OECD Taxation Working Papers N. 47 – What drives consumption tax revenues? Disentangling policy and macroeconomic drivers

OECD Taxation Working Papers N. 47 – What drives consumption tax revenues? Disentangling policy and macroeconomic drivers. This paper decomposes consumption tax revenues in OECD countries into the implicit tax rate (ITR) and consumption relative to GDP, to identify how economic downturns affect consumption tax revenues. It further considers the impact of changes in VAT efficiency and VAT rates on ITRs. The analysis finds that the observed stability in consumption tax revenues results from offsetting changes in the ITRs and in consumption as a share of GDP, arising from both macroeconomic changes and intentional policy changes. During the economic crisis in 2007-2009, lasting changes in consumption patterns, notably increases in government spending and in private consumption of necessity goods, adversely affected the efficiency of VAT systems. These changes have not since been reversed, suggesting that consumption tax revenues are now less robust to economic shocks. Broadening the VAT base and narrowing the scope of reduced rates can help to stabilise consumption tax revenues during economic downturns. 1. During the economic crisis from 2007 to 2009, tax revenues from all sources fell considerably, with most countries experiencing the lowest point in their tax revenues as a share of GDP for several decades. Among these taxes, revenues from taxes on consumption were typically less affected than revenues from other bases such as corporate income. Over time, taxes on consumption have been seen to be less volatile and more stable than most other forms of taxation (OECD, 2018). This paper examines the reasons for this, disentangling consumption tax revenues to understand the impact of changes in the consumption tax base and the tax system applied to that base. 2. In addition, taxes on consumption represent a large share of both total tax revenues and GDP in OECD countries. Over the last 40 years, revenues from taxes on consumption have been relatively stable, on average, around 11% of GDP and around one-third (32.7%) of total tax revenues. However, during the same period, the mix of consumption taxes has changed markedly due to the growing share of value-added taxes (VAT), which have displaced other forms of consumption taxes in most OECD countries (OECD, 2018). 3. With all OECD countries strongly relying on consumption tax revenues, understanding what drives changes in revenues from consumption taxes is crucial for both policy makers and researchers. The aim of this paper is twofold: first, to identify through which channels consumption tax revenues are affected during an economic downturn, using the most recent economic crisis (2007-2009) as a case study; and second, to understand what drives fluctuations in the overall tax burden on consumption, using the implicit tax rate on consumption as the starting point. 4. The structure of this paper is as follows. Section 2 describes developments in consumption tax revenues across OECD countries. Section 3 reviews the existing literature on analysing changes in consumption tax revenues, before section 4 sets out the methodology used to address the two questions outlined above. In section 5, the presented decomposition is used to analyse the drivers of changes in consumption tax revenues in OECD countries, before Section 6 discusses the results of this analysis as well as avenues for future work.

OECD Environment Working Papers N. 70 – ENVIRONMENTAL AND RELATED SOCIAL COSTS OF THE TAX TREATMENT OF COMPANY CARS AND COMMUTING EXPENSES

OECD Environment Working Papers N. 70 – ENVIRONMENTAL AND RELATED SOCIAL COSTS OF THE TAX TREATMENT OF COMPANY CARS AND COMMUTING EXPENSES. This paper builds upon a recent OECD paper on the personal tax treatment of company cars and commuting expenses in OECD member-countries and aims to arrive at a better understanding of the environmental and related social costs of the tax treatment described therein. The paper begins with an analysis of the larger transport market, which is the primary storehouse of evidence on the nature and extent of the environmental impacts of the various transport modes, the relative importance of the proximate and underlying determinants of these impacts, and the elasticities and functional relationships at work. Non-linearities in the relevant elasticities and functional relationships mean that the tax treatment of company cars may have a greater or lesser impact than is suggested by the size of the company car market. And distortions in relative prices between competing modes in the larger transport market mean that subsidies can have very different impacts depending on the mode in question. The further analysis of the interaction of the current tax treatment of company cars and commuting expenses with the transport market yields several findings. The current under-taxation of company cars is likely to result in a disproportionately large increase in total distance driven, composed of both an increase in the number of cars in use and an increase in distance driven per car. In turn, this is likely to result in disproportionately large impacts on most relevant environmental and related social costs. And a favourable tax treatment of commuting expenses generally, and of employer-paid parking in particular, is likely to impact on the choice of transport mode in favour of the car relative to public transport and non-motorised modes. In turn, this is likely to impact on most relevant environmental and related social costs. An Annex to this paper provides, for the OECD group of countries as a whole, some indicative estimates of the main relevant impacts of the under-taxation of company cars as well as an indicative estimate of its overall social cost. The largest quantified cost elements are additional congestion costs; additional local air pollution costs; and additional traffic accident costs. The overall social cost attributable to the current under-taxation of company cars is estimated at circa EUR 116 billion per year. (Rana Roy).

