OECD – THE CAPACITY OF GOVERNMENTS TO RAISE TAXES. ECONOMICS DEPARTMENT WORKING PAPERS N. 1407 By Oguzhan Akgun, David Bartolini and Boris Cournède. 1. This paper investigates the capacity of governments to raise revenue by assessing the ways in which tax receipts respond to rates and how policies and other framework conditions influence this response. Governments need solid revenue bases to fund the basic foundations of thriving economies and societies (Gaspar et al., 2016a, 2016b), including the public services that underpin inclusive growth (Fournier and Johansson, 2016). In some cases, governments need to increase tax revenue in reaction to unexpected macroeconomic shocks, to comply with fiscal rules, or as a strategy to ensure sustainability. In this context, it is important to understand the relationship between tax rates and revenue. Setting rates and defining the tax base represent the two main policy levers that governments have to raise revenue with a given tax. This study focuses on the rate-revenue relationship in advanced economies, a choice which allows an empirical, data-based inquiry informed by the experience of a large number of comparatively homogenous OECD countries over a substantial period of time. 2. Revenue returns from tax increases can be expected to decrease with the level of tax rates, because higher rates exacerbate disincentives to produce and raise incentives to avoid taxation. These two main channels can therefore imply that tax receipts rise less than proportionately with rates and may peak at a given point. The present study advances knowledge on this rate-revenue relationship in three ways. First, it provides new evidence based on the experience of 34 OECD countries over the period 1978-2014. Second, it investigates this relationship in a consistent fashion for three categories of taxes that account for a large share of overall government revenue: corporate income tax, value added tax and personal income tax. Third, it brings a new dimension to the literature by systematically documenting how policies, institutions and framework conditions shape this relationship.2 3. These empirical investigations yield the following main results: · Revenues from corporate income and value added taxes (CIT and VAT) respond increasingly weakly as tax rates rise, flatten out, and may even decline after a tipping point. · Institutions and framework conditions shape the response of tax receipts to rates: – Revenues of corporate income and value-added taxes respond more strongly to changes in rates where indicators point to a greater quality or effectiveness of governance. – In more open economies, corporate income tax receipts react less to changes in rates. – Budgetary authorities that allocate more resources to tax collection benefit from corporate income, personal income and value-added tax revenues that are more responsive to tax rates. · The revenue-maximising level of taxation is estimated to vary from 9 to 37% depending on country characteristics for the effective marginal rate of CIT and from 21 to 27% for the standard VAT rate. · Estimates of revenue-maximising rates should not be seen as policy objectives or recommendations, as they imply high levels of economic distortions or tax avoidance. · Revenue from broadly-defined personal income taxes, which include social security contributions and payroll taxes, responds linearly to effective marginal tax rates at and immediately above the average income level. This could reflect that personal income tax (PIT) systems are designed to minimise adverse behavioural responses around these income levels. Below and clearly above average income, PIT revenue exhibits marginal returns that are estimated to decrease when effective marginal rates increase, PIT receipts reach a turning point when effective marginal rates approach 55-57%. · More progressive broadly defined personal income taxes generally yield more revenue, but very strong progressivity is associated with lower revenue. · The investigation uncovers significant externalities between personal and corporate income tax (CIT). Higher effective marginal rates of CIT taxation result in higher PIT receipts for given PIT rates, and vice versa. These findings provide support for the view that firms and individuals use incorporation and disincorporation to optimise their tax bill in response to the joint configuration of CIT and PIT. 4. The next section reviews the related literature. Section 3 presents the conceptual and econometric framework for estimation. Section 4 applies it to probe the response of receipts from corporate income tax to the effective tax rate. Section 5 analyses the value-added tax. Section 6 looks at personal income tax, payroll taxes and social security contributions: it investigates the responsiveness of receipts to rates as well as the role of progressivity. In conclusion, Section 7 concludes about the main lessons that can be drawn from the inquiry.
