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

2. 2 GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMS Fundamental Goals and Objectives of Tax Policy Challenges Response to Challenges KPMG Tax Survey 2007 Issues for Global and National Tax Authorities

3. 3 FUNDAMENTAL GOALS AND OBJECTIVES OF TAX POLICY GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMS

4. 4 FUNDAMENTAL GOALS AND OBJECTIVES OF TAX POLICY Meeting revenue needs in a fair manner Maintaining neutrality and minimizing distortions Limiting compliance and administrative burdens Impacting on array of economic and social activities Promoting investment and accelerating economic growth Creating employment opportunities

5. 5 Providing relief to common man and improving social indicators Attracting Foreign Direct Investment (FDI) Strengthening country’s infrastructure Meeting the challenge of change FUNDAMENTAL GOALS AND OBJECTIVES OF TAX POLICY

6. 6 CHALLENGES GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMS

7. 7 CHALLENGESCHALLENGES Fall of Trade barriers Global Market for capital Instantaneous access to information around the globe Development of e-commerce and new technologies Expansion of services economy New financial instruments, tax havens and financial innovations

8. 8 Rapidly changing business structures Focus on corporate governance Impact of other jurisdictional choices in tax policy on national ability to raise revenue in a fair manner International Tax Competition CHALLENGESCHALLENGES Harmful Tax Competition Arbitrage

9. 9 CHALLENGES – HARMFUL TAX COMPETITION Competition occurs when one country provides tax inducement to attract capital Harmful tax competition Can severely erode the capital base of losing country Can distort investment decision and undermine fiscal stability Can result in high taxes on immobile income like wages, etc.

10. 10 CHALLENGES – TAX ARBITRAGE Exploitation of differences in tax laws of two or more jurisdictions that results in lowering of a tax payers world- wide tax liability by ensuring that income is not taxed anywhere

11. 11 CHALLENGES – ELECTRONIC COMMERCE Adaptation of existing tax systems to an economy that increasingly ignores physical borders and operates under new business models Shrinkage of tax base by convergence of more and more assets into intangibles Adaptation of a location – base for taxing e-commerce Increasing difficulties for governments to verify that a transaction has occurred and where

12. 12 CHALLENGES – ELECTRONIC COMMERCE The overall problem of double taxation in case of e-commerce due to conflicting provisions of countries regarding e-commerce and intangible assets

13. 13 CHALLENGES – POLITICAL & SOCIAL Fiscal responsibility requires addressing both taxes and spending Rising inequality strengthens the case for progressivity Tax system should collect the taxes that are owed Tax reforms should strengthen taxation at the business level Taxes for individuals be simplified Social policy can and should often be advanced through the tax code-and it must be well designed

14. 14 RESPONSE TO CHALLENGES GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMS

15. 15 RESPONSE TO CHALLENGES Tax Reforms EfficiencyFairnessSimplicity

16. 16 RESPONSE TO CHALLENGES Tax environment for Foreign Direct Investments (FDI) Adaptation of international tax rules to the services economy Countering the use of tax havens to evade tax Balance between tax payers service and enforcement Avoiding double taxation Linkage between tax compliance and good corporate governance Discourage bribery and corruption

17. 17 RESPONSE TO CHALLENGES OECD Role in inspiring better International Tax Co-operation Agreement on the models – guidelines and best practices Monitoring implementation of models Developing framework for resolving disputes Encouraging dialogue amongst developed, developing and economies in transition OECD Model Tax Convention OECD Transfer Pricing guidelines

18. 18 RESPONSE TO CHALLENGES OECD Role in inspiring better International Tax Co-operation Interact with business to provide global framework Provide tax framework for e-commerce Extending the debate to all cross border services Issues under Direct Tax Issues under Indirect Tax - VAT

19. 19 KPMG TAX SURVEY 2007 GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMS

20. 20 KPMG TAX SURVEY 2007 KPMG Survey stresses that corporate tax rate worldwide continue to fall but the rate of decline is slowing Global average rate is 26.8 percent as against 27.2 percent last year Out of 92 countries which participated in the survey, 18 countries lowered their rate and 2 countries increased. Major exception was Turkey where 10% reduction of tax was made (from 30 to 20 percent) Corporate tax rates have almost reached their natural low point and countries are now turning to more sophisticated method of attracting and retaining inward investment

21. 21 KPMG TAX SURVEY 2007 There would still be some further reduction of tax rate in UK, Germany, Spain, Singapore, China and countries like Pakistan, which demonstrates that international tax competition will still have some way to go

22. 22 KPMG TAX SURVEY 2007

23. 23 KPMG TAX SURVEY 2007

24. 24 KPMG TAX SURVEY 2007

25. 25 KPMG TAX SURVEY 2007

26. 26 KPMG TAX SURVEY 2007

27. 27 KPMG TAX SURVEY 2007

28. 28 KPMG TAX SURVEY 2007 (VAT / GST OECD 2007)

29. 29 KPMG TAX SURVEY 2007 (Latin America / Caribbean 2007)

30. 30 KPMG TAX SURVEY 2007 (European Union 2007)

31. 31 KPMG TAX SURVEY 2007 (Asia / Pacific 2007)

32. 32 ISSUES FOR GLOBAL AND NATIONAL TAX AUTHORITIES GLOBALIZING ECONOMIES: CHALLENGES TO TAX SYSTEMS

33. 33 ISSUES FOR GLOBAL AND NATIONAL TAX AUTHORITIES Global and Regional collaboration Devising globally acceptable principles for International Tax Competition Globally / Regionally acceptable tax regulators for: Mergers and Acquisitions Intangibles Electronic Commerce Transfer Pricing Permanent establishment Services Taxation balanced approach – Source vs Location

34. 34 ISSUES FOR GLOBAL AND NATIONAL TAX AUTHORITIES Policy makers have a difficult task in communicating the benefits of a low corporate tax strategy especially if it is combined with higher indirect tax Requires a lot of efforts to persuade voters and general public of the benefits of paying taxes for a better tomorrow Modernizing the VAT system to better reflect current business environment Review of the VAT rules for Finance and Insurance sectors to create a legislation which is easier to administer and comply with

35. 35 ISSUES FOR GLOBAL AND NATIONAL TAX AUTHORITIES VAT for these sectors will be more stable and tax leakages will be minimized Develop a system to better reflect taxation where consumption occurs principally for services which can be supplied at a distance (e-commerce, etc.). OECD effort on this by the year 2010 may result in shift of VAT from one country to another Need to tackle the Carousel / missing trades fraud issues Worldwide re-focusing on indirect taxation Transfer Pricing regulations and documentation

36. 36 Thank you

37. 37 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 details SYED MASOUD ALI NAQVI KPMG Taseer Hadi & Co. +92 (21) 568 5847 mnaqvi@kpmg.comwww.kpmg.com.pk