Syed Masoud Ali Naqvi Senior Partner KPMG Taseer Hadi & Co. Karachi 15-16 April 2008 GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMS

Syed Masoud Ali NaqviSenior Partner

KPMG Taseer Hadi & Co.Karachi

15-16 April 2008

Syed Masoud Ali NaqviSenior Partner

KPMG Taseer Hadi & Co.Karachi

15-16 April 2008

South Asian Tax Summit 2008, South Asian Tax Summit 2008, KarachiKarachi

GLOBALIZING ECONOMIES: GLOBALIZING ECONOMIES:

CHALLENGES TO TAX CHALLENGES TO TAX SYSTEMSSYSTEMS

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GLOBALIZING ECONOMIES: GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMSCHALLENGES TO TAX SYSTEMSGLOBALIZING ECONOMIES: GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMSCHALLENGES TO TAX SYSTEMS

Fundamental Goals and Objectives of Tax PolicyFundamental Goals and Objectives of Tax Policy

ChallengesChallenges

Response to ChallengesResponse to Challenges

KPMG Tax Survey 2007KPMG Tax Survey 2007

Issues for Global and National Tax AuthoritiesIssues for Global and National Tax Authorities

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FUNDAMENTAL GOALS ANDFUNDAMENTAL GOALS ANDOBJECTIVES OF TAX POLICYOBJECTIVES OF TAX POLICY


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FUNDAMENTAL GOALS ANDFUNDAMENTAL GOALS ANDOBJECTIVES OF TAX POLICYOBJECTIVES OF TAX POLICYFUNDAMENTAL GOALS ANDFUNDAMENTAL GOALS ANDOBJECTIVES OF TAX POLICYOBJECTIVES OF TAX POLICY

Meeting revenue needs in a fair mannerMeeting revenue needs in a fair manner

Maintaining neutrality and minimizing distortionsMaintaining neutrality and minimizing distortions

Limiting compliance and administrative burdensLimiting compliance and administrative burdens

Impacting on array of economic and social activitiesImpacting on array of economic and social activities

Promoting investment and accelerating economic Promoting investment and accelerating economic growthgrowth

Creating employment opportunitiesCreating employment opportunities

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Providing relief to common man and improving social Providing relief to common man and improving social indicatorsindicators

Attracting Foreign Direct Investment (FDI)Attracting Foreign Direct Investment (FDI)

Strengthening country’s infrastructureStrengthening country’s infrastructure

Meeting the challenge of changeMeeting the challenge of change

FUNDAMENTAL GOALS ANDFUNDAMENTAL GOALS ANDOBJECTIVES OF TAX POLICYOBJECTIVES OF TAX POLICYFUNDAMENTAL GOALS ANDFUNDAMENTAL GOALS ANDOBJECTIVES OF TAX POLICYOBJECTIVES OF TAX POLICY

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CHALLENGESCHALLENGES


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CHALLENGESCHALLENGESCHALLENGESCHALLENGES

Fall of Trade barriersFall of Trade barriers

Global Market for capitalGlobal Market for capital

Instantaneous access to information around the Instantaneous access to information around the globeglobe

Development of e-commerce and new technologiesDevelopment of e-commerce and new technologies

Expansion of services economyExpansion of services economy

New financial instruments, tax havens and financial New financial instruments, tax havens and financial innovationsinnovations

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Rapidly changing business structuresRapidly changing business structures

Focus on corporate governanceFocus on corporate governance

Impact of other jurisdictional choices in tax policy on Impact of other jurisdictional choices in tax policy on national ability to raise revenue in a fair mannernational ability to raise revenue in a fair manner

International Tax CompetitionInternational Tax Competition

CHALLENGESCHALLENGESCHALLENGESCHALLENGES

Harmful Tax CompetitionHarmful Tax Competition

ArbitrageArbitrage

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CHALLENGES – CHALLENGES – HARMFUL TAX COMPETITIONHARMFUL TAX COMPETITIONCHALLENGES – CHALLENGES – HARMFUL TAX COMPETITIONHARMFUL TAX COMPETITION

Competition occurs when one country provides tax Competition occurs when one country provides tax inducement to attract capitalinducement to attract capital

Harmful tax competitionHarmful tax competition

Can severely erode the capital base of losing countryCan severely erode the capital base of losing country

Can distort investment decision and undermine fiscal Can distort investment decision and undermine fiscal stabilitystability

Can result in high taxes on immobile income like Can result in high taxes on immobile income like wages, etc.wages, etc.

