Mandate of the Tax Commission

Background

Supporting the production capacity of the mainland economy is important. A broad range of measures must be employed to improve competitiveness and ensure the efficient use of resources. Norway has found that tax reforms can have a positive effect on the economy. Tax-system design and robustness play an important role. The closer integration of markets as a result of globalisation has motivated various countries to amend their tax rules. Internationally, there is a trend towards combining lower corporate tax rates with measures to prevent undesirable cross-border adjustments. The purpose of the tax commission is to ensure that Norway maintains a robust tax system that is better equipped to deal with the international mobility of tax bases. The tax system must also contribute to the future financing of the welfare system and make it attractive to invest and create jobs in Norway.

The emphasis of the 1992 tax reform was on equal tax treatment, broad tax bases and low rates, with a particular focus on corporate and capital taxation. These guiding principles were also followed in the 2006 tax reform. The theoretical foundation and close integration of different parts of the tax system have produced a robust, stable tax system and reduced tax-adjustment incentives. The positive features of the tax system are believed to have helped Norway to maintain relatively high overall tax rates compared to other countries without incurring higher economic costs.

The 1992 reform followed an international trend of broadening tax bases and reducing tax rates. Norway went further than many other countries. The corporate tax rate was reduced from 50.8 per cent to 28 per cent. Distributional preferences were addressed particularly by the progressive taxation of labour and pension income and the retention of the net wealth tax for individuals. In contrast, the main aim of the corporate and capital taxation design was to ensure efficient resource use.

The difference between the tax rates on capital income and labour income, and the opportunities available to transform business income into capital income, necessitated further tax reform. The 2006 tax reform introduced the shareholder model, the participant model and the enterprise model. Today, owner income above an estimated risk-free return on invested capital is taxed either as personal income (enterprise model for self-employed persons), or as ordinary income when paid to business owners (shareholder model and participant model for participants in a general partnership, limited partnerships etc.) An evaluation of the 2006 tax reform has indicated that the reform has been successful, and that tax arbitration through the conversion of labour income into capital income has largely been eliminated.

Reduced corporate taxes will make more investments profitable, but localisation decisions depend on many factors, including the responsibility shown in government economic policy, proximity to markets, the openness of trading systems, access to skilled workers, cost trends, the institutional framework, the administrative burden and available infrastructure. Globalisation and greater mobility of tax bases increase the relative importance of taxes in investment decisions. Norway is a small, open economy in which capital flows relatively freely across borders. The required return on investments will thus be determined by the international capital market.

The Norwegian corporate tax rate of 28 per cent has remained unchanged since 1992. At the same time, the average corporate tax rate in the EU27 has fallen from 35.3 per cent in 1995 to 23.5 per cent in 2012. The effective corporate tax rate (taxes paid as a percentage of the company's actual earnings), has also fallen, although not by as much because rate reductions have often been combined with base-broadening. Corporate tax as a share of GDP has fluctuated around 3 per cent in the EU27 in the same period.

Differences in corporate taxes between countries allow multinational enterprises (MNEs) to engage in profit-shifting – using deductions and transfer pricing to shift profits from high-tax to low-tax countries. For example, the part of an MNE located in a high-tax country may take out a loan to finance other parts of the MNE, while equity is concentrated in countries with low corporate tax rates. Transfer pricing includes the pricing of services and intellectual property rights in transactions within MNEs. For tax purposes, the price should be set at the estimated market price, i.e. the price two independent parties would set (the arm's length principle), but this may be difficult to do in practice.

The corporate tax base has also changed in many countries. More countries are combining reduced corporate tax rates with measures to prevent the tax base from being undermined by MNEs. Several countries have also shifted the tax burden from income taxes to consumption taxes.

"Tax Policy Reform and Economic Growth" (OECD 2010) discusses how shifting the tax burden between different taxes can promote increased growth and welfare. Subject to the proviso that the starting point of each country must also be considered, the study recommended that member states relocate some of the tax burden away from income taxation and onto less distortive taxes, such as taxes on consumption and property. The OECD argued that such a tax shift can be growth-enhancing in the long term. According to the report, it is first and foremost corporate taxes that are most harmful to economic growth.

