On 18 March 2017, the Organisation for Economic Co-operation and Development (OECD) and International Monetary Fund (IMF) published their report on tax certainty,which had been requested by G20 leaders at the conclusion of their Hangzhou (China) Summit in 2016, and is the result of international cooperation on pro-growth tax policies and the work on tax and inclusive growth and tax certainty conducted by both organizations.
“How can taxpayers contribute? By letting us know what they think. If they miss this opportunity, then they should not complain.“
Pascal Saint-Amans, leader of the Organisation for Economic Cooperation and Development’s (OECD) Centre for Tax Policy and Administration
The report was provided to the G20 finance ministers’ meeting in Baden-Baden, Germany, a precursor to the G20 Leaders’ Summit that will be held in Hamburg, Germany, on 7-8 July 2017. The G20 finance ministers issued a communiqué after the meeting, in which the G20 welcomed the international cooperation on pro-growth tax policies and the work on tax and inclusive growth and tax certainty conducted by the OECD and the IMF.
The G20 also acknowledged the report on tax certainty, and encouraged jurisdictions to consider voluntarily the practical tools for enhanced tax certainty as proposed in the report, including with respect to dispute prevention and dispute resolution.
Furthermore, the G20 asked the OECD and the IMF to assess progress in enhancing tax certainty in 2018.
In this article, we review the key findings and recommendations of the report, and set out some thoughts on additional issues that we have heard from EY clients.
Background to the tax certainty project
At the G20 Summit in Hangzhou in September 2016, the G20 leaders recognized that, while the global economic recovery is progressing, numerous financial and political challenges remain and that growth is “still weaker than desirable.”
In that regard, the leaders emphasized “the effectiveness of tax policy tools in supply-side structural reform for promoting innovation-driven, inclusive growth, as well as the benefits of tax certainty to promote investment and trade.” The G20 leaders therefore asked the OECD and the IMF to continue working on the issues of pro-growth tax policies and tax certainty.
In response, the OECD launched a survey in October 2016, in which it invited businesses and other stakeholders to contribute their views on tax certainty, in particular the effects of the direct and indirect tax system on business behavior. The survey attracted responses from 724 enterprises headquartered in 62 different countries, and with regional headquarters in 107 different jurisdictions. A survey of 25 national tax administrations was also completed on a confidential basis.
The report explores the nature of tax uncertainty, its main sources and effects on business decisions and outlines a set of practical approaches that may help policymakers and tax administrations shape a more certain tax environment.
The report explains that several factors have contributed to heightened tax uncertainty, such as the spread of new business models, aggressive tax planning, fragmented and unilateral policy decisions, some court decisions, and updates to the international tax rules, including the G20/OECD Base Erosion and Profit Shifting (BEPS) project.
It also notes that, while good progress has been made in terms of fighting tax evasion and aggressive tax avoidance through increased transparency and the BEPS project, it is also important to focus on tax certainty. In this context, the importance of providing greater tax certainty to taxpayers to support trade, investment and economic growth has become a shared priority of governments and businesses.
Impacts of uncertainty in investment decision-making
The report states that while the effects of uncertainty on investment are ambiguous in theory, the empirical evidence is clear and does suggest adverse effects on investment and trade. This type of uncertainty can be divided into two key groupings:
- Business factors for investment and location decisions
- Tax factors for investment and location decisions
According to the business survey respondents, the five most important (non-tax) business factors for investment and location decisions are as follows (respondents used a scale from 5 to 1, where 5 is extremely important and lower numbers indicate that the factor is progressively less important; scores are noted in parentheses):
- Corruption (3.9)
- Political certainty(3.8)
- The overall tax environment (3.8)
- Current and expected macroeconomic conditions in the country (3.8)
- Labor costs (3.5)
The five most important tax factors for investment and location decisions for all business survey respondents are as follows:
- Uncertainty about the effective tax rate on profit (3.9)
- The anticipated effective tax rate on profit (3.7)
- Uncertainty about input tax credits, refunds, place of supply issues for VAT/GST purposes and/or uncertainty about the tax burden of other consumption taxes (e.g., excises, sales taxes, custom duties) (3.8)
- The anticipated neutrality of VAT/ GST (e.g., through the availability of input tax credit refund and other relief arrangements) or the tax burden of other consumption taxes (e.g., excises, sales taxes, custom duties) (3.6)
- Existence of tax treaties (3.5)
Three hundred sixty-four of the responses were from multinational companies (MNCs), which the report divides as companies operating in between 2 and 10 jurisdictions (90 companies) or companies operating in more than 10 jurisdictions (274 of the 364).