OECD WORK ON TAXATION. 2016-17. Tax is at the heart of our societies. A well-functioning tax system is the foundation stone of the citizen-state relationship, establishing powerful links based on accountability and responsibility. It is also critical for inclusive growth, sustainable development, and well-being, providing governments with the resources needed to invest in infrastructure, education and health, and support social protection systems. In recent decades, globalisation and the pace of economic change have increased, bringing new opportunities and challenges to our societies. Governments are confronted by a world where the effectiveness of domestic policies is increasingly impacted by the external environment. The mobility of people, assets, as well as new business models emerging from the digital world, have all had important implications for the structure and operation of our tax systems. As the world becomes increasingly globalised and cross-border activities become the norm, tax administrations need to work together to ensure that taxpayers pay the right amount of tax to the right jurisdiction. Over the last 50 years, the OECD has led the way on tax issues. This work is the result of global dialogue, now directly involving more than 130 countries and jurisdictions from across the world, representing a diverse range of needs, objectives and contexts. What ties us together however, is a common recognition that a globalised world needs global solutions. This is the context in which the OECD developed a global standard on the Automatic Exchange of Financial Account Information, and a new framework to tackle base erosion and profit shifting (BEPS). The OECD/G20 BEPS Project enables all interested countries and jurisdictions to work together to shut down loopholes and update international tax rules for the 21st century. Our work on tax represents the OECD at its best: the focal point for an inclusive conversation that leads to world class standards and effective implementation, always recognising the full range of contexts and constraints faced by countries. I look forward to our tax work continuing to deliver tangible results, helping governments create the resilient, stable and sustainable environment needed for more inclusive growth.
OECD – BASE EROSION AND PROFIT SHIFTING (BEPS). BEPS ACTION 7. ADDITIONAL GUIDANCE ON THE ATTRIBUTION OF PROFITS TO PERMANENT ESTABLISHMENTS. 4 OCTOBER 2017. On 22 June 2017, interested parties were invited to provide comments on two discussion drafts. The first discussion draft on Attribution of Profits to Permanent Establishments, which deals with work in relation to Action 7 (“Preventing the Artificial Avoidance of Permanent Establishment Status”) of the BEPS Action Plan; and a second one on Revised Guidance on Profit Splits, which deals with work in relation to Actions 8-10 (“Assure that transfer pricing outcomes are in line with value creation”) of the BEPS Action Plan. The OECD is grateful to the commentators for their input and now publishes the public comments received.
OECD – INTERNATIONAL TAX PLANNING AND FIXED INVESTMENT ECONOMICS DEPARTMENTS WORKING PAPERS No. 1361: 1. Corporate income taxes affect business investment in several ways. By reducing the after-tax return on investment, high corporate taxes can lead firms to reject certain investment projects or reduce their scale, thus reducing the overall level of investment (OECD, 2009; Arnold et al., 2011). Corporate taxes also influence the allocation of investment across industries and countries (Fatica, 2013). All else equal, higher-tax rate countries attract less international investment than lower-tax rate countries, although corporate taxes are only one among many determinants of investment location (Skeie, 2016; Hajkova et al., 2006; Feld and Heckemeyer, 2011). 2. This paper explores whether the effect of corporate taxes on investment is influenced by international tax planning, which is also known as Base Erosion and Profit Shifting (BEPS) (OECD, 2013). The idea is that tax planning allows multinational enterprises (MNEs) to reduce their tax burden, for example by shifting profits to lower-tax rate or no-corporate-tax countries (Johansson et al., 2016a). As a result, the return on investment of an MNE entity in a high-tax rate country is only partially taxed (or not taxed at all) in this country. Reflecting this, tax-planning MNEs are expected to be less sensitive to corporate taxes in their investment decisions than non-tax-planning firms. Indeed, existing single-country studies focusing on US and German MNEs suggest that tax planning can affect the tax sensitivity of investment (Grubert, 2003; Overesch, 2009). The purpose of this paper is to assess this effect systematically across a wide range of countries. 3. This paper confirms that corporate taxes have a negative impact on investment and shows that this negative impact is smaller among tax-planning MNEs than other firms. The analysis is based on a large sample of industry and firm-level data for OECD and G20 countries. A 5 percentage point increase in the effective marginal corporate tax rate is found to be associated with a reduction in investment by about 5% in the long term on average across industries. This effect is lower in industries with a high concentration of MNE entities with profit-shifting incentives, i.e. entities facing a higher statutory corporate tax rate than the average in their MNE group. This definition of profit-shifting incentives is in line with the accompanying paper on the assessment of tax planning (Johansson et al., 2016a). For an industry with a strong presence of MNE entities with profit-shifting incentives (75th percentile of the distribution), the tax sensitivity of investment is nearly halved as compared to the median industry. Results obtained at the firm-level are consistent with these industry-level results. 4. The estimation results also suggest that strong anti-avoidance rules against tax planning (e.g. strict transfer pricing documentation requirements and interest deductibility rules, see Johansson et al., 2016b) increase the tax sensitivity of investment in industries with a strong concentration of profit-shifting MNEs. This confirms that tax planning affects the tax sensitivity of investment. Thus, tax planning opportunities may allow higher-tax rate countries to retain attractiveness as investment destinations for taxplanning MNEs, but this would come at the cost of tax distortions and losses in tax revenues. (By Stéphane Sorbe and Åsa Johansson).