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CHALLENGES –CHALLENGES –TAX ARBITRAGETAX ARBITRAGECHALLENGES –CHALLENGES –TAX ARBITRAGETAX ARBITRAGE

Exploitation of differences in tax laws of two or more Exploitation of differences in tax laws of two or more

jurisdictions that results in lowering of a tax payers jurisdictions that results in lowering of a tax payers

world-wide tax liability by ensuring that income is not world-wide tax liability by ensuring that income is not

taxed anywheretaxed anywhere

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CHALLENGES –CHALLENGES –ELECTRONIC COMMERCEELECTRONIC COMMERCECHALLENGES –CHALLENGES –ELECTRONIC COMMERCEELECTRONIC COMMERCE

Adaptation of existing tax systems to an economy Adaptation of existing tax systems to an economy that increasingly ignores physical borders and that increasingly ignores physical borders and operates under new business modelsoperates under new business models

Shrinkage of tax base by convergence of more and Shrinkage of tax base by convergence of more and more assets into intangiblesmore assets into intangibles

Adaptation of a location – base for taxing e-Adaptation of a location – base for taxing e-commercecommerce

Increasing difficulties for governments to verify that Increasing difficulties for governments to verify that a transaction has occurred and wherea transaction has occurred and where

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CHALLENGES –CHALLENGES –ELECTRONIC COMMERCEELECTRONIC COMMERCECHALLENGES –CHALLENGES –ELECTRONIC COMMERCEELECTRONIC COMMERCE

The overall problem of double taxation in case of The overall problem of double taxation in case of e-commerce due to conflicting provisions of e-commerce due to conflicting provisions of countries regarding e-commerce and intangible countries regarding e-commerce and intangible assetsassets

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CHALLENGES –CHALLENGES –POLITICAL & SOCIALPOLITICAL & SOCIALCHALLENGES –CHALLENGES –POLITICAL & SOCIALPOLITICAL & SOCIAL

Fiscal responsibility requires addressing both taxes Fiscal responsibility requires addressing both taxes and spendingand spending

Rising inequality strengthens the case for Rising inequality strengthens the case for progressivityprogressivity

Tax system should collect the taxes that are owedTax system should collect the taxes that are owed

Tax reforms should strengthen taxation at the Tax reforms should strengthen taxation at the business levelbusiness level

Taxes for individuals be simplifiedTaxes for individuals be simplified

Social policy can and should often be advanced Social policy can and should often be advanced through the tax code-and it must be well designedthrough the tax code-and it must be well designed

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RESPONSE TO CHALLENGESRESPONSE TO CHALLENGES


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RESPONSE TO CHALLENGESRESPONSE TO CHALLENGESRESPONSE TO CHALLENGESRESPONSE TO CHALLENGES

Tax ReformsTax Reforms

EfficiencyEfficiency

FairnessFairness

SimplicitySimplicity

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Tax environment for Foreign Direct Investments (FDI)Tax environment for Foreign Direct Investments (FDI)

Adaptation of international tax rules to the services Adaptation of international tax rules to the services economyeconomy

Countering the use of tax havens to evade taxCountering the use of tax havens to evade tax

Balance between tax payers service and enforcementBalance between tax payers service and enforcement

Avoiding double taxationAvoiding double taxation

Linkage between tax compliance and good corporate Linkage between tax compliance and good corporate governancegovernance

Discourage bribery and corruptionDiscourage bribery and corruption

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OECD Role in inspiring betterOECD Role in inspiring betterInternational Tax Co-operationInternational Tax Co-operation

Agreement on the models – guidelines and best practicesAgreement on the models – guidelines and best practices

Monitoring implementation of modelsMonitoring implementation of models

Developing framework for resolving disputesDeveloping framework for resolving disputes

Encouraging dialogue amongst developed, Encouraging dialogue amongst developed, developing and economies in transitiondeveloping and economies in transition

OECD Model Tax ConventionOECD Model Tax Convention

OECD Transfer Pricing guidelinesOECD Transfer Pricing guidelines

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OECD Role in inspiring betterOECD Role in inspiring betterInternational Tax Co-operationInternational Tax Co-operation

Interact with business to provide global frameworkInteract with business to provide global framework

Provide tax framework for e-commerceProvide tax framework for e-commerce

Extending the debate to all cross border servicesExtending the debate to all cross border services

Issues under Direct TaxIssues under Direct Tax

Issues under Indirect Tax - VATIssues under Indirect Tax - VAT

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KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007


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KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007

KPMG Survey stresses that corporate tax rate worldwide KPMG Survey stresses that corporate tax rate worldwide continue to fall but the rate of decline is slowingcontinue to fall but the rate of decline is slowing

Global average rate is 26.8 percent as against 27.2 Global average rate is 26.8 percent as against 27.2 percent last yearpercent last year

Out of 92 countries which participated in the survey, 18 Out of 92 countries which participated in the survey, 18 countries lowered their rate and 2 countries increased. countries lowered their rate and 2 countries increased. Major exception was Turkey where 10% reduction of tax Major exception was Turkey where 10% reduction of tax was made (from 30 to 20 percent)was made (from 30 to 20 percent)

Corporate tax rates have almost reached their natural Corporate tax rates have almost reached their natural low point and countries are now turning to more low point and countries are now turning to more sophisticated method of attracting and retaining inward sophisticated method of attracting and retaining inward investment investment