For the MNCs operating in more than 10 jurisdictions, the top five tax factors are slightly different than for all survey respondents, with “Existence of tax treaties” (3.7) taking second place, and “Uncertainty about the ability to effectively obtain relief for withholding taxes” taking fifth place (3.6).
Key sources of tax uncertainty
While the report notes that the sources of uncertainty are many and varied, it identified the key findings in regard to leading sources of tax uncertainty (where all business survey respondents’ views are taken into account) as follows:
- Issues related to tax administration were ranked as among the major drivers of uncertainty in tax systems, with the top 2, and 3 out of the top 10, sources of tax uncertainty deriving from issues related to tax administration. In this regard, “Considerable bureaucracy to comply with tax legislation, including documentation requirements” was the leading source of all tax uncertainty, attracting a mean score of 3.54. “Unpredictable or inconsistent treatment by the tax authority” attracted a virtually identical score (3.53).
- Concerns over the inconsistent approaches of different tax authorities toward the application of international tax standards (for example, in the area of transfer pricing) ranked high in the business survey, scoring 3.38.
- Issues associated with dispute resolution mechanisms (3.34), including time scales, were also identified as an important driver of uncertainty. In particular, respondents to the business survey highlighted concerns about lengthy decision-making of the courts (3.26) — which may be an aspect of the wider judicial system, and not wholly under the tax authorities’ control.
- Tax administrations identified taxpayer behavior as an important source of uncertainty, in particular as a result of aggressive tax planning and a lack of cooperation. This was an open-form text-based response, and therefore not scored.
- Tax administrations also highlighted complexity in legislation, lengthy court procedures, unclear drafting and frequency of legislative changes. The survey analysis suggests there is considerable variation across advanced countries in both the frequency of corporate tax changes and the lag before implementation. Most corporate income tax changes, however, are announced at least 90 days in advance of implementation. There is no obvious trend toward less pre-announcement of corporate income tax changes.
- A key area of agreement in both surveys was that legislative and tax policy design issues are a major source of tax uncertainty, mainly through complex and poorly drafted tax legislation and the frequency of legislative changes.
Table 1 below shows the top 10 sources of tax uncertainty for both businesses and tax administrations. Respondents were asked the following question: “The following factors (legal systems, tax administration, dispute resolution, and specific international dimensions) have been identified as increasing the overall uncertainty on tax issues. Please identify from your tax administration’s perspective the extent to which you believe each of these factors contributes to tax uncertainty for business taxpayers in your country’s tax system, regardless of whether or not the factors are within the control of the tax administration to influence.” The factors proposed to the tax administrations were the same as those proposed in the business survey.
Table 1: Leading 10 sources of tax uncertainty for both businesses and tax administrations (Source: OECD)
Respondents were asked the following question: “The following factors (legal systems, tax administration, dispute resolution, and specific international dimensions) have been identified as increasing the overall uncertainty on tax issues. Please identify from your tax administration’s perspective the extent to which you believe each of these factors contributes to tax uncertainty for business taxpayers in your country’s tax system, regardless of whether or not the factors are within the control of the tax administration to influence.” The factors proposed to the tax administrations were the same as those proposed in the business survey.
Practical tools to enhance tax certainty
While not delivering any new minimum standards, the report outlines a set of practical approaches and solutions to enhancing tax certainty in G20 and OECD countries. The report notes that developing countries face different challenges and may require alternative tools to address tax uncertainty.
While recognizing that governments and tax administrations already take a wide range of measures in pursuit of tax certainty in both the domestic and international context, the report highlights the benefits of reducing or addressing uncertainty at the earliest possible point in time.
However, where issues cannot be avoided or resolved early on, effective dispute resolution mechanisms will be needed.
