Recent Developments in Tax Harmonization/Coordination

Isaias CoelhoTax Policy Division

Fiscal Affairs DepartmentInternational Monetary Fund

XVII Regional Seminar on Fiscal PolicyCEPAL

Santiago de Chile, January 26, 2005

2

Proposition 1

There is no reason why the tax system should be uniform across countries.Even complete domestic uniformity is possible only in very small countries.

3

Proposition 2

However, tax structures seem to move in large waves as new paradigms develop – e.g. tax withholding and the VAT in the 20th century.

4

Proposition 3

Tax systems tend therefore to converge, either by agreement (economic integration) or through emulation

5

Proposition 4

Eventually, new significant differences arise when one country—or a group of countries—depart from the established wisdom. If successful, the experience generates a new tax reform wave.

6

Harmonization of Coordination?

Tax harmonization involves an harmonious articulation of different tax systems. However, it has often been misunderstood as implying tax uniformity.

For this reason, perhaps the term tax coordination should be used instead (as for example in Barreix & Villela 2003).

7

Welfare Effects

There is a consensus that tax coordination increases efficiency and is welfare-improving for the community as a whole. However, how if affects the welfare of each member country is still open to question (Keen 1996).

For a given community of countries, the gains from internal tax coordination are much smaller than the gains from engaging in global tax coordination (Sorensen 2001).

8

Capital Movements

The globalization of economic activity (greater mobility of capital and increased trade in goods and services) tends to erode national tax bases.

The major recipients of capital, both direct and portfolio, are relatively developed (industrial) countries:

Portfolio Investment Inflows (bn US$)

0

200

400

600

800

1000

1200

1981-85 1986-90 1991-95 1996-00

IndustrialCountries

DevelopingCountries

11

Tax responses to the globalization challenge - I

(1) tax treaties, involving a sharing of the tax base

(2) thin capitalization rules, limiting abusive interest deduction—or allowing deduction of an inputed interest on equity (Keen-King 2002)

(3) transfer pricing rules, trying to limit profit shifting to low-tax jurisdictions via intra firm trade

12

Tax responses to the globalization challenge - II

(4) attenuation of profit taxation, including lower profit tax and lower withholding on income remitted abroad spontaneous harmonization

(5) adoption of worlwide income taxation

(6) gradual move to a dual income tax (7) exchange of information, for tax

and nontax purposes (Keen-Ligthart 2004)

13

The case of excises on cigarettes

too high rates

smuggling, counterfeiting, evasion

lower rates & tendency to regional rate alignment

14

Strategies for attracting foreign investment often involve:

tax incentives and

tax competition (unilateral attempts to create tax differentials)

15

Tax competition...

...always involves lowering taxation, and is feared to involve a race to the bottom that could impair the ability of the state to properly finance its functions.

But:

16

But:

the reduction in profit tax rates appears to be leveling off (Zee 2004); and

fiscal solvency imposes limits on the race to the bottom (Mendoza-Tesar 2003).

In the end, the mobile factor will be taxed more lightly than the factor less mobile (Wilson 2004).

Top Corporate Income Tax Rates

05101520253035404550

1986 1992 1997 1998 1999-2000 2001-2002

Perc

ent o

f net

inco

me

OECD

Lat.Am,

Top Personal Income Tax Rates

051015202530354045505560

1985 1992 1997 1998 1999-2000 2001-2002

Perc

ent o

f net

iinc

ome

OECD

Lat.Am.

19

Policies to deal with tax competition

(1) less favorable tax treatment of income remitted to/expenses made in low-tax jurisdictions

20

Tax competition (ctd.)

(2) code of conduct, in connection with a process of economic integration

Example: EU’s Code of Conduct for Business Taxation, for member countries and associated territories, involves a political commitment not to enter in harmful tax competition.

The EU Commission intends to actively promote the Code of Conduct to third countries.

21

Tax competition (ctd.)

(3) information exchange and transparency as a way to preserve tax sovereignty

(4) tax withholding and sharing of corresponding tax revenue

(5) moral suation; the OECD Initiative on Harmful Tax Practices

22

Tax competition (ctd.)

(6) widespread adoption of international accounting standards

(7) alternative strategies for the EU:-- separate accounting (current

system); or-- formula apportionment of revenue

(better for compliance: Mintz 2004)

23

Tax harmonization or tax competition: what suits the EU?

