Moving from BEPS to a Broader Tax Policy Agenda

Jeffrey Owens

Director WU Global Tax Policy Center at

the Institute for Austrian and International Tax Law

Foundation For International TaxationMumbai, 1 December 2016

Section A: The Economic and Public Finance Background

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Global economic growth failing to hit the highs of pre-crisis

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-1%

0%

1%

2%

3%

4%

5%

6%

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90

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Global real annual GDP growth %

World GDP growth trend growth decade before crisis

Source: Oxford Economics forecasts updated August 2016; countries weighted at PPP exchange rates

► Global growth expected to slow to 2.9% in 2016

► Slowest since crisis

Budget deficits falling but still, pressure on governments to cut expenditure and raise taxes

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General Government Overall Balance among different groups of emerging

market economies, 2008–21; % GDP

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-6

-4

-2

0

2

4

6

8

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Oil exporters Non-oil commodity exporters Commodity importers

Forecast

-4

-2

0

2

4

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8

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Norw

ay

Sw

eden

Austr

alia

Canada

Spain

United K

ingdom

Pola

nd

Indonesia

Sw

itzerland

Bra

zil

Irela

nd

OECD

-Avera

ge

Austr

ia

United S

tate

s

Belg

ium

Neth

erlands

Icela

nd

Germ

any

India

South

Kore

a

Mexic

o

South

Afr

ica

Fra

nce

Port

ugal

Japan

Italy

Denm

ark

Turk

ey

Chin

a

Gre

ece

Arg

entina

Change in overall tax burden; percentage point change in

tax revenue % of GDP between 2004 &* 2014

OECD average

Governments have increased the tax take

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Developing countries are poor mobilizers of tax revenues

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Emerging Economies Need to Improve DRM

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Revenue from the corporate income tax (% of total revenue)

BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax

Source: IMF staff estimates.Notes: Resource-rich counties excluded.

Figure shows medians with countries ranked by income per capita each year and divided into four equal-size groups.

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Section B: Tax Certainty

What do we mean and is

all uncertainty bad ?

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BEPS reforms as a source of uncertainty…and a way to resolve uncertainty?

BEPS has been a trigger for changes

All changes bring uncertainty … but some changes bring more uncertainty than others

www.ey.com/BEPShttp://www.ey.com/gl/en/services/tax/ey-beps-developments-tracker

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Country-by-Country Report (CbCR) Implementation status

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Harmful Tax Practices: Preferential Regimes

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Treaty Abuse(including EU Directive)

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PE related developments

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Dispute Resolution

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Other sources: EY Attractiveness Survey

BEPS only one source of uncertainty … General rules and complexity

Digital disruption – ill fitting tax regimes

Other non-BEPS changes

Retrospection

External – e.g. State Aid!

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Sources of tax uncertainty …Measuring corporation tax uncertainty across countries - Devereux

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Minimizing tax uncertainty

Consultation with business on policy design and implementation

Clear and consistently applied tax laws

Pre-empting uncertainty: APAs, rulings etc.

―Roadmaps‖ – stability of direction

Cooperative compliance

Alignment with global standards

Dispute resolution – domestic and international

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Section C: Designing tax systems which promote sustainable and inclusive growth

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Channels through which tax affect growth

Economic factor DescriptionMajor tax components

affecting the factorImpact

Employment levelTax policies can have a significant impact on the labourmarket & hence unemployment

Personal income tax, corporate income tax, social security contributions, payroll tax

High

Human capitalWith personal and corporate income taxes directlyaffecting labor income, it can distort labor demand and supply

Personal income tax, corporate income tax, social security contributions

High

Foreign Direct Investment

Tax policies; regimes; incentives & the level of uncertainty can have a significant impact on foot loose multinational foreign investment

Personal income tax, corporate income tax, SSC, GST, property, payroll

Medium-High

Factors of production

Taxes on production affect the costs of producing goods and services, and so can change the relative competitiveness of some sectors, and thus economic growth

Personal income tax, corporate income tax, GST, CGT Medium-High

EntrepreneurshipTax mix changes can have a significant impact on entrepreneurship by changing incentives, including businesses’ ability to invest & hire.

Corporate income tax, SSC High

Source: “Tax Policy Reform and Economic Growth”, OECD, accessed 201020

Channels through which tax policy affects inequality

• Net wealth taxes and inheritance taxes are effective tools to narrow the distribution of wealth

Taxes can reduce inequalities in wealth

• PIT progressivity is the key tool to narrow the distribution of disposable income

Taxes can reduce disposable income inequality

• Taxes affect pre-tax opportunities and behaviours, e.g. tax and skills

Taxes can reduce market income inequality

• Intra-personal as opposed to inter-personal redistribution, e.g. SSCs to finance future benefits

The tax system can redistribute income across the lifecycle

But the best tools government have are education , social benefits and minimum wages

