TAX CERTAINTY. This report responds to the request from the G20 Leaders at their Summit in Hangzhou, China in September 2016 for the OECD and the IMF to work on issues of tax certainty. The request arises against the backdrop of heightened concern about uncertainty in tax matters and its impact on cross-border trade and investment, especially in the context of international taxation. There are many reasons for heightened concerns about tax uncertainty, affecting both taxpayers and tax administrations. These include: the spread and emergence of new business models and increased internationalization of business activities; heightened concern with aggressive tax planning; some fragmented and unilateral policy decisions; certain court decisions; and updates to the international tax rules, such as through the G20/OECD Base Erosion and Profit Shifting (BEPS) Project, which are necessary to ensure that the international tax rules remain up to date with the changing environment. At a time when good progress has been made in fighting tax evasion and aggressive tax avoidance through increased transparency and the G20/OECD BEPS Project, it is also important to focus on tax certainty. In this context, the importance of providing greater tax certainty to taxpayers to support trade, investment and economic growth has become a shared priority of governments and businesses. This report explores the nature of tax uncertainty, its main sources and effects on business decisions and outlines a set of concrete and practical approaches to help policymakers and tax administrations shape a more certain tax environment. It draws on the experience of the IMF and the OECD and on input received by the OECD from businesses, tax administrations and civil society. The report provides new information from an extensive global survey by the OECD of more than 700 businesses—representing annual turnover of more than USD 17 trillion and companies headquartered in 62 different jurisdictions—and a survey of 25 predominantly G20 and OECD tax administrations. It is recognised that surveys of this kind need to be interpreted with caution. Narrative evidence, from a new IMF dataset, is also presented on the frequency and pre-announcement of changes in corporate taxation in twelve advanced countries. This report focuses on tax certainty from the perspective of businesses and tax administrations in G20 and OECD countries, and stresses that the issues faced and many of the responses needed are likely to be different in developing countries. While there is widespread agreement on the need to increase certainty in tax matters, the report recognizes that developing countries can face particular challenges of capacity and in combining the need to secure sustainable revenues to support domestic revenue mobilization with ensuring the tax certainty necessary to create an attractive business environment.
OECD Taxation Working Papers n. 28: Distinguishing between “normal” and “excess” returns for tax policy
OECD Taxation Working Papers n. 28: Distinguishing between “normal” and “excess” returns for tax policy. This paper explores the practical challenges tax policy analysts face when trying to apply differential taxation to “normal” and “excess” returns. The distinction between these two elements is being increasingly used in tax policy. The problem is that there is no clear definition for a “normal” return. While it is often equated to a risk-free return, or the return available on a ten-year government bond, many commentators agree that it should incorporate a risk element. The typical rationale for applying differential taxation stems from the desire to achieve neutral taxation, i.e. minimise the real economic responses of taxpayers due to the wedge taxation imposes between before-tax and after-tax returns. A set of importante questions are raised for tax policy analysts to consider. Two crucial factors that make the distinction challenging are heterogeneity and uncertainty. Given the potential for unintended consequences, this is na important issue that warrants more discussion and thought. Reynolds, H. and T. Neubig (2016).
