Fiscal/Tax Competition: State Issues

1. Fiscal/Tax Competition:State Issues Ken Klassen

3. Overview • Outline: • Overview of trends multijurisdictional commerce and implication for tax planning • Encouraging economic growth • Some thoughts on directions for research

4. 1. Importance of the Topic • Much discussion of international tax systems’ effects of global businesses, country economies, tax revenues. • “Governments risk ‘global tax chaos’ as they chase dwindling revenues from multinational companies unless the international tax regime is radically overhauled” —G20 Report

5. The 1998 Ottawa Taxation Framework Conditions • Main principles • Neutrality: between form and across method • Efficiency: cost of compliance • Certainty and Simplicity: when, where, how • Effectiveness and Fairness: right amountand timing with minimal avoidance opportunities • Flexibility: the world will change

6. Trends • Connectivity, and the diversity thereof, is increasing rapidly • Devices are sold at a loss to achieve services • Cloud computing • Eventually to “The Internet of Things” • Robotics and 3-D printing

7. Tax Issues Raised by Changing Mode of Commerce • Strategic income location • well, BEPS • Can shift burden of taxation to single-state business or across forms of business • Creates non-neutralities of location or form • Always existed, but trends have made the revenue effect larger and it is likely to grow

8. The 1998 Ottawa Taxation Framework Conditions • Main principles • Neutrality: between form and across method • Efficiency: cost of compliance • Certainty and Simplicity: when, where, how • Effectiveness and Fairness: right amountand timing with minimal avoidance opportunities • Flexibility: the world will change

9. 2. Encouraging Economic Growth • Beyond neutrality • Who creates economic growth? • Deloitte 2012: Growing businesses • Van Praag and Versloot (2007) • Meta analysis of 57 ‘high quality’ studies • Small and young firms  employment growth and maybe productivity growth • <10% use self-employment as def’n

10. Encouraging Growth • Wong et al. (2005) and Stam et al (2011) • The effect of entrepreneurs on growth is not universal across entrepreneurs • Only “ambitious” entrepreneurs relate to economic growth • Other entrepreneurs and other high-growth firms have no incremental effect • The results for high-growth firms may be because their growth results from M&A

11. 3. Three Conceptual Possibilities • Collect tax in customer’s jurisdiction through self-assessment • Rarely does anyone self assess • …in the seller’s jurisdiction • Wrong tax rate and wrong government • …in the customer’s jurisdiction by seller • Requires non-Nexus entities to register creating complexity and limiting supply

12. Options considered at the OECD • Create a ‘digital presence’ standard analogous to physical presence • Some form of ‘virtual permanent establishment’ • Require remote suppliers to register locally • Require federal mediation or state collective

13. Other Options • Introduce a VAT rather than sales tax • Suffers from some of the same issues • Possibly easier to achieve multi-state collection agreements • Other advantages as well • Much less concern about cascading

14. Conclusion • Important issues as pressure on state tax revenue continues • Tax in a neutral fashion both harder and more important as methods of business evolve • Continued need for careful examination of policies focused on economic growth