OECD WORKING PAPERS ON INTERNATIONAL INVESTMENT – The Most Favoured Nation and Non-Discrimination Provisions in international trade law and the OECD Codes of Liberalisation

OECD WORKING PAPERS ON INTERNATIONAL INVESTMENT – The Most Favoured Nation and Non-Discrimination Provisions in international trade law and the OECD Codes of Liberalisation. By Andrea Marín Odio. Increasing moves away from multilateralism have created a fragmented trade and investments cenario where economies progressively combine the application of restrictive unilateral actions with bilateral and regional preferences. The application of, and exceptions to, the non-discrimination provisions are a fundamental element of these trends. This paper sheds light on the two types of non-discrimination provisions considered the founding stones of the multilateral system: the most favoured nation (MFN) clause – as developed under the GATT and GATS – and the non – discrimination clause among countries adhering to the OECD Codes of Liberalisation. While not taking a position on the complex question of whether a multilateral, plurilateral or bilateral approach to trade and investment liberalisation should be pursued, the paper illustrates the OECD has upheld the non – discrimination obligation as one of its basic principles, dating back to its origins over 60 years ago.

OECD Taxation Working Papers N. 48 – Carbon pricing design: Effectiveness, efficiency and feasibility. An investment perspective

OECD Taxation Working Papers N. 48 – Carbon pricing design: Effectiveness, efficiency and feasibility. An investment perspective. Carbon pricing helps countries steer their economies towards and along a carbon-neutral growth path. This paper considers how the design of carbon pricing instruments affects their effectiveness, efficiency and feasibility. Design choices matter both for taxes and Emissions Trading Systems (ETSs). Considering the role of carbon price stability for clean investment, the paper shows how volatile carbon prices can cause risk-averse investors to forego clean investment that they would have undertaken with more stable prices. The paper then evaluates the effectiveness and efficiency of policy instruments to stabilise carbon prices in ETSs, which tend to produce more volatile carbon prices than taxes. The paper analyses the auction reserve price in California, the carbon price support in the UK, and the market stability reserve in the EU ETS. Considering feasibility, the paper discusses the tax (or emissions) base, how revenue use can affect support from households and firms, and administrative choices. (Florens Flues and Kurt van Dender, 22 Jun 2020).

OECD – TAX DATABASE. KEY TAX RATE INDICATORS. Update June 2020

OECD – TAX DATABASE. KEY TAX RATE INDICATORS. Update June 2020. This summary presentes comparative information on a range of statutory tax rates and tax rate indicators in OECD countries, encompassing personal income tax rates and social security contributions, corporate income tax rates and value-added taxes. These indicators provide a baseline of information on tax settings in 2019 and in early 2020.