OECD Taxation Working Papers n. 2: What is a “Competitive” Tax System? 1. Statements about the importance of tax systems being ‘competitive’ are often made by business, politicians, lobbyists and other commentators, but what does this term mean? 2. In everyday usage ‘competitive’ is a relative concept. When applied to a business, it would mean that the firm in question is able to produce its output at the same or lower cost than other firms in the same line of business, or that it has some other advantage over them such as the quality of its product. In most industries a competitive firm would (as a result of its cost or other advantages over its rivals) be able to earn returns in excess of its cost of capital. 3. It is more difficult conceptually to apply the term ‘competitive’ to an economy as a whole rather than a particular business. An economy is made up of many different firms (plus extensive public sector provision of services). Moreover the structure of its production and the pattern of its trade will depend on its comparative advantage relative to other economies. Specialisation in line with comparative advantage increases production efficiency and raises living standards. 4. For a typical advanced economy (where natural resources and primary products make up a relatively small part of domestic output) there are likely to be strong links between the competitiveness of its firms and the overall levels of productivity and living standards that the country is able to sustain. Individual firms may then be ‘competitive’ internationally (in the sense of having a cost or other advantage relative to their foreign rivals, given the exchange rate, etc); and if a firm is not competitive, then national output and income are likely to be higher if the resources it would have used are redeployed to another line of business where profit opportunities are better. 5. Most of the drivers of the competitiveness of firms lie within the domestic economy. Thus the World Economic Forum, for instance, in its Global Competitiveness Report defines ‘competitiveness’ as ‘the set of institutions, policies and factors that determine the level of productivity of a country’. The level of productivity in turn sets the sustainable level of living standards. The Global Competitiveness Report weights together data pertinent to 12 ‘pillars of competitiveness’: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods Market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation. 6. There are likely to be significant overlaps and interactions between these ‘pillars’ and views may differ on precisely how they translate into increased production efficiency and growth potential. However, one approach to examining the impact of tax on ‘competitiveness’ is to consider how tax policy and administration impact on the various ‘pillars’ and hence productivity, etc. In practice, most taxes (not just the corporate income tax) can have an impact on competitiveness, as section B below indicates. In practice, the underlying themes arising from taking a ‘competitiveness’ perspective are very similar to those explored in OECD work on Tax and Economic Growth (OECD 2010a) and the Tax Policy Brief on Tax Policy Reform and Fiscal Consolidation (OECD 2010b). 7. However, in considering how tax policy can help to generate economic growth and prosperity, each country’s tax system cannot be considered in isolation. In open economies where capital is mobile across boundaries and multinational enterprises play an increasing role in international trade and investment, tax regimes and tax rates can potentially have a significant influence on decisions about the location of production and investment. Section C accordingly explores notions of ‘international tax competitiveness’ and how they interact with other desiderata for tax regimes: raising sufficient revenues, fairness, economic efficiency, etc. Section D discusses further some of the problems of measuring international tax ‘competitiveness’. 8. Section E then sets out a few concluding observations on the implications for tax policy and the role that common principles (e.g. the OECD Model) and economic cooperation can potentially play.
OECD Taxation Working Papers N. 31: THE ENVIRONMENTAL TAX AND SUBSIDY REFORM IN MEXICO. Johanna Arlinghaus, Kurt van Dender. Governments around the world are facing mounting environmental challenges: at a global (e.g. climate change), but also at local level (e.g. air and water pollution, waste management). Environmentally related taxes, which encourage polluters to take account of the consequences of their behaviour to society at large, are a cost-effective policy to address these concerns. They also raise government revenue, often a welcome property, but policy design is in many cases shaped by a range of different considerations, too. In a bold policy effort, Mexico recently moved away from subsidies to transport fuels, increased tax rates on these fuels and introduced a carbon tax. Together, these changes represent an environmental tax reform, understood here as a set of changes in tax rules, of which one of the primary goals is to improve environmental outcomes. Though motivations beyond environmental policy have played a role in Mexico, parts of the reform were explicitly motivated by environmental concerns, justifying this interpretation. The Mexican reforms are an interesting case study, since they took place in a country with a decade-long history of fuel subsidies, and strong reliance on income from oil exports. Implementing an environmental tax reform in this context involves a considerable policy effort with potentially wide-ranging environmental and climate benefits. Lessons from this experience might be of interest for other countries, especially for emerging economies, and particularly in view of the recently increased efforts to reduce global greenhouse gas emissions in the context of the global negotiations to combat climate change. The Mexican reforms are analysed using a broad set of criteria that consider the main practical dimensions of environmental policy design: environmental effectiveness, equity