OECD AND TAX POLICY

Martin JarešTax Policy and Statistics DivisionOECD Centre for Tax Policy and Administrationmartin.jares@oecd.org

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• 1. Work of the OECD in the tax area– Introduction

– Double taxation

– Transfer pricing

– Harmful tax practices

– Tax administration

– Consumption taxes

• 2. Tax statistics and tax policy analysis– Revenue Statistics

– Taxing Wages

– Tax Database

– Tax policy studies

– Current work

Overview

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1. WORK OF THE OECD IN THE TAX AREA

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• The core work of the OECD in the tax policy area lies in setting standards.

• The standards are not binding, the OECD does not have any legislative power to enforce them.

• However, they are generally highly regarded and also many non-OECD countries follow recommendations formulated by the OECD.

• There is no voting, the aim is to find a unanimous support.

Introduction

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• In the case of international transactions, both countries might want to tax the profit

• Double taxation would be harmful for international business and investment

• Countries conclude bilateral double-taxation treaties

• Model Tax Convention on Income and on Capital– A model for bilateral double-taxation treaty

– It sets general principles and allocation of taxing rights of the two contracting countries

– Used by all OECD countries and some non-OECD countries as a basis for negotiation with other countries

– Regularly updated

– The full version has more than 2,000 pages

Double taxation

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• One of the ways to shift profits among subsidiaries of a multinational group

• Multinational groups manipulate intra-group prices,– Increase prices of export to high-tax countries

– Decrease prices of exports to low-tax countries

• Tax legislation says that the intra-group prices must be set at the same level as prices of third-party transactions– It is called “arm’s length principle”

• Easier in the case of tangibles, complicated in the case of intangibles

Transfer pricing

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• Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.– Provide guidance on the application of the arm's length

principle (valuation of cross-border transactions between associated enterprises)

– Used by all OECD countries as a basis for their legislation

– The full version has almost 400 pages

Transfer pricing (2)

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• In the last decades, countries have been decreasing corporate income tax rates in order to attract more investment.

• This is called tax competition.

• There are instances of tax competition which is regarded as harmful.– For example, a country might introduce tax incentives

only for new, foreign-owned companies.

• Harmful Tax Competition report in 1998 and progress reports.– Model Agreement on Exchange of Information on Tax

Matters

Harmful tax practices

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• Investment incentives in the Czech Republic– Direct subsidies

– Tax expenditures (tax holiday up to 10 years)

• Is it a harmful tax practice?

• Is it good for the Czech Republic?

Investment incentives

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• Sharing best practices and experiences

• Main areas of concern are– Voluntary compliance (taxpayers pay voluntarily their

taxes)

– Taxpayer services (e-services)

• Two work streams:– Taxpayers with global interests (multinational

companies, high net worth individuals),

– Small and medium enterprises.

• Tax Administration: Comparative Information– A good source of information on tax administration

Tax administration

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• Traditionally, OECD worked only in the are of direct taxation– Direct taxes = taxes on income

– Indirect taxes = consumption taxes

• Importance of indirect taxation is rising

• Indirect taxes could cause double-taxation if countries do not follow similar principles– One of the reasons for harmonisation of VAT and

excises in the EU

• The OECD started to work also in this area

• International VAT/GST Guidelines

Consumption taxes

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2. TAX STATISTICS AND TAX POLICY ANALYSIS

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• Work on tax policy analyis and tax statistics is carried on by– Working Party No. 2 on tax policy analyis and tax statistics

– Joint Meeting of Tax and Environment Experts

• Regular statistical products– Revenue Statistics

– Taxing Wages

– Tax Database

– Environmental Tax Database

– Data available at http://stats.oecd.org

• Economic analysis– Tax policy studies and Working papers

Overview

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• The Interpretative Guide defines what is tax– In the OECD classification the term “taxes” is confined

to compulsory unrequited payments to general government

• Data on tax revenues of all member states from 1965

• Data on accrual basis– Tax revenue is recorded at the time that the tax liability

was created

• Breakdown by type of tax and level of government

Revenue Statistics

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• 1000 Taxes on income, profits and capital gains– 1100 Taxes on income, profits and capital gains of individuals

– 1200 Corporate taxes on income, profits and capital gains

• 2000 Social security contributions

• 3000 Taxes on payroll and workforce

• 4000 Taxes on property

• 5000 Taxes on goods and services– 5100 Taxes on production, sale, transfer, leasing and delivery of

goods and rendering of services• 5110 General taxes (5111 Value added taxes)

• 5120 Taxes on specific goods and services (5121 Excises)

– 5200 Taxes on use of goods, or on permission to use goods or perform activities

• 5210 Recurrent taxes (5211, 5212 Paid in respect of motor vehicles)

Revenue Statistics – classification of taxes

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• Attribution of tax revenues to levels of government

• In general, a tax is attributed to the government unit that– exercises the authority to impose the tax (either as a

principal or through the delegated authority of the principal),

– has final discretion to set and vary the rate of the tax, and

– also final discretion over the use of the tax proceeds.