TAX POLICY REFORMS 2020. OECD AND SELECTED PARTNER ECONOMIES

Tax Policy Reforms: OECD and Selected Partner Economies is an annual publication that provides comparative information on tax reforms across countries. It tracks tax policy developments over time and gives an overview of the latest tax reform trends. This year’s edition focuses on the tax reforms that came into force or were due to come into force in the second half of 2019 and 2020. However, given the significant packages of measures that were introduced in the first half of 2020 in response to the COVID19 crisis, the report also includes a Special Feature on “Tax and Fiscal Policy Responses to the COVID19 Crisis”. This Special Feature takes stock of the tax and broader fiscal measures introduced by countries from the beginning of the virus outbreak up to mid-June 2020, largely based on countries’ updates to the database1 compiled by the OECD on tax and fiscal policy responses to the crisis. This year also marks the first time that China is included in the publication. This year’s report covers 40 countries including all OECD countries (with the exception of Colombia, 2 which became a member of the OECD after the primary data collection exercise had been completed), as well as Argentina, China, Indonesia and South Africa. The intention is to continue expanding the coverage of the report to additional G20 countries. In its assessment of the reforms adopted before the COVID-19 crisis, and due to come into force in the second half of 2019 and 2020, the report identifies a number of common tax reform trends across countries. It should be noted that these are trends that emerged before the COVID-19 crisis and that reforms have in some cases been delayed in response to the crisis. More generally, the COVID-19 crisis should be seen as a significant intervening event and future reports will focus on the impact of the crisis on these longer-term trends. Looking at the reforms adopted before the COVID-19 crisis, the report identifies the following trends: · Personal income tax (PIT) reductions, targeted in particular at low and middle-income households, have continued. While this trend represents a broad continuation of PIT reforms in recent years, an intensification of PIT rate cuts has been observed. PIT base narrowing measures, often targeted at families and low-income earners, have also been frequent. Regarding the taxation of household capital income, limited changes have been introduced, involving both tax increases and decreases. These measures have included changes to the taxation of rental income as well as expanded tax reliefs to support small savers. · Changes to social security contributions (SSCs) have been limited both in number and in scope. Most of the reforms were aimed at lowering SSCs, but changes were generally modest. This confirms that the pace of reform in this area has slowed. · Corporate income tax (CIT) rate cuts have continued in 2020. As was the case last year, the most significant CIT rate reductions have generally been introduced in countries with higher initial CIT rates, leading to further convergence in statutory CIT rates across countries. Many countries have also reinforced the generosity of their corporate tax incentives to stimulate investment, innovation and environmental sustainability. · With regard to international taxation, efforts to protect CIT bases against corporate tax avoidance have continued with the adoption of significant reforms in line with the OECD/G20 Base Erosion and Profit Shifting (BEPS) project. The tax challenges arising from the digitalisation of the economy continue to represent a major concern for many countries. Efforts to achieve a consensus-based multilateral solution to address those challenges are ongoing, but a growing number of countries have announced or implemented interim measures to tax certain revenues from digital services in the meantime. · The stabilisation of standard value-added tax (VAT) rates observed in recent years is continuing, while VAT base changes have involved a mix of base broadening and base narrowing measures. High standard VAT rates in many countries have limited the room for additional rate increases. Instead, many countries have concentrated their efforts on the fight against VAT fraud and on ensuring the effective taxation of cross-border online sales to raise additional revenues and strengthen the functioning of their VAT systems.