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There would still be some further reduction of tax rate There would still be some further reduction of tax rate

in UK, Germany, Spain, Singapore, China and in UK, Germany, Spain, Singapore, China and

countries like Pakistan, which demonstrates that countries like Pakistan, which demonstrates that

international tax competition will still have some way international tax competition will still have some way

to goto go

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KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007(VAT / GST OECD 2007)(VAT / GST OECD 2007)KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007(VAT / GST OECD 2007)(VAT / GST OECD 2007)

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KPMG TAX SURVEY 2007 KPMG TAX SURVEY 2007 (Latin America / Caribbean 2007)(Latin America / Caribbean 2007)KPMG TAX SURVEY 2007 KPMG TAX SURVEY 2007 (Latin America / Caribbean 2007)(Latin America / Caribbean 2007)

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KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007(European Union 2007)(European Union 2007)KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007(European Union 2007)(European Union 2007)

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KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007(Asia / Pacific 2007)(Asia / Pacific 2007)KPMG TAX SURVEY 2007KPMG TAX SURVEY 2007(Asia / Pacific 2007)(Asia / Pacific 2007)

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ISSUES FOR GLOBAL AND ISSUES FOR GLOBAL AND NATIONAL TAX NATIONAL TAX AUTHORITIESAUTHORITIES


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ISSUES FOR GLOBAL ANDISSUES FOR GLOBAL ANDNATIONAL TAX AUTHORITIESNATIONAL TAX AUTHORITIESISSUES FOR GLOBAL ANDISSUES FOR GLOBAL ANDNATIONAL TAX AUTHORITIESNATIONAL TAX AUTHORITIES

Global and Regional collaborationGlobal and Regional collaboration

Devising globally acceptable principles for Devising globally acceptable principles for International Tax CompetitionInternational Tax Competition

Globally / Regionally acceptable tax regulators for:Globally / Regionally acceptable tax regulators for:

Mergers and AcquisitionsMergers and Acquisitions

IntangiblesIntangibles

Electronic CommerceElectronic Commerce

Transfer PricingTransfer Pricing

Permanent establishmentPermanent establishment

Services Taxation balanced approach – Source vs LocationServices Taxation balanced approach – Source vs Location

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ISSUES FOR GLOBAL ANDISSUES FOR GLOBAL ANDNATIONAL TAX AUTHORITIESNATIONAL TAX AUTHORITIESISSUES FOR GLOBAL ANDISSUES FOR GLOBAL ANDNATIONAL TAX AUTHORITIESNATIONAL TAX AUTHORITIES

Policy makers have a difficult task in communicating Policy makers have a difficult task in communicating the benefits of a low corporate tax strategy the benefits of a low corporate tax strategy especially if it is combined with higher indirect taxespecially if it is combined with higher indirect tax

Requires a lot of efforts to persuade voters and Requires a lot of efforts to persuade voters and general public of the benefits of paying taxes for a general public of the benefits of paying taxes for a better tomorrowbetter tomorrow

Modernizing the VAT system to better reflect current Modernizing the VAT system to better reflect current business environmentbusiness environment

Review of the VAT rules for Finance and Insurance Review of the VAT rules for Finance and Insurance sectors to create a legislation which is easier to sectors to create a legislation which is easier to administer and comply withadminister and comply with

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ISSUES FOR GLOBAL AND ISSUES FOR GLOBAL AND NATIONAL TAX AUTHORITIESNATIONAL TAX AUTHORITIESISSUES FOR GLOBAL AND ISSUES FOR GLOBAL AND NATIONAL TAX AUTHORITIESNATIONAL TAX AUTHORITIES

VAT for these sectors will be more stable and tax VAT for these sectors will be more stable and tax leakages will be minimizedleakages will be minimized

Develop a system to better reflect taxation where Develop a system to better reflect taxation where consumption occurs principally for services which consumption occurs principally for services which can be supplied at a distance (e-commerce, etc.).can be supplied at a distance (e-commerce, etc.).

OECD effort on this by the year 2010 may result in OECD effort on this by the year 2010 may result in shift of VAT from one country to anothershift of VAT from one country to another

Need to tackle the Carousel / missing trades fraud Need to tackle the Carousel / missing trades fraud issuesissues

Worldwide re-focusing on indirect taxationWorldwide re-focusing on indirect taxation

Transfer Pricing regulations and documentationTransfer Pricing regulations and documentation

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Thank youThank you

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2005 KPMG Taseer Hadi & Co., the Pakistan member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in Pakistan. The KPMG logo and name are trademarks of KPMG International.

Presenter’s contact Presenter’s contact detailsdetails

SYED MASOUD ALI NAQVISYED MASOUD ALI NAQVI

KPMG Taseer Hadi & Co.KPMG Taseer Hadi & Co.

+92 (21) 568 5847+92 (21) 568 5847

[email protected]@kpmg.com

www.kpmg.com.pkwww.kpmg.com.pk

Documents

Syed Masoud Ali Naqvi Senior Partner KPMG Taseer Hadi & Co. Karachi 15-16 April 2008 GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMS