Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Taxation, Social Cohesion and Sustainable Development - Overview of key determinants and assistance in tax compliance strategies LAC Tax Policy Forum September 2010, Panama City W. Steven Clark OECD Centre for Tax Policy and Administration

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) 2

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): 1.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 3

Taxation and development: -- tax revenues to fund public expenditures 2.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 4

Taxation and development: -- accountability of government 3.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 5

Taxation and development: -- fairness/efficiency encouraging compliance 4.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 6

Taxation and development: -- fairness/efficiency encouraging participation in above-ground economy 5.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 7

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 8

Encouraging voluntary compliance of 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. 9

Curbing aggressive tax 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 10

Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Thank you