OECD Taxation Working Papers N. 32: LEGAL TAX LIABILITY, LEGAL REMITTANCE RESPONSIBILITY AND TAX INCIDENCE
LEGAL TAX LIABILITY, LEGAL REMITTANCE RESPONSIBILITY AND TAX INCIDENCE. THREE DIMENSIONS OF BUSINESS TAXATION. This paper explores the relationship between businesses and tax authorities in the revenue collection process. Although there is evidence that taxes paid and remitted by businesses on behalf of others can be shifted at least partially to workers and consumers and away from capital owners, businesses play a very specific role in the collection of tax revenues. Notably, they are legally liable for the corporate income tax (CIT). Analysts and policymakers pay a great deal of attention to the CIT and analysis of its impacts. Yet businesses’ role is wider in range than the legal liability of CIT alone, encompassing many taxes other than the CIT for which businesses are legally liable. Additionally, tax remittance by businesses is a key feature of modern tax system administration. In addition to their legal tax liabilities, businesses collect and remit taxes to tax authorities on behalf of others in the economy, such as workers and consumers. Given the large volume of income, sales, purchases and value creation that flow through businesses, it is not surprising that governments have sought out businesses as an important collection and remittance vehicle. There are important reasons why businesses facilitate part of the collection of revenues in modern tax systems. It is more efficient to collect taxes from organised businesses rather than from households as there are economies of scale for tax authorities in dealing with a smaller number of larger units (Alt, 1983). Businesses already have recordkeeping and accounting systems in place to simplify the process of tax remittance (Slemrod, 2008). Additionally, businesses systematically collect information which enables verification that the correct amount of tax has been collected from all of the remitting parties (Shaw, Slemrod & Whiting, 2011), facilitating overall compliance. For example, businesses collect information on salaries paid to their employees. However, businesses’ tax remittance role has thus far received little analytical attention. In pointing to and analysing the ways in which businesses’ role in tax system administration extends beyond the CIT, it is important to emphasise that this does not necessarily imply an expanded economic burden on business shareholders. There is often confusion between taxes remitted by businesses and the tax burden on capital owners. The tax burden may not be borne by capital owners but instead reallocated to others in the economy. The same can be said for the burden of compliance costs incurred in remitting taxes on behalf of businesses and of others in the economy. The prevalence of such reallocation, or economic incidence, is a key concern for tax policymakers and for distributional analysis of taxes, as it determines who in the economy bears the overall burden of a given tax and of compliance costs. In reality, there can often be large differences between legal tax liability, the remittance liability and the ultimate economic incidence. Until very recently, it was assumed that assignment of the legal obligation to remit a tax has no impact on who finally bears the burden of a tax. Recent evidence shows that shifting the remittance liability from one type of business to another may affect economic incidence and total tax collection (Kopczuk, Marion, Muehlegger, & Slemrod, 2016). Relying on data collected from the OECD’s Revenue Statistics database as well as a survey administered to delegates of OECD member countries, this paper analyses tax remittance by businesses across 24 OECD countries for 2014. It makes a clear distinction between businesses’ legal tax liabilities and legal remittance responsibilities, categorising each Revenue Statistics tax into one bucket or the other. On average, businesses’ legal tax liabilities are found to be 33.5% of total tax revenue in 2014, while businesses’ legal remittance responsibilities are found to be 45.3%. While some readers may be tempted to deduce, on account of these figures, a correspondingly economic burden on business’ owners, the discussion of economic incidence in Section 4 marshals and emphasises that it is not likely to be the case. The costs associated with business taxation – whether arising from legal tax liabilities or legal remittance responsibilities – can be passed from capital owners to workers and consumers. This paper considers each of these issues in turn. Section 2 explores the distinction between legal tax liability and legal remittance responsibility in greater detail and outlines why this distinction is important to tax policymakers. Section 3 discusses how to categorise tax remittance data according to these two roles of business, with a separate focus on each OECD Revenue Statistics tax category. Section 4 reviews the theoretical and empirical evidence on the economic incidence of various taxes. Section 5 concludes with policy considerations for analysing tax remittance data and assessing the relationship between businesses and tax collection in the tax system. (Anna Milanez).