More specifically, the report outlines the following practical tools to enhancing tax certainty, when (again) all 724 survey respondents’ views are taken into account:
- Reducing complexity and improving the clarity of legislation through improved tax policy and law design. The report suggests the development of a robust principles-based tax law design and monitoring framework coupled with various other measures to improve clarity and reduce complexity, including avoiding inappropriate retroactivity, encouraging appropriate mechanisms for consultation on proposed or announced legislation and enhanced guidance. As an example, “Reduced frequency of changes in the tax legislation” was the leading measure identified by business survey respondents, scoring 4.1.
- In the area of tax administration, “Effective dispute resolution mechanisms” (3.9), “Increased transparency from tax administrations in relation to their compliance approaches” (3.8) and “Efficient communication between taxpayers and administration, e.g., by digital means” (also 3.8) were identified as the leading tools for reducing tax uncertainty.
- The report outlines a number of approaches to enhancing tax certainty in the international context for G20 and OECD countries, including through dispute prevention and early issue resolution programs, such as cooperative compliance programs and advance pricing agreements (APAs) (3.3), as well as simultaneous and joint audits (3.0), where appropriate. The innovative use of such tools in a multilateral context also received support from the business and tax administration surveys.
- Implementing robust and effective international dispute resolution mechanisms, such as the mutual agreement procedure (MAP) (3.3) — including fully implementing the minimum standard under Action 14 of the BEPS Project — and the use of arbitration, where countries elect to do so.
- Updating tax treaties through the use of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. The multilateral instrument will allow for the amendment of treaties to be made rapidly and consistently, thereby enhancing certainty, says the report.
- Making further progress toward simplified and effective withholding tax collection and treaty relief procedures.
- Cooperation and coordination on the development of coherent international standards and guidance, and consistent implementation.
Table 2 below shows the leading 10 tools for fostering tax certainty for businesses and tax administrations. The respondents were asked the following question: “The following tools have been identified as potential solutions to enhancing certainty in the tax system in regard to legal systems, tax administration, dispute resolution, and specific international dimensions. Please identify from your perspective the extent to which you think each tool could enhance tax certainty in your country’s tax system, regardless of whether or not the tools are within the control of the tax administration.” The tools for enhanced tax certainty were the same as those proposed in the business survey.
Table 2: Leading 10 tools for fostering tax certainty for businesses and tax administrations (Source: OECD)
Tax uncertainty for MNCs
Table 3 below indicates the three leading tools that could best enhance tax certainty for MNCs operating in more than 10 jurisdictions, for each of the four categories of sources of potential tax uncertainty (tax policy design and legislation, tax administration, dispute resolution, and specific international dimensions) for which the report surveyed:
Table 3: Three leading tools that could best enhance tax certainty for MNCs operating in more than 10 jurisdictions
|Tax policy design and legislation|
|Specific international dimensions|
Where to next?
So, the report sets out information on the sources of tax uncertainty as well as the tools that are available to government and taxpayers to tackle. So why do we have uncertainty? And where do we head from here?
On a recent webcast, we asked about 800 polling respondents: “Which one specific issue would do most to raise overall levels of tax certainty?” More than one-third (34%) of respondents thought that countries “will do their own thing,” indicating skepticism that the outputs of the OECD’s work on tax and certainty will bear fruit.
That shows that, despite all the hard work going on by the OECD and countries on MAP and issues like arbitration (not to mention the hard work going on to make bilateral and multilateral APAs available and to increase the use of joint audits), there is still some distance between aspirations and experiences. In fact, the 34% figure was more than the combined figure for “improvements to the Mutual Agreement Procedure” (16%) and “more countries adopting mandatory binding arbitration” (12%) combined.
While there were some interesting ideas in the report — like the possibility of multilateral cooperative compliance programs or encouraging greater use of fiscal stability agreements — no new programs or minimum standards of any type are set out. The innovative use of dispute resolution tools is welcome, but should not overshadow the need for tax administrations to strengthen their domestic tools and processes, which were scored far higher by business respondents.
Of course, there will always be issues that simply cannot be predicted. Much of the tax uncertainty existing today is rooted in the sheer pace, complexity and volume of change we are experiencing. That is to be expected when disruption is as rife as it is today, having its unarguably profound effect on business models.
But stakeholders are not completely at the mercy of events. Surveys like this are but one way to feed in