Changes in international tax rules – positive or negative for Sweden?

In Dagens Industri on 19 October, one could read about the recently introduced changes in international tax rules which could result in companies moving from Sweden. As reported upon in previous Tax matters, these new rules imply a clearer requirement that profits be taxed in the country in which the operations actually take place and where the decisions are made.

As DI very correctly noted, this implies that important decision-making functions could possibly be moved to low tax countries to ensure a globally effective level of taxation. However, this is nothing new as it has been taking place during a long period of time. It is not uncommon to see a number of foreign large comporates locate important functions (such as mangement functions, research & development) in Switzerland, Singapore or Ireland – countries having relatively advantagous coproate tax levels.

The aim of these countries is, of course, not to ensure that they receive a large amount of corporate tax reveneus in their country, but, rather, to ensure that highly educated, and often well paid, individuals are kept in the country. In additon and equally important, the aim is also to ensure that this type of individual moves to the country in question from abroad, and once they are there, pays social security fees, tax on salaries, real estate tax and VAT, and that they spend money providing employment in the services industry in that country. If management functions are moved by a compnay, highly qualified advisory services serving such functions also often move. This includes, for example, management consultants, laywers and auditors. In brief, this implies significant revenue for the country to which the management functions move. This is a question of international tax competition, that is, attracting employment opportunities and increasing total tax revenues.

There are a number of reasons for Swedes to be concerned about what is happening in the international tax arena. Many large Swedish companies have, today, so-called vitual management groups spread over a number of countries. Previously, these companies, who had their origin and the majority of their members of management in Sweden, also brought back a major portion of their profits for taxation in Sweden The newly introduced rules can, in many cases, require that a portion of these profits, which have historically been taxed in Sweden, will now be required to be taxed in other countries, which can imply that a smaller portion of the remaining profits is taxed in Sweden.

There are also proposals for changes which can affect the possibility of keeping current corporate tax revenues in Sweden. The EU has, once again, blown life into a proposal for a common system of corporate taxation within the EU (Common Consolidated Corporate Tax Base, CCCTB). In brief, this means that a company’s entire operations and profits within the EU are to be allocated between the countries in which the company operates based on a number of allocation ratios. It is probable that these allocation ratios, such as assets, net sales and number of employees, can be of major significance in this context.

The ratios, which are probably not to Sweden’s relative advantage, would risk a re-allocation of the manner in which the profits for companies operating with the EU are currently allocated, that is, the new method would be based on the jurisdiction of the mangement functions and other key functions (where the value is created). According to the proposal, the EU would introduce its own specific rules on how the taxation base is to be allocated within the EU, wherby it is probable that large, end-customer countries (countries with large populations) and countries with a large amount of manufacturing (low cost countries in, primarily, Eastern Europe) would have an advantage.

It is also not suprising that many countries are positive to these proposals which would, if they are implemented, imply higher tax revenues for them. However, there are also EU countries who are sharply protesting these proposals. Recently, for example, the Danish minister in charge of taxation stated that if the proposal from the EU regarding a common tax base would be implemented, it would lead to a serious debate in Denmark on the possible need to follow in the UK’s footsteps and leave the EU. The reason given for this was that the re-allocation of tax revenues from Denmark to other EU countries would imply that the Danish welfare system would be at risk. Sweden, similar to Denmark, risks belonging to the loosers if a common tax base is introduced in the EU.

The above changes and proposed changes risk resulting in negative effects for Swedish state finances and imply a lost of revenue which will need to be compensated through either reduced costs or increased tax revenues from other sources. To date, and in contrast with Denmark, we have seen no debate on this issue here in Sweden.