THE PAPER CONSIDERS HOW TAX POLICY AND ADMINISTRATION IMPACT ON AN ECONOMY’S COMPETITIVENESS AND REVIEWS VARIOUS MEASURES OF ‘TAX COMPETITIVENESS’. 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.2 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. (Stephen Matthews)
OECD – POSSIBLE TOUGHER INCENTIVES FOR FAILURE TO RESPECT THE INTERNATIONAL EXCHANGE OF INFORMATION ON REQUEST STANDARDS
OECD – POSSIBLE TOUGHER INCENTIVES FOR FAILURE TO RESPECT THE INTERNATIONAL EXCHANGE OF INFORMATION ON REQUEST STANDARDS. At their meeting in September 2014, the G20 Finance Ministers asked the OECD to work with all G20 members: “… to propose possible tougher incentives and implementation processes, to deal with those countries which fail to respect Global Forum standards on exchange of tax information on request.” 2. An interim report was delivered to G20 Finance Ministers at their meeting in February 2015. This final report builds on those preliminary findings and sets out proposals to deal with those jurisdictions which fail to respect Global Forum standards of exchange of information on request. It provides an important step towards putting in place such tougher incentives, which also have the potential to be further built upon over time. (…) Following the request in September 2014, the OECD has been working with G20 countries and others to identify ways to strengthen the incentives for jurisdictions to comply with the international standard of EOIR. Proposals have been developed in relation to the following five areas, with each area discussed in greater depth below: i. Further publicising the Global Forum ratings to amplify their reputational impact ii. Reviewing existing measures to include the Global Forum ratings as at least a factor in their application and publicising where they are linked to the ratings iii. Considering introducing new measures with the Global Forum ratings as at least a factor in their application iv. Calibrating the application of the measures to best incentivise jurisdictions to comply with the international standard of EOIR v. International organisations and national development agencies, where they do not already do so, reviewing their investment policies to consider incorporating restrictions in relation to the routing of investments through jurisdictions failing to respect the EOIR standard.
Guidance on the Implementation of Country-by-Country Reporting. BEPS ACTION 13. UPDATED SEPTEMBER 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 Taxation Working Papers N. 30 – THE IMPACT OF ENERGY TAXES ON THE AFFORDABILITY OF DOMESTIC ENERGY
OECD Taxation Working Papers N. 30 – THE IMPACT OF ENERGY TAXES ON THE AFFORDABILITY OF DOMESTIC ENERGY. Energy affordability can be defined as a household’s ability to pay for necessary levels of energy use within normal spending patterns. This paper uses three indicators to measure energy affordability risk in 20 OECD countries at current taxes on electricity, natural gas and heating oil. Energy affordability risk differs widely between countries. The countries with the highest GDP per capita tend to have the lowest levels of energy affordability risk. The paper then analyses how indicators of energy affordability change in response to a hypothetical tax reform that introduces uniform taxes on natural gas, heating oil and electricity in all countries analysed, mostly increasing tax rates on these fuels. Results show that, if combined with an income-tested cash transfer using one third of the change in revenue resulting from the tax reform, the reform generally improves energy affordability. If combined with a lump-sum transfer instead, results show that energy affordability increases only according to the most selective of the three indicators. Florens Flues, Kurt van Dender, 2017.
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 commentars 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 important 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 an important issue that warrants more discussion and thought. Hayley Reynolds, Thomas Neubig, 2016.