Recent Developments in Tax Harmonization/Coordination

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Recent Developments in Tax Harmonization/Coordinat
ion

• Isaias Coelho
• Tax Policy Division
• Fiscal Affairs Department
• International Monetary Fund
• XVII Regional Seminar on Fiscal Policy
• CEPAL
• Santiago de Chile, January 26, 2005

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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.

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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.

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Proposition 3

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

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Proposition 4

• Eventually, new significant differences arise
  when one countryor a group of countriesdepart
  from the established wisdom. If successful, the
  experience generates a new tax reform wave.

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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).

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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).

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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

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Tax responses to the globalization challenge - I

• (1) tax treaties, involving a sharing of the tax
  base
• (2) thin capitalization rules, limiting abusive
  interest deductionor 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

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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)

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The case of excises on cigarettes

• too high rates
• ? smuggling, counterfeiting, evasion
• ? lower rates tendency to regional rate
  alignment

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Strategies for attracting foreign investment
often involve

• tax incentives and
• tax competition (unilateral attempts to create
  tax differentials)

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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

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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).

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OECD
Lat.Am,
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OECD
Lat.Am.
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Policies to deal with tax competition

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

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Tax competition (ctd.)

• (2) code of conduct, in connection with a
  process of economic integration
• Example EUs 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.

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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

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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)

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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

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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.

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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 Commissions 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.

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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 Its 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.

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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/pap
  ers/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.

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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 Schools 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/con
  f2004/.
• Zee, H., World Trends in Tax Policy, Intertax
  32(8/9), pp. 352-364, August 2004.