Capital Taxation in an International Economy – The Tax Commission's Report

The Tax Commission today submitted its Report, NOU 2014: 13, to the Minister of Finance. The Report (Norwegian Official Report) includes the Commission's proposal for changes to the corporate tax system and adjustments to the tax system in general. The Commission was appointed by the previous government (Stoltenberg II) in March 2013 and was mandated to review the corporate tax system in light of recent trends in international taxation. In November 2013, the current government (Solberg) broadened the mandate to also include an assessment of tax depreciation rules. The Commission was also asked to present an alternative proposal with overall tax relief.

Most taxes have a negative impact on economic performance. The Commission recommends that the Norwegian tax system should be changed to provide for better allocation and higher return on labour and capital. Norway will gradually rely more on the profitability of the mainland economy. In this situation it is of special importance to have a competitive and effective tax system.

The Commission concludes that Norway generally has a well-functioning tax system and that the system should be based on the principles of neutrality, broad tax bases and low tax rates. These principles were central in the Tax Reform of 1992. The Commission has identified several areas in the tax system that can be improved to make the system more efficient and less distortionary as a whole.

The Norwegian corporate tax rate (27 pct.) is relatively high in an international context. The economic conditions in Norway, including the tax system, should be able to compete for investment and to attract business in an international market. At the same time the Commission cautions against Norway taking a leading role in international tax competition, e.g. by having a particularly low tax for companies or for specific sectors. The Commission's advice is that relief in corporate taxation should happen through tax rate reductions rather than narrowing the corporate tax base.

The Commission has reviewed alternative corporate tax systems such as ACE and CBIT, but recommends that the current corporate tax system is retained. However, the corporate tax rate should be adjusted in light of the international development with declining tax rates and increasingly mobile tax bases. The Commission proposes to lower the corporate tax rate to 20 percent. A reduction of the corporate tax rate will diminish distortions from the corporate tax, including the favourable treatment of debt financing and the profitability of shifting profits abroad. The Commission recommends that the tax rate reduction is accompanied with other measures aimed at reducing profit shifting. The Commission further recommends improvements to the wealth tax and the value added tax.

The proposal implies a shift in the overall tax burden with less weight on corporate taxes and personal income taxes and more emphasis on consumption taxes and taxes on immovable property. Such a shift in taxes is in line with international recommendations for a more efficient tax system to enhance economic growth. The proposals will increase investments and labour supply and promote better allocation of savings. This will contribute to increased labour productivity, a raise in real wages, and a higher return on investment. The potential for profit shifting will, at the same time, be diminished. A fair assumption is therefore that a significant part of the immediate revenue loss from the corporate and capital tax bases will be offset by higher tax revenue in the longer run.

In accordance with the mandate and the expanded mandate the Commission submits one proposal which is tax revenue neutral and one proposal with overall tax relief. The expanded mandate did not give guidance on the amount of such tax relief, but the Commission has discretionally chosen a scope amounting to about 15 billion NOK.

The Report will be submitted for Public Consultation.

Chapter 1 of the Report has been translated into English and is available here

 

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