India Tax Insights – ninth edition
“Tax certainty shall drive investments and growth”
In conversation with:
DG International Taxation, Germany and
Chair, OECD's Committee on Fiscal Affairs (as of 01.01.2017)
Q. How is G20 factoring tax certainty into its agenda to provide a more conducive tax environment?
A. High level of tax certainty delivers trust and encourages further investment. Certain level of uncertainty will always exist with continual economic change. Also, legislators cannot foresee all circumstances, so they need to rely on a generic abstract language. But tax uncertainty can be as harmful as tax increases. Certainty is essential to avoid negative effects on overall investment, productivity and, ultimately, economic growth. G20, supported by Organisation for Economic Co-operation and Development (OECD), is in discussions on how tax policy can be used to achieve the G20’s broader objective of strong, sustainable and balanced growth.
Q. How is OECD engaging with economies to bring in tax certainty?
A. We are entering a new phase of tax certainty. Tackling Base Erosion and Profit Shifting (BEPS), improving transparency to fight tax evasion and addressing the tax aspects of the domestic resource mobilization challenge in view of the 2030 Agenda remain the top priorities. In addition, 2016 saw the OECD supporting the G20 Finance Ministers launch a comprehensive discussion on the role that tax policy can play in achieving sustainable, balanced and inclusive growth and certainty in business environment. We have achieved a lot in recent years in bringing the G20 agenda forward and in adapting international tax rules to progressive internationalization of our economies.
We have made great progress in the areas of transparency with the BEPS project. Although this work is not yet finished, the international tax policy landscape has already changed significantly. I am sure G20 will continue to have a leading role.
Q. Are tax policies focused on supporting and driving innovation?
Tax and inclusive growth, i.e., promoting strong, sustainable and balanced growth, remains the overall aim of the G20. We recognize that a tax system focused on driving innovation can play a key role in shaping the knowledge-based economy. Future growth will be led by new ideas and technologies.
One main challenge for policymakers will be to design policies that ensure that innovation contributes to social inclusiveness. This is very important so as to have the society also agree to the policies shaped by the G20, aligned to efficiency and equity.
Q. How can countries take forward the agenda of tax reforms to enable inclusive growth?
Innovation and inclusiveness do not have to be mutually exclusive. Digitalization fosters economic growth, and it is one of the key drivers of innovations. But at the same time, it has inclusive qualities. The internet has opened up new markets for products and services. Market entry barriers have significantly lowered. It has helped create employment for people worldwide. A well-designed tax policy can contribute to this by avoiding barriers for innovative founders and also for employees.
At the G20 meeting in July, ministers were asked to share their views on the creation of tax systems that drive innovation and growth, while reducing inequalities at the same time. A very broad range of options emerged from the discussion. Broad base and low rate approach, simple and transparent tax system in place, reducing bureaucracy and keeping reforms sustainable to make sure that tax policy supports inclusive growth were some good ideas.
Alongside, some specific ideas were discussed, such as research and development (R&D) incentives for small enterprises — in particular, offering incentives for hiring high skilled workers, reducing the regressivness of value added tax (VAT) and also capping personal income tax allowances. In the discussions, it was made clear that there cannot be a one-size-fits-all approach. Every country has to design its tax system and its tax laws specifically suited to its own systems and situations.
The challenge now is to focus on the tax system as a whole and introduce an appropriate mix of measures taking into account their interdependencies. This, in short, will ensure a balance between the aims of efficiency, equity, simplicity and revenue-raising.
There is, of course, a need for further analysis of how the efficiency and equity objectives may be reconciled. The tradeoffs between tax policies that pursue growth and equity objectives have to be identified and the factors both within and beyond the tax systems that have an impact on those trade-offs have to be explored. The OECD, together with the International Monetary Fund (IMF), supports the G20 with more in-depth research on the topic. They are putting a really great effort on this, and I am very much looking forward to the research outcomes.
Q. What can we look forward to from the G20 agenda under Germany’s leadership?
We will continue to stress on the importance of sustainable growth and economic inclusion. Our own priorities for the finance track will focus on strengthening resilience and shaping digitalization. In the tax field, we will continue the current international tax work in order to increase the reliability of the international tax system. For this purpose, we want to make sure that the G20 and OECD BEPS recommendations are implemented consistently. We will also continue to strengthen the work on tax transparency. Capacity building is another issue that we will be focusing on.
With regard to BEPS, we will now start the monitoring process to make sure that the BEPS recommendations are being implemented consistently by participating countries. 85 countries have already signed up to the BEPS commitment and we expect more countries to sign up as we continue to identify relevant countries. It is important to have everyone on board.
On transparency, the G20 has achieved a lot of progress over the past few years. There are robust peer reviews. Various countries are living up to their expectations of sharing information on request, and there has been a global agreement on the new reporting standards.
Another central topic that we are focusing on is tax certainty related to cross-border investments.
Q. How can tax policies be made certain?
Tax policy can contribute to tax certainty by ensuring a stable, accountable and appropriate legal environment. This is important on both the domestic and international levels. The economic environment keeps changing over time. It is a dynamic process, and hence the need for corresponding tax reforms. However, tax reforms can also have unintended side-effects and can lead to uncertainty.
Well-designed reforms accompanied by informative communication strategies can contribute to the target of achieving tax certainty. Countries should communicate what they intend to do.
Tax administration must ensure transparent and swift procedures and fair and even application of the tax laws. Processes must be accountable and transparent. Similar cases that fall under the same legal provisions should be treated in the same way and should not lead to different results. In other words, enterprises must be able to assess the tax consequences of their investment projects before the final decision is taken.
Q. What are the possible instruments to improve tax certainty?
We expect on delivering concrete instruments to improve tax certainty. The first set of concrete instruments would be dispute-avoidance procedures such as joint audits. The second area would be of dispute-resolution procedures.
On dispute-avoidance procedures, it is important to make sure, as far as possible, that conflicts are avoided. For example, advance price agreements (APAs) are instruments to bring clarity at very early stages of cases and help avoid lengthy conflicts. Such procedures should be designed in a way that enterprise can get reliable results within a reasonable period of time. APAs should be open to as many cases as possible, and tax payers should also be in a position to get that certainty via APAs. Designing the right procedures and rules for dispute avoidance is also an important issue.
If it turns out that a conflict cannot be avoided, it is essential to have an effective and efficient dispute-resolution procedure in place. This aspect has been covered under BEPS Action Plan, under Action Item 14. The G20 countries have already committed themselves to improve the international dispute-resolution mechanisms and, in particular, the mutual agreement procedures.
Q. Are tax transparency and exchange of information moving along the desired track?
A. Some countries are more tax transparent and have identified the beneficial owners. Their legal systems and arrangements are completely transparent. However, many other countries are not yet transparent. There is a need to create a level playing field to foster growth and cross-border investments. Reliability of information, accuracy and completeness are also very important for exchange of information.
Q. How do you motivate governments to build consensus on various standards? Is the G20 planning to publish the information on various standards?
A. The whole idea of BEPS is to make things predictable, coordinate various countries’ policies and agree to minimum and maximum standards. I disagree with the view that BEPS is creating uncertainty. Though we don’t know yet how countries will be implementing the suggested policies, we do have agreement on certain minimum standards and timelines, which are binding. For instance, for country by country reporting, same conditions will be followed by the different countries. The G20 will pick up the initiative to get a political agreement on the issues. The rest of the work is supported by OECD and IMF.
Q. How does BEPS plan to take care of the diverse decisions by countries on a common issue? For instance, in a recent case, the EU decided that the OECD transfer pricing rules were against the EU State Aid norms.
A. In future, there will be a need to consider the link between harmful tax competition, state aids and World Trade Organisation (WTO) subsidies. I cannot comment on the specific case, as we will need to understand the full picture and learn more about the case.
Q. Finally, which areas need special attention for enabling tax certainty?
A. Coming to a workable result within an appropriate period of time requires a coherent institutional design of procedures and trained staff. For instance, in Germany, it has not been easy to get the right staff and the right number of staff. I do see a great need of action in this area.
The OECD has undertaken preparatory work in the area of tax certainty and I am sure that OECD and IMF together can provide us a solid foundation of further work in this area. I am certain that the tax certainty topic fits very well in both our G20 tax agenda and also the boarder G20 agenda, and I am looking forward to the coming year.