Tax harmonization favored by high-tax jurisdictions in Western Europe

Tax competition favored by some accession countries in Eastern Europe

24

References

Barreix, A., and L. Villela, Tributación el el Mercosur: Evolución, Comparación y Posibilidades de Coordinación. Washington and Buenos Aires: IADB and INTAL, 2003.

Bernauer, T. and V. Styrsky, “Adjustment of Voice? Corporate Responses to International Tax Competition”, European Journal of International Relations 10(1): 61-94, 2004.

Cano, H., A Harmonização Tributária nos Processos de Integração Econômica (Brasilia: Ministério da Fazenda/ESAF, 1986).

Cano, H., Armonización Tributaria del Mercosur: Ensayos sobre los Aspectos Tributarios em el Proceso de Integración. Buenos Aires: Ediciones Académicas, 1996.

Keen, M., “The Welfare Economics of Tax Coordination in the European Community”, Ch. 5 of M. Devereux (ed.), The Economics of Tax PolicyI. New York etc.: Oxford University Press, 1996.

25

References (ctd.)

Keen, M., and J. King, “The Croatian Profit Tax: An ACE in Practice”, Fiscal Studies 23(3), pp. 401-18, 2002.

Keen, M. and J. Ligthart, Information Sharing and International Taxation, IMF and Tilburg University, November 2004.

Kind, H., K. Midelfart, and G. Schjelderup, Corporate Tax Systems, Multinational Enterprises, and Economic Integration, CESifo Working Paper No. 1241, July 2004. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=573261.

McLure, Jr., C., “Corporate Tax Harmonization in the European Union: The Commission’s Proposals”, Tax Notes International 36(1), pp. 45-69, October 4, 2004.

Mendoza, E., and L. Tesar, Winners and Losers of Tax Competition in the European Union, NBER Working Paper 10051, October 2003.

26

References (ctd.)

Lemgruber, A., O Fenômeno da Competição Tributária: Aspectos Teóricos e uma Análise do Caso Brasileiro. Brasilia: ESAF, 1999.

Mintz, J., “Corporate Tax Harmonization in Europe: It’s All About Compliance”, International Tax and Public Finance, 11, pp.221-234, 2004.

OECD, A Process for Achieving a Global Levey Playing Field, presented at the Global Forum on Taxation, Berlin, June 2004. Available at http://www.oecd.org/dataoecd/13/0/31967501.pdf

Pita, C., Armonización y Sistemas Tributarios en América. Panama: CIAT, 2003.

Rezende, F., “Evolução da Estrutura Tributária: Experiências Recentes e Tendências Futuras”, Planejamento e Políticas Públicas 13, pp. 3-32, June 1996.

27

References (ctd.)

Sabaini, J., A Política Tributária Comum: A Visão Argentina e a Brasileira. Brasilia: IPRI, June 1999. Available at http://www2.mre.gov.br/ipri/papers/argentina2/2-JuanCGomezSabaini.tp.doc

Sorensen, P., “Company Tax Reform in the European Union”, International Tax and Public Finance, 11, pp. 91-115, 2004.

Tanzi, V., Globalization, tax competition, and the future of tax systems. IMF Working Paper WP/96/141. Washington: IMF, 1996.

Tanzi, V., “Globalization, Technological Developments, and the Work of Fiscal Termites”, Brooklyn Journal of International Law 26(4), pp. 1261-84, 2001.

Varsano, R., “A Guerra Fiscal do ICMS: Quem Ganha e Quem Perde”, Planejamento e Políticas Públicas 15, pp. 3-18, 1997.

28

References (ctd.)

Verdi, M., Problemas e Oportunidades na Repartição da Receita Tributária: Competição, Harmonização e Coordenação na Área Fiscal, presentation for Curso de Relações Fiscais Internacionais, s/d.

Villela, L., A. Barreix, and J. Taccone (eds.), Mercosur: Impacto Fiscal de la Integración Económica. Washington and Buenos Aires: IADB and INTAL, 2003.

Wilson, J., Tax Competition with and without Preferential Treatment of a Highly-Mobile Tax Base, presented at the Andrew Young School’s IV Annual Conference on Public Finance Issues in an International Perspective, Georgia State University, May 2004. Available at http://isp-aysps.gsu.edu/academics/conferences/conf2004/.

Zee, H., “World Trends in Tax Policy”, Intertax 32(8/9), pp. 352-364, August 2004.