in 2011 (HFD 2011:90 II-V) the Swedish Supreme Administrative Court decided that interest payments to foreign companies were not deductible because the corresponding interest income was not taxable. The decision was by several experts supposed to be contrary to the principles of freedom for establishment in the EU, because it hit transactions with other EU state companies in cases where transactions between Swedish companies would not have been hit.
In a new case the Swedish Supreme Administrative Court (HFD 2021 not 10, Lexel) asked the EU Court if the Swedish rules were in accordance with the rules of freedom for establishment. The EU Court said no, and the Swedish Court accepted the deduction for the interest cost. Although the law had been changed twice since the case HFD 2011:90 the specific aspect in question was unchanged. So the decisions of the cases HFD 2011:90 II-V seem to have been unlawful.
38 Council Directive (EU) 2018/822.
Article 8ab Scope and conditions of mandatory automatic exchange of information on reportable cross border arrangements
1. Each Member State shall take the necessary measures to require intermediaries to file the information that is within their knowledge, possession or control on reportable cross border arrangements with the competent authorities within 30 days.7. The relevant tax payer with whom the reporting obligation lies shall file the information within 30 days, beginning on the day after the reportable cross-border arrangement is made available for implementation to that relevant tax payer, or is ready for implementation by the relevant taxpayer, or when the first step in its implementation has been made in relation to the relevant taxpayer, whichever occurs first.
Article 25a Penalties
Member States shall lay down the rules on penalties applicable to the infringements of national provisions adopted pursuant to this Directive ---. The penalties shall be effective, proportionate and dissuasive.
39 In the long run not invested profit will by definition be distributed
• F.d. Allmänt Ombud för Mellankommunala Mål i Riksskatteverket
• F.d. bankdirektör, ansvarig för
skattefrågor i Handelsbanken
• F.d. ledamot av Skatterättsnämnden
i 20 år
• F.d. ledamot av Näringslivets skattedelegation
