TAX CERTAINTY - OECD

1 IMF/ oecd report for the G20 finance Ministers march 2017 TAX CERTAINTY Acronyms ADR Alternative Dispute Resolution APA Advance Pricing Agreement BEPS Base Erosion and Profit Shifting BIAC Business Industry Advisory Committee CIT Corporate Income Tax CIV Collective Investment Vehicle COSEFIN Council of Ministers of finance of Central America, Panama and the Dominican Republic CRS Common Reporting Standard EAC East African Community EI Extractive Industries ETPF European Tax Policy Forum FT Financial Times FTA Forum on Tax Administration G20 Group of Twenty GAAR General Anti-Avoidance (Abuse) Rule GST Goods and Services Tax IMF International Monetary Fund MAP Mutual Agreement Procedure MNE Multinational Enterprise NACE Nomenclature Statistique des Activit s conomiques dans la Communaut Europ enne NPV Net Present Value OECD Organisation for Economic Co-operation and Development OUCBT Oxford University Centre for Business Taxation SAAR Specific Anti-Avoidance Rule TADAT Tax Administration Diagnostic Tool TRACE Treaty Relief and Compliance Enhancement UN United Nations VAT Value Added Tax 3 Table of Contents EXECUTIVE SUMMARY.

2 5 Key Messages .. 6 Practical tools to enhance tax CERTAINTY .. 7 Next steps .. 8 INTRODUCTION .. 9 THE NATURE AND IMPACT OF TAX UNCERTAINTY .. 11 A. Preliminaries .. 11 B. Analytical perspectives .. 11 C. Evidence .. 14 MAIN SOURCES OF TAX UNCERTAINTY .. 16 A. Policy design and legislative uncertainty .. 16 B. Policy implementation and administrative uncertainty .. 20 C. Uncertainty around dispute resolution mechanisms .. 22 D. Uncertainty arising from changes in business and technology .. 22 E. Taxpayer conduct can contribute significantly to uncertainty .. 23 F. International aspects of uncertainty .. 23 NEW EVIDENCE ON TAX UNCERTAINTY .. 25 A. Summary of Findings .. 25 B. The business survey .. 26 C. The tax administration survey .. 34 D. Narrative analysis of CIT changes .. 37 PRACTICAL TOOLS FOR ENHANCING TAX CERTAINTY IN G20 AND OECD COUNTRIES .. 43 A. Tax policy design and legislation.

3 43 B. Tax Administration: Avoiding and Resolving Disputes .. 47 C. International Aspects .. 58 D. Other approaches .. 59 TAKING THE TAX CERTAINTY AGENDA FORWARD .. 62 Appendix A Tax uncertainty and investment: Theory and Evidence .. 63 Appendix B The Business Survey .. 70 Appendix C The Tax Administration Survey .. 103 Appendix D Summary Statistics for Narrative Analysis .. 110 References .. 111 4 5 EXECUTIVE SUMMARY This report responds to the request from the G20 Leaders at their Summit in Hangzhou, China in September 2016 for the OECD and the IMF to work on issues of tax The request arises against the backdrop of heightened concern about uncertainty in tax matters and its impact on cross-border trade and investment, especially in the context of international taxation. There are many reasons for heightened concerns about tax uncertainty, affecting both taxpayers and tax administrations.

4 These include: the spread and emergence of new business models and increased internationalization of business activities; heightened concern with aggressive tax planning; some fragmented and unilateral policy decisions; certain court decisions; and updates to the international tax rules, such as through the G20/OECD Base Erosion and Profit Shifting (BEPS) Project, which are necessary to ensure that the international tax rules remain up to date with the changing environment. At a time when good progress has been made in fighting tax evasion and aggressive tax avoidance through increased transparency and the G20/OECD BEPS Project, it is also important to focus on tax CERTAINTY . In this context, the importance of providing greater tax CERTAINTY to taxpayers to support trade, investment and economic growth has become a shared priority of governments and businesses.

5 This report explores the nature of tax uncertainty, its main sources and effects on business decisions and outlines a set of concrete and practical approaches to help policymakers and tax administrations shape a more certain tax environment. It draws on the experience of the IMF and the OECD and on input received by the OECD from businesses, tax administrations and civil society. The report provides new information from an extensive global survey by the OECD of more than 700 businesses representing annual turnover of more than USD 17 trillion and companies headquartered in 62 different jurisdictions and a survey of 25 predominantly G20 and OECD tax administrations. It is recognised that surveys of this kind need to be interpreted with caution. Narrative evidence, from a new IMF dataset, is also presented on the frequency and pre- announcement of changes in corporate taxation in twelve advanced countries.

6 This report focuses on tax CERTAINTY from the perspective of businesses and tax administrations in G20 and OECD countries, and stresses that the issues faced and many of the responses needed are likely to be different in developing countries. While there is widespread agreement on the need to increase CERTAINTY in tax matters, the report recognizes that developing countries can face particular challenges of capacity and in combining the need to secure sustainable revenues to support domestic revenue mobilization with ensuring the tax CERTAINTY necessary to create an attractive business environment. 1 The report has been prepared by staff from the OECD and IMF, under the responsibility of the Secretariats and Staff of the two mandated organizations.

7 The report reflects a broad consensus among these staff, but should not be regarded as the officially endorsed views of those organizations or of their member countries. 6 Key Messages 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.

8 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 administration. 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.

9 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.

10 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. 7 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.