and distributional impacts, broader tax system impacts, macroeconomic effects, compliance and administration, policy process and consistency. No hierarchy or weighting of criteria is proposed; instead, assessment under the framework is meant to better inform decisions around policy design, and make trade-offs among different objectives and constraints explicit. In Mexico, abolishing transport fuel subsidies and increasing taxes on transport fuels to much higher levels means that the prices of transport fuels now reflect the external cost of fuel use more closely. Beyond transport, the new carbon tax covers a much larger share of emissions with a price, but the rates are very low and do not consistently reflect the carbon content of the underlying fuels. In particular, of all rates above zero, coal is taxed at the lowest rate despite the high external cost associated with its use, and natural gas – the use of which is expected to increase in the coming years – is zero-rated. In that sense, the cost of carbon emissions differs across economic sectors, reducing environmental effectiveness. It appears that compromises were made on this dimension to satisfy stakeholder demands. Up to January 2017, the staged transition towards higher energy prices facilitated the political acceptability of the reforms and decreased their immediate distributional effects. In the particular case of transport fuels, where prices are the subject of close public and political scrutiny, the low oil price provided an opportunity to smooth the initial impact of price increases in the domestic market. However, recent crude oil price rises and worsening exchange rates led to a much tougher policy environment. Although the transport fuel price reforms appear progressive overall, higher fuel prices and their indirect effects can pose energy affordability problems for poorer households. Nevertheless, OECD analysis for twenty countries (predominantly European, not including Mexico) has shown that redistributing up to a third of revenues is sufficient to address energy affordability risk. In the case of the carbon tax, low initial rates might set the stage for future gradual increases. However, any future changes will also need to take account of the effects of the tax on the distribution of income and on energy affordability. In these circumstances, any future adjustments to the carbon price may need to be accompanied by targeted flanking measures to protect those at the lower end of the income distribution. The new and increased taxes are already raising substantial additional revenues, slowly shifting general government income away from its reliance on oil exports. The Mexican taxes on energy, and in particular the carbon tax, may have the potential to raise much larger amounts of revenue if rates were increased, and the tax base enlarged in the future. In the Mexican debate, a major argument in favour of introducing a carbon tax, and not an emissions trading system, was its relative ease of administration and collection. To ensure that carbon pricing lives up to its potential, both in terms of reducing emissions and raising revenue, it could be important to retain these two characteristics, especially when considering recent moves towards carbon trading and increased recognition of international carbon offsets.
The Platform for Collaboration on Tax invites comments on a draft toolkit on the taxation of offshore indirect transfers of assets
The Platform for Collaboration on Tax – a joint initiative of the IMF, OECD, UN and World Bank Group – is seeking public feedback on a draft toolkit designed to help developing countries tackle the complexities of taxing offshore indirect transfers of assets, a practice by which some multinational corporations try to minimise their tax liability.
The tax treatment of ‘offshore indirect transfers’ (OITs) — the sale of an entity located in one country that owns an “immovable” asset located in another country, by a non-resident of the country where the asset is located — has emerged as a significant concern in many developing countries. It has become a relatively common practice for some multinational corporations trying to minimise their tax burden, and is an increasingly critical tax issue in a globalised world. But there is no unifying principle on how to treat these transactions, and the issue was not addressed in the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. This draft toolkit, “The Taxation of Offshore Indirect Transfers – A Toolkit,” examines the principles that should guide the taxation of these transactions in the countries where the underlying assets are located. It emphasises extractive (and other) industries in developing countries, and considers the current standards in the OECD and the U.N. model tax conventions, and the new Multilateral Convention. The toolkit discusses economic considerations that may guide policy in this area, the types of assets that could appropriately attract tax when transferred indirectly offshore, implementation challenges that countries face, and options which could be used to enforce such a tax.
The toolkit responds to a request by the Development Working Group of the G20, and is part of a series the Platform is preparing to help developing countries design their tax policies, keeping in mind that those countries may have limitations in their capacity to administer their tax systems. Previous reports have included discussions of tax incentives, and external support for building tax capacity in developing countries. This series complements the work that the Platform and the organisations it brings together are undertaking to increase the capacity of developing countries to apply the OECD/G20 BEPS Project.
The Platform partners now seek comments by 25 September 2017 from all interested stakeholders on this draft. Comments should be sent by e-mail to email@example.com, a common comment box for all the Platform organisations. Spanish and French language versions of the toolkit are forthcoming and will also be posted for comment. The Platform aims to release the final toolkit by the end of 2017.