OECD – TRANSFER PRICING GUIDANCE ON FINANCIAL TRANSACTIONS INCLUSIVE FRAMEWORK ON BEPS: ACTIONS 4, 8-10

The 2015 BEPS Action Plan reports on Action 4 (Limiting base erosion involving interest deductions and other financial payments) and Actions 8-10 (Aligning Transfer Pricing Outcomes with Value Creation) mandated follow-up work on the transfer pricing aspects of financial transactions. In particular, Action 4 of the BEPS Action Plan called for the development of: “…transfer pricing guidance … regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements.” Under these mandates, the Committee on Fiscal Affairs produced a non-consensus discussion draft on financial transactions in July 2018. The discussion draft aimed to clarify the application of the principles included in the 2017 edition of the OECD Transfer Pricing Guidelines (the “Guidelines”), in particular, the accurate delineation analysis under Chapter I, to financial transactions. It also provided guidance with specific issues relating to the pricing of loans, cash pooling, financial guarantees, and captive insurance. The guidance contained in this report takes account of comments received in response to the public discussion draft. This guidance is significant because it is the first time the Guidelines will be updated to include guidance on the transfer pricing aspects of financial transactions, which should contribute to consistency in the application of transfer pricing and help avoid transfer pricing disputes and double taxation. Sections A to E of this report will be included in the Guidelines as Chapter X. The guidance in Section F of this report will be added to Section D.1.2.1 in Chapter I of the Guidelines, immediately following paragraph 1.106. This report describes the transfer pricing aspects of financial transactions, including a number of examples to illustrate the principles discussed. Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the Guidelines to financial transactions. In particular, Section B.1 of this report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of an MNE within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C, D and E of this report address specific issues related to the pricing of financial transactions (e.g. treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance). This analysis elaborates on both the accurate delineation and the pricing of the controlled financial transactions. Finally, Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return.

OECD Economics Department Working Papers N. 1407

This paper investigates the factors that shape governments’ capacity to collect revenue. To do so, it analyses how tax revenue responds to tax rates using evidence from a panel of 34 OECD countries over 1978-2014. The estimations show that the response of revenue to rates weakens as rates become higher, confirming the existence of a hump-shaped relationship between tax revenue and rates for corporate income taxation and providing a new contribution by analysing value-added taxation. Importantly, the estimated responses of revenue to tax rates vary, in some cases very strongly from an economic perspective, depending on country-specific policies and framework conditions. In particular, the corporate income tax revenue-generating potential of hiking the effective rate shrinks much more quickly in more open economies than in more closed ones. Tax revenue is found to be more responsive to tax increases in countries where the tax authorities have more resources. The investigations also cover personal income taxation. They point to diminishing revenue returns of increasing the effective marginal tax rates that apply at substantially above-average income levels. (By Oguzhan Akgun, David Bartolini and Boris Cournède, 2019).

OECD – The COVID-19 crisis creates an opportunity to step up digitalisation among subnational governments

OECD – The COVID-19 crisis creates an opportunity to step up digitalisation among subnational governments. Recent decades have seen rapid growth of advanced digital technologies, including high-speed computing, big data, artificial intelligence, the internet-of-things and blockchain. This “digital revolution” creates significant opportunities for all levels of government to improve the delivery of public goods and services, and to raise more and better revenue. This is particularly important in the context of the COVID-19 crisis. Fighting a pandemic while minimising the associated economic costs calls for appropriate digital infrastructure for the design and enforcement of containment measures, as well as to ensure access by the population and enterprises to critical government services. After all, subnational governments (SNGs) account for about 40% of government spending on average in OECD countries; they also play an important role in the delivery of key services that are at the heart of the policy actions being taken to slow the spread of the pandemic, including on health care and social protection. By Luiz de Mello, OECD, and Teresa Ter-Minassian, OECD Fiscal Network.

OECD Taxation Working Papers N. 47

What drives consumption tax revenues?  Disentangling policy and macroeconomic drivers. This paper decomposes consumption tax revenues in OECD countries into the implicit tax rate (ITR) and consumption relative to GDP, to identify how economic downturns affect consumption tax revenues. It further considers the impact of changes in VAT efficiency and VAT rates on ITRs. The analysis finds that the observed stability in consumption tax revenues results from offsetting changes in the ITRs and in consumption as a share of GDP, arising from both macroeconomic changes and intentional policy changes. During the economic crisis in 2007-2009, lasting changes in consumption patterns, notably increases in government spending and in private consumption of necessity goods, adversely affected the efficiency of VAT systems. These changes have not since been reversed, suggesting that consumption tax revenues are now less robust to economic shocks. Broadening the VAT base and narrowing the scope of reduced rates can help to stabilise consumption tax revenues during economic downturns.