• Link: http://www.oecd.org/tax/tax-policy/revenue-statistics.htm.

Revenue Statistics – levels of government

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• Total tax burden in the Czech Republic has been slightly above the average of the OECD countries.

Revenue Statistics & Czech Republic

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2013 orig

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OECD - Average Czech Republic

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• Czech Republic has higher share of social security contributions and lower share of personal income tax and property taxes.

Revenue Statistics & Czech Republic (2)

OECD 2013 Czech Republic 20130

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Taxes on goods and services Property taxes Taxes on corporate income

Taxes on personal income Social security + payroll taxes

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• Provides comparative information of tax burden on labour income of OECD countries.

• Shows information on– income tax paid by workers

– social security contributions levied on employees and their employers

– family benefits paid as cash transfers.

Taxing Wages

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• Average and marginal effective tax rates are calculated– Average effective tax rate = total tax divided by total income

– Marginal effective tax rate = tax from additional income divided by the additional income

• Not based on actual data but on a model

• Results are presented for different household types which differ by– income level (in percentage of average wage)

– household composition (one- and two-earner families, different number of children)

• Link: http://www.oecd.org/ctp/tax-policy/taxing-wages.htm.

Taxing Wages (2)

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Taxing Wages & Czech Republic

• Average tax wedge (vertical axis) for different levels of income (horizontal axis) and different family types– Tax wedge = income tax, employer and employee social

security contributions, pay roll tax minus social benefit as a percentage of gross labour costs (gross wage + employer SSC)

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• Tax burden on labour income in the Czech Republic is comparable with the OECD average– The lines are close to each other

• Even with a single tax rate of personal income tax, the Czech tax system is as progressive as tax systems of OECD countries on average– The lines increase similarly

• The Czech Republic has lower tax burden of low-income families with children compared to the OECD average but higher in other case– Red lines are below blue lines in the right-hand graphs

Taxing Wages & Czech Republic (2)

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• Comparative information on a range of tax statistics on– personal income taxes,

– social security contributions

– non-tax compulsory payments,

– corporate and capital income taxes

– taxes on consumption.

– (data from Revenue Statistics and Taxing Wages also included here.)

Tax Database

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• Personal income taxes• Social security contributions paid by

– employees

– employers

– self-employed

• Non-tax compulsory payments– compulsory payments made to organisations outside

the government sector or because they are not unrequited

Tax Database – Personal taxes

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• Basic (non-targeted) rates• Surcharges• Small business tax rates• Corporate income taxes relating to sub-

central governments

Tax Database – Corporate taxes

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• Value added tax– Rates

– Registration threshholds

• Excise duties on– Beer

– Wine

– Alcoholic beverages

– Mineral oils

– Tobacco

• Link: http://www.oecd.org/ctp/tax-policy/tax-database.htm

Tax Database – Indirect taxes

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• Tax Policy Studies

• Since 1999, 22 studies published

• Link: http://www.oecd-ilibrary.org/taxation/oecd-tax-policy-studies_19900538

• Taxation Working Papers

• Since 2011, 22 papers published

• Link: http://www.oecd-ilibrary.org/fr/taxation/oecd-taxation-working-papers_22235558

Economic analysis

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• Regression analysis of data on GDP growth, the structure of tax revenue and other variables

• Main findings: different types of taxes have different effects on economic growth– Corporate income taxes the most harmful

– Personal income taxes

– Consumption taxes

– Recurrent taxes on immovable property the least harmful

Tax Policy Reform and Economic Growth

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• Actual household microdata used

• Households ranked by their income (or expenditure) and split into ten deciles

• Each expenditure item was assigned its VAT rate

• VAT paid can be calculated for each decile

• It allows to calculated how much each deciles gains from reduced rates

• One of the outcomes: highest income deciles benefit most from reduced VAT rates

The Distributional Effects of Consumption Taxes

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The Distributional Effects of Consumption Taxes (2)

Average tax expenditure (in CZK) per household from reduced rates on museums and ZOOs : income deciles, Czech Republic

1 2 3 4 5 6 7 8 9 100

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Thank you for your attention.