OECD – Guidance on the Implementation of Country-by-Country Reporting: BEPS ACTION 13. Updated July 2017
OECD – Guidance on the Implementation of Country-by-Country Reporting: BEPS ACTION 13. Updated July 2017. All OECD and G20 countries have committed to implementing country by country (CbC) reporting, as set out in the Action 13 Report “Transfer Pricing Documentation and Country-by-Country Reporting”. Recognising the significant benefits that CbC reporting can offer a tax administration in undertaking high level risk assessment of transfer pricing and other BEPS related tax risks, a number of other jurisdictions have also committed to implementing CbC reporting (which with OECD members form the “Inclusive Framework”), including developing countries. Jurisdictions have agreed that implementing CbC reporting is a key priority in addressing BEPS risks, and the Action 13 Report recommended that reporting take place with respect to fiscal periods commencing from 1 January 2016. Swift progress is being made in order to meet this timeline, including the introduction of domestic legal frameworks and the entry into competent authority agreements for the international exchange of CbC reports. MNE Groups are likewise making preparations for CbC reporting, and dialogue between governments and business is a critical aspect of ensuring that CbC reporting is implemented consistently across the globe. Consistent implementation will not only ensure a level playing field, but also provide certainty for taxpayers and improve the ability of tax administrations to use CbC reports in their risk assessment work. The OECD will continue to support the consistent and swift implementation of CbC reporting. Where questions of interpretation have arisen and would be best addressed through common public guidance, the OECD will endeavour to make this available. The guidance in this document is intended to assist in this regard.
OECD releases latest updates to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
The OECD Transfer Pricing Guidelines provide guidance on the application of the “arm’s length principle”, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises. In today’s economy where multinational enterprises play an increasingly prominent role, transfer pricing continues to be high on the agenda of tax administrations and taxpayers alike. Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein and taxpayers need clear guidance on the proper application of the arm’s length principle.
The OECD Committee on Fiscal Affairs has just released the draft contents of the 2017 update to the OECD Model Tax Convention prepared by the Committee’s Working Party 1. The update has not yet been approved by the Committee on Fiscal Affairs or by the OECD Council, although, as noted below, significant parts of the 2017 update were previously approved as part of the BEPS Package. It will be submitted for the approval of the Committee on Fiscal Affairs and of the OECD Council later in 2017. This draft therefore does not necessarily reflect the final views of the OECD and its member countries.
OECD SECRETARY-GENERAL REPORT TO G20 LEADERS. Hamburg, Germany July 2017. Fixing the international tax system to close down loopholes, improve transparency and make sure that multinational enterprises pay tax where they carry out their activities has been a key priority of the G20 since its inception. Major progress has been achieved, making the fight against tax avoidance and tax evasion a success story of the G20, with the support of the OECD. With recent recognition of the backlash against globalisation, and a stronger-than-ever need to deliver an agenda of inclusive growth, the work of the G20/OECD work on tax is one of the most important contributions to these challenges, and one which is having a concrete impact to address the concerns being raised. 2017 is the year of implementation: implementation of the Common Reporting Standard with the first automatic exchanges of financial account information (AEOI) to take place in September 2017; and, implementation of the measures to address base erosion and profit shifting (BEPS), with the OECD/G20 Inclusive Framework on BEPS implementation now fully operational. Following the Panama Papers, your call to identify jurisdictions which had not sufficiently progressed towards satisfactory level of implementation of the tax transparency standards triggered massive progress. Since April 2016, 17 jurisdictions have made changes leading to an upgrade in their overall ratings against the Exchange of Information on request (EOIR) standard, and 31 countries have committed to joining the multilateral Convention on Mutual Administrative Assistance in Tax Matters. This Convention now covers all financial centres, OECD and G20 countries and many developing countries have begun taking advantage of it as well, creating over 7 000 exchange relationships with the latest countries joining. As a result of these developments, only one jurisdiction is currently identified, in line with your request in July 2017, as having not yet made sufficient progress on the tax transparency standards. Continued diligence is required though, and I propose to report back at your 2018 Summit with an update on the identification of non-cooperative jurisdictions, reflecting progress towards the effective implementation of the tax transparency standards, in particular for AEOI. The OECD/G20 Inclusive Framework on BEPS today has 100 countries and jurisdictions as members, all committed to the BEPS package and monitoring its implementation, with peer reviews of the four minimum standards. Efforts to begin implementation of the BEPS measures have been rapid, as illustrated with 77 countries and