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Efficiency

and equity

implications

of taxes

Design of individual taxes

• Economic structure and challenges

• Interactions with benefit systems

• (Non-tax) drivers & characteristics of informality

• Social preferences for redistribution

• Existence of compensation mechanisms

• Time horizons

• Tax administration and tax enforcement

• Tax remittance

• Behavioural responses to tax changes

• Tax planning and income shifting

• Tax incidence

• International tax rules

Tax system factors

Non-tax system factors

A systems approach to tax design for inclusive growth

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Some tax policy design principles for inclusive growth

Taking into account overall

tax system progressivity

Broadening tax bases

Affecting pre-tax behaviours

and opportunities

Enhancing tax administration

and policy

Keep bases broad and rates low

Remove regressive

tax expenditures

Broaden social security financing

Equitable taxation of capital income and

wealth

Horizontal equity to enhance vertical

equity

Strengthen link between lifetime taxes & benefits

Compensate losers of reforms

Align private & social costs and returns

Promote the optimal use of human capital

Provide incentives for formalisation

Intergenerational and gender equity

Tackle tax evasion and avoidance

Increase business awareness in tax administration

1 2 43

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Improve tax indicators/analysis

Section D: Tax Competition for FDI and Services

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• 1980’s• Tax holidays in 40 percent of Sub-Saharan

Africa

• Now• Tax holidays in > 80 percent of Sub-Saharan

Africa

The spread of tax incentives

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● All started in Ireland ● Shannon first SEZ

● Many types● Export processing, SEZs for domestic markets

● Often non-tax benefits

● Widely seen as important in several countries in Asia● e.g. Work on China

● But wider experience mixed● No discernible impact on growth in India

● Much experience of risks to revenue

The spread of economic zones

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Are they good value for money?

• Econometrics suggests taxes do affect investment Maybe less in developing

countries

Mainly for location choices/greenfield

• But tax can significantly impact decisions on structure and financing of investment

• Redundancy often high

Would you have invested

also without the incentive?

Source: James (2014)27

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How much do they cost in terms of lost revenue?

• Revenue cost:

Where available, often (very) large

With high opportunity costs (scarce public

funds)

• Importance of tax expenditure reporting and reviews

Source: CIAT, 2014

0 0.5 1 1.5 2 2.5

Argentina

Peru

Paraguay

Dominican Republic

Costa Rica

Brazil

Chile

Mexico

Honduras

Colombia

Uruguay

Ecuador

CIT tax expenditure, in percent of GDP

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• Long-run (domestic) GDP elasticity of R&D ≈ 0.13‐ 40% more R&D will imply roughly 5% more

GDP (in 20 years)

• International spillovers could add to these effects‐ R&D in G7 yields 25% extra return outside G7

‐ Implies higher global Pigovian subsidy; and higher GDP effect (≈ 8%)

The impact of R&D incentives on growth

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Tax incentives which correct distortion

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Australia Small firms: 45% refundable R&D tax creditLarge firms: 40% non-refundable R&D tax credit (capped)

US Regular: 20% R&D tax credit on incrementSimplified: 14% R&D tax credit on increment

China 150% R&D super deduction15% reduced CIT rate for high-tech firms

Germany No tax incentivesR&D subsidies: can be 25 -50 percent of R&D costs

Korea Either 40% of increment (50% for SMEs) ;Or between 2% and 25% on volume, depending on size

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Does the spread of patent boxes increase R&D?

Ineffective – no effect at all in two countries

Inefficient – relief depends on income, not R&D

Negative international spillovers – focus is on attracting mobile IP income (aggressive tax competition)

Synthetic Control Estimation Results: Intellectual Property Box and

Private R&D (Log of real R&D spending)

31Source : IMF estimates

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Some design principles…

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• Cost based incentives preferred to profit based incentives

• Avoid tax holidays

• Fix term limits

• Avoid discretionary incentives

• Only MOF should be able to grant

• Integrate into regular budgetary process

Moving from Competition to Coordination

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● Global response

• BEPS action 5 and inclusive forum

● WTO

• Subsidies which distort trade flows

● Regional responses • EU Code of Conduct and State aid rules

• Regional groupings in LDC ( e.g. SADIC )

• ASEAN ( but only beginning )

● Second best solution: Developing best

practices guidelines and cooperation

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How does this link into the International Tax Debate

• Tax incentives not part of G20/OECD BEPS

– Action 5 on harmful tax practices—but mainly IP

More fundamentally:

• Does making avoidance harder increase tax competition:

- To offset increase in M/AETR?

- Or tighter CFC reduce incentives’ effectiveness

• Do narrowly-defined incentives guard against broader tax competition?

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Achieving sustainable and inclusive growth in India: The Tax Dimension

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GST : Be true to original vision of low rate and broad base

Reduce CIT rate and eliminate distortionary incentives

Widen the PIT base

Modernize the taxation of land and buildings

Review case for inheritance and Net wealth taxes

Continue fight for better tax compliance