Fiscal/Tax Competition:State Issues
Ken Klassen
Overview• Outline:
1. Overview of trends multijurisdictional commerce and implication for tax planning
2. Encouraging economic growth3. Some thoughts on directions for research
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
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 amount and
timing with minimal avoidance opportunities– Flexibility: the world will change
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
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
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 amount and
timing with minimal avoidance opportunities– Flexibility: the world will change
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
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
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
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
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
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