Taxation, Social Cohesion and Sustainable Development - Overview of key determinants and assistance in tax compliance s

1. Taxation, Social Cohesionand Sustainable Development- Overview of key determinants andassistance in tax compliance strategies LAC Tax Policy Forum 16-17 September 2010, Panama City W. Steven Clark OECD Centre for Tax Policy and Administration

2. Overview of speaking points • Taxation and development – consider ways in which taxation influences the development path of countries: • Economic activity (level and allocation of investment) • Financing of key public expenditures (economic, social) • Accountability of government • Voluntary compliance of taxpayers • Market participation (above-ground economy) • Efforts to improve voluntary compliance of individuals • Approaches to curb aggressive corporate tax planning (tax compliance by banks)

3. Taxation and development (key linkages):- level of economic activity, investment • Taxation (policy, administration, compliance) plays a fundamental role in shaping economic and social development – consider various influences (1-5): • Tax policy (selection of taxes, tax mix, tax rates and base), tax administration, and tax compliance can positively or negatively influence economic activity (income/GDP). • Some tax systems are less distorting (more efficient) to the level and allocation of capital: • Stability, transparency, predictability • Tax mix (consumption tax, residential property tax vs. income tax) • Tax design (low rate, broad base, limited use of incentives) • Factors influencing tax compliance

4. Taxation and development:-- tax revenues to fund public expenditures • Taxation establishes amount of tax revenue to be raised to fund public expenditure on key programmes important to attracting investment and social policy: • Infrastructure, education, health care, property rights • Unemployment, social welfare, housing • Note: tax incentives for investment given on discretionary basis, other incentives found to be inefficient and favouring high net worth individuals -- can be detrimental to economic development by: • Misallocating resources • Eroding tax revenues • Discouraging voluntary tax compliance

5. Taxation and development:-- accountability of government • Taxation influences the level of accountability of government over use of public funds (efficient/equitable?) -- accountability influences: • Taxpayer compliance • Business participation in the market (above-ground) economy. • Some tax systems exhibit high degree of accountability: • Broad taxpayer base (e.g. consumption tax) – diverse vested interests, broad-based social contract, pressure on government to act in interest of citizens collectively • Some tax systems exhibit low degree of accountability: • Narrow taxpayer base (e.g. heavy reliance on resource taxation) – can inhibit transparency, invite corruption, misuse of public funds

6. Taxation and development:-- fairness/efficiency encouraging compliance • Features of tax system (tax mix, design, administration) influence degree of willingness of individuals and business to voluntarily comply with a tax system • Relevant tax-related factors influencing tax compliance: • Fairness in taxation (sharing of tax burden) • Tax compliance costs (policy and administration; provisions recognizing high costs for small firms; use of ICT) • Government accountability • Fairness in taxation – where tax system reduces income inequality, contributes to perception of fairness in sharing of tax burden, strengthen voluntary compliance

7. Taxation and development:-- fairness/efficiency encouragingparticipation in above-ground economy • Features of tax system (tax mix, design, administration) influence business incentives to operate in above-ground market economy or shadow-economy • Relevant tax-related factors: • Fairness in taxation (sharing of tax burden) • Tax compliance costs • Government accountability • Increased business opportunities (e.g. foreign markets), business growth where tax system encourages participation in above-ground economy

8. Focus of recent OECD work • Recent OECD work elaborates ways in which tax can help underpin social cohesion and thereby foster economic development: • Broad-based taxation to increase government accountability • Design of tax systems to achieve fairer sharing of the tax burden (tax mix, tax rates, base provisions) • Progressive PIT rate schedules, basic allowances, provision benefiting primarily low-income households (e.g. in-work tax credits) • Limited use of personal tax reliefs/incentives benefiting primarily high-income households (e.g. savings incentives) • Taxation of corporate profits (domestic and foreign) • Measures to ensure tax compliance, steps to contain aggressive tax planning by high net worth individuals and corporations

9. Encouraging voluntary complianceof high net worth individuals • In recent years, greater transparency and exchange of information to counter offshore tax evasion. • Request by G20 leaders – Global Forum on Transparency and Exchange of Information – reorganized to provide robust peer review on effective implementation of standards (start March 2010) • Increased steps being taken by governments to facilitate voluntary disclosures by taxpayers with undisclosed income and/or assets. • Offshore Voluntary Disclosure (OECD, 2010) sets out a framework for successful offshore voluntary compliance programmes for governments to consider.

10. Curbing aggressivetax planning by corporations • Offshore risks include use of no/nominal tax jurisdictions by closely-held businesses and multinationals to avoid reporting of taxable income: • Offshore financing structures • Offshore holding companies for intellectual assets. • Key challenge of government – addressing aggressive tax planning by banks, both on their own account and for their clients: • Direct revenue losses from leaving unchecked aggressive planning • Indirect revenue loss where perceptions of unfair sharing of the tax burden discourage voluntary compliance of other taxpayers

11. Thank you