jurisdictions already addressing tax treaty shopping through the new Multilateral Convention on Tax Treaty Related Measures to Prevent BEPS, and a number of preferential regimes, such as patent boxes, abolished or revised to meet the new standards. Under the Inclusive Framework, the peer reviews to assess the effective implementation of the four BEPS minimum standards are now underway, and a number of important pieces of guidance have been issued to support implementation of the measures by taxpayers and tax administrations. The results of the Inclusive Framework’s work in the past year are set out in their report, annexed hereto, and include specific work targeting the priority BEPS issues for developing countries, recognising that improving domestic resource mobilisation, including through stronger tax systems, is fundamental to achieving the universal Sustainable Development Goals. We expect that our work with developing countries, and particularly with those in Africa, will support the objectives of the G20 Compact with Africa which is being considered as one of the possible outcomes of the Hamburg Summit. Looking ahead, support on implementation across all areas of the G20’s tax agenda will continue. In the Inclusive Framework, technical discussions amongst its members continue, in particular on a number of important issues relating to transfer pricing, and with a growing sense of urgency among many governments for the development of policy options to be advanced in relation to taxation of the digital economy, we will publish an interim report in the first half of 2018. Following-up the delivery in March to G20 Finance Ministers of recommendations from the joint OECD-IMF report to enhance tax certainty, we will monitor progress and provide an update next year, recognising that certainty is important to establish an environment conducive for trade and investment. The work on the international tax agenda has become more inclusive in recent years, and has demonstrated the power of multilateral cooperation to deliver global solutions to global problems. At the same time, G20 members continue to have a specific and critical leadership role to play. Your rapid implementation of agreed measures, and commitment to continue working together on evolving global tax challenges sends an important message. The OECD will continue to support your efforts in these important matters. While my report outlines the impressive advances which you have led in the last twelve months, your ongoing commitment to creating a strong and effective international tax system for all is vital to continued progress.
A REPORT TO THE G-20 DEVELOPMENT WORKING GROUP BY THE IMF, OECD, UN AND WORLD BANK – Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment. Experience shows that there is often ample room for more effective and efficient use of investment tax incentives in low-income countries. Tax incentives generally rank low in investment climate surveys in low-income countries, and there are many examples in which they are reported to be redundant – that is, investment would have been undertaken even without them. And their fiscal cost can be high, reducing opportunities for much-needed public spending on infrastructure, public services or social support, or requiring higher taxes on other activities. Effective and efficient use of tax incentives requires that they be carefully designed. Many low-income countries use costly tax holidays and income tax exemptions to attract investment, while investment tax credits and accelerated depreciation yield more investment per dollar spent. Tax incentives targeted at sectors producing for domestic markets or extractive industries generally have little impact, while those geared toward export-oriented sectors and mobile capital appear to be relatively effective – but the former need to be tempered by considerations of WTO consistency and both can be instances of mutually damaging tax competition. Enabling conditions – good infrastructure, macroeconomic stability, rule of law, etc.- are important for effectiveness. Good governance of incentives is critical for their effectiveness and efficiency. Transparency is necessary to facilitate accountability and reduce opportunities for rent seeking and corruption. Tax incentives should therefore be subject to legislative process, consolidated under the tax law, and their fiscal costs reviewed annually as part of a tax-expenditure review. The approval process of tax incentives may involve several stakeholders, but is ultimately best consolidated under the authority of the Minister of Finance and enforced and monitored by the tax administration. To the extent possible, the granting of tax incentives should be based on rules rather than discretion. Despite political obstacles, several countries have successfully reformed their tax incentive regimes. The proliferation of incentives is largely a manifestation of international tax competition – which regional coordination can help mitigate, although this requires political commitment and an effective supranational enforcement mechanism – which is often lacking. Common reporting standards and data collection can be an important first step toward coordination and enhanced transparency. More systematic evaluations are needed to facilitate informed decision making. In most low-income countries, the effectiveness and efficiency of tax incentives cannot be assessed due to lack of data and the absence of analytical tools and skills. The background document to this report offers guidance on how to develop the data and tools required for systematic analysis. Progress requires concerted action by several stakeholders to ensure evidence-based, transparent decision making.