Changes in international conditions make it necessary to consider the Norwegian tax rules in general, and corporate tax in particular.

Further details of what the commission is to consider

Norway wishes to maintain a robust tax system that generates high revenues for the public sector. Accordingly, and given that the tax base is more mobile as a result of globalisation, the commission is to consider potential changes in the area of corporate tax. The commission is also to examine whether the taxation of companies is well adapted to international developments.

The commission is to consider whether the corporate tax rate should be changed. A change in the corporate tax rate must be evaluated by reference to the rest of the tax system, in terms of both revenue and organisational structure. The different parts of the Norwegian tax system are tightly integrated, and the 28 per cent rate on ordinary income is applied in both personal and corporate taxation. The introduction of a uniform rate is believed to have reduced the possibility of tax avoidance associated with tax rate differences, and to have improved the stability of the tax system. A change in the corporate tax rate must be evaluated by reference to the tax system as a whole, and the relationship between personal and corporate taxation must be considered in context. In this connection, thought must be given to whether the systemic changes made through the 2006 reform (the exemption method, the shareholder model and the harmonisation of marginal tax rates for different income types), can be maintained if the 28 per cent rate changes.

The commission must consider the effects of the proposed solutions, check whether they will be robust and examine how adverse adaptations to the new legislation can be avoided.

The commission is to consider the possibility of moving income and deductions between countries in order to save tax, and assess measures to protect the Norwegian corporate tax base. The commission must provide an overview of the measures that have been implemented in other countries.

The commission must also consider whether the difference in the tax treatment of debt and equity held by foreign investors creates room for tax avoidance and, if so, consider counter-measures. The commission is to examine the possibility of protecting Norwegian corporate taxation by treating debt and equity equally, either by removing the right to deduct interest expenses from corporate tax (referred to as Comprehensive Business Income Tax - CBIT), or by granting companies deductions for the alternative return on equity (referred to as Allowance for Corporate Equity - ACE). Belgium and Italy have introduced variants of ACE.

The exemption method excludes corporate dividends and gains from taxation. The exemption method does not apply to shares in companies registered in low-tax countries outside the EEA or portfolio investments outside the EEA. The commission must consider whether the exemption method offers possibilities for tax avoidance with respect to cross-border income from equity and, if so, consider the need for changes.

The commission is requested to discuss whether greater emphasis should be placed on less mobile tax bases. The overall taxation of real property in Norway is low, both compared to the taxation of other capital and compared to the taxation of real property in many other countries. The purpose of the commission is not to consider the taxation of real property. The commission may refer to a scenario that includes increased taxation of real property, but the emphasis should be on alternatives that leave property taxation largely unchanged.

Guiding principles for the assessment

The main purpose of the tax system is to contribute to the community's income. Tax policies should be designed so that the costs of taxation are low. The tax system should stimulate effective use of resources and good investment decisions. The tax base should capture actual income. This is important both for efficiency and redistributive reasons. It is also necessary that the tax system works satisfactorily as an automatic stabiliser of the economy.

The tax system, in combination with the social security system, must provide strong incentives to choose work rather than social security benefits. This consideration should also be emphasised.

Taxation, together with the social security system and an economic policy of full employment, helps to reduce income inequality. The commission is to consider effects on income distribution, and discuss how its proposals meet redistributive aims.

The tax system should be as simple as possible, and the administrative costs to both taxpayers and the tax administration should not be too high. The commission must discuss administrative consequences.

The commission's proposals must take into account Norway's international obligations.

The commission's proposals should be approximately revenue-neutral. The commission is not requested to consider the special tax regimes for petroleum and power companies, and can assume that revenue from these schemes will remain unchanged.

The commission's report must present analyses of how changes to the tax system will affect economic decisions and thus resource use, employment, tax revenue and redistribution in both the short and long term. The commission is to examine how the changes will affect production and growth. The commission must give particular emphasis to empirical analysis of the proposals.

The commission is to take into account developments in corporate tax theory, for instance by drawing on external expertise. The Ministry of Finance will establish a consultative forum of experts drawn from labour organisations, employer organisations and other institutions. The commission is also to promote openness and debate, for instance by organising seminars.

The commission shall submit its report by 15 October 2014.