In September 2016, at the G20 Summit in China, the G20 leaders asked the IMF and the OECD to look at issues of tax certainty both for tax payers and tax administrations. The request was in response to ‘heightened concern about uncertainty in tax matters and its impact on cross-border trade and investment, especially in the context of international taxation’.
The concern over tax uncertainty arose due to the spread and emergence of new business models and increased internationalization of business activities; concern over aggressive tax planning, fragmented and unilateral policy decisions; certain court decisions; and updates to international tax rules, for example, the BEPS project. The report explored the nature of tax uncertainty, its main sources and its effect on business decisions. It then goes on to outline approaches to help policymakers and tax administrations ‘shape a more certain tax environment’. The OECD conducted a survey of more than 700 business headquartered in 62 different jurisdictions alongside a survey of 25 predominantly G20 and OECD tax administrations.
Causes of Uncertainty
The report highlights that there is risk of uncertainty discouraging investment. The effects of uncertainty on investment are ambiguous in theory. But the empirical evidence, while sparse, is more clear- cut—and does suggest adverse effects on investment and trade. The results of
the business and the tax administration surveys presented in this report are instructive, with respondents to both reporting that tax uncertainty is a major concern:
• Uncertainty in the corporate income tax and the VAT systems is reported by business as having an important influence on investment and location decisions. Over 60 percent of respondents to the OECD business survey indicate that uncertainty in the corporate income tax and the VAT is very or extremely important to investment and location decisions.
• Tax certainty is a high priority for tax administrations, with over 80% of respondents to the tax administration survey identifying it as a very high or extremely high priority of their tax
While the sources of uncertainty are many and varied, the key findings from the surveys are:
• According to businesses, issues related to tax administration were ranked as among the major drivers of uncertainty in tax systems, with the top two, and three out of the top 10, sources of tax uncertainty deriving from issues related to tax administration. In this regard, the main sources included bureaucracy to comply with the tax legislation, although this may also reflect concern over compliance costs, and inconsistent treatment. Concerns over the inconsistent approaches of different tax authorities towards the application of international tax standards ranked high in the
business survey. Issues associated with dispute resolution mechanisms, including timescales, were also identified as an important driver of uncertainty. In particular, respondents to the business survey highlighted concerns about lengthy decision making of the courts— which may be an aspect of the wider judicial system, and not wholly under the tax authorities’ control. Tax administrations identified taxpayer behaviour as an important source of uncertainty, in particular as a result of aggressive tax planning and a lack of cooperation. They also highlighted complexity in legislation, lengthy court procedures, unclear drafting and frequency of legislative changes.
• A key area of agreement in both surveys was that legislative and tax policy design issues are a major source of tax uncertainty, mainly through complex and poorly drafted tax legislation and
the frequency of legislative changes. The narrative analysis suggests there is considerable variation across advanced countries in both the frequency of corporate tax changes and the lag before implementation. Most corporate income tax changes, however, are announced at least ninety days in advance of implementation. There is no obvious trend towards less pre -announcement of corporate income tax changes.
Practical Tools to Enhance Tax Certainty
The report outlines a set of concrete and practical approaches and solutions to enhance tax certainty in G20 and OECD countries. While recognising that governments and tax administrations already take a wide range of measures in pursuit of tax certainty in both the domestic and international context, the report highlights the benefits of reducing or addressing uncertainty at the earliest stage possible. However, where issues cannot be avoided or resolved early on, effective dispute resolution mechanisms will be needed. More specifically, the report outlines
the following practical tools to enhance tax certainty:
• Reducing complexity and improving the clarity of legislation through improved tax policy and law design. The development of a robust principles-based tax law design and monitoring framework coupled with various other measures to improve clarity and reduce complexity, including avoiding inappropriate retroactivity, ensuring appropriate mechanisms for consultation on proposed or announced legislation and enhanced guidance.
• Increasing predictability and consistency by tax administrations, through timely issuance of rulings and technical interpretations. Proactive taxpayer engagement and education can also improve understanding of the legislation and its requirements, and of the practices of the administration.
• Effective dispute resolution mechanisms have a critically important role to
play in establishing certainty. Dispute resolution mechanisms should be fair and independent, accessible to taxpayers and effective in resolving disputes in a timely manner.
• Tackling tax uncertainty in the international context can be particularly important. The report outlines a number of approaches to enhance tax certainty in the international context for G20 and OECD countries, including through:
• Dispute prevention and early issue resolution programs, such as cooperative compliance programs and advance pricing agreements (APAs), as well as simultaneous and joint audits, where appropriate. The innovative use of these tools in a multilateral context also received support from the business and tax administration surveys.
• Robust and effective international dispute resolution procedures, such as mutual agreement procedure (MAP), including fully implementing the minimum standard under Action 14 of the G20/OECD BEPS Project, and the use of arbitration, where countries elect to do so.
• Updating of tax treaties through the use of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. The multilateral instrument will allow for the amendment of treaties to be made rapidly and consistently, thereby enhancing certainty.
• Making further progress towards simplified and effective withholding tax collection and treaty relief procedures.
• Cooperation and coordination on the development of coherent international standards and guidance, and consistent implementation, play an important role in ensuring greater tax certainty.
This report highlights that tax certainty is an important priority for governments and businesses in G20 and OECD countries and outlines a set of concrete and practical tools to enhance tax
certainty. In this context, this report represents an important opportunity for the G20 to affirm its commitment, which could for instance be included in a declaration, to enhanced tax certainty and its support for practical actions by governments, tax administrations and businesses to provide a more predictable and certain tax environment to support cross-border trade and investment and secure a more stable and predictable revenue stream for governments.
While the focus of this report is on the G20 and OECD, it also presents an important opportunity to engage in dialogue with developing countries on areas where enhanced tax certainty furthers their development goals. Developing countries need to mobilize domestic resources to finance the Agenda
2030 for Sustainable Development, while facing many distinct challenges in balancing the need for sustainable revenues against creating an attractive business environment. The appropriateness for developing countries of the specific tools to enhance tax certainty suggested in the report for G20 and OECD countries needs to be assessed in terms of their weaker enforcement capabilities and lower implementation capacity. While noting that many issues relating to tax certainty are already embedded in existing capacity building programs, as a specific practical measure, the report proposes a consultative workshop on tax certainty for African countries to be held in the region in 2017 to take forward the discussion on the particular challenges that developing countries face.
* ‘Tax Certainty – IMF/OECD Report for the G20 Finance Ministers’, March 2017
go to www.oecd.org
TAX CERTAINTY – IMF/OECD REPORT FOR THE G20 FINANCE MINISTERS
Results from survey of 724 businesses from 62 different countries, with regional headquarters in 107 different jurisdictions.
Top five general factors affecting investment and location decisions
2. Political certainty
3. The overall tax environment
4. Current and expected macroeconomic conditions in the country
5. Labour costs
Top five tax factors affecting investment and location decisions
1. Uncertainty about the effective tax rate on profit
2. The anticipated effective tax rate on profit
3. Uncertainty about the outcome of indirect taxes and consumption taxes
4. The anticipate neutrality of VAT/GST of the tax burden of other consumption taxes
5. Existence of tax treaties.
Top five sources of tax uncertainty for businesses
2. Inconsistent tax treatment by the tax authority
3. Inconsistent interpretation of international tax standards
4. Lengthy decision making of the courts
5. Complexity in the tax legislation
Top five tools for fostering tax certainty
1. Reduction in frequency of change in tax legislation
2. Reduction in bureaucracy in complying with tax legislation
3. Detailed guidance in tax regulations
4. Changes in statutory tax system announced in advance
5. Effective domestic tax resolution regimes
Note: the respondents were asked to rate each factor on a scale from 1 to 5 where 1
means that the factor is not important and 5 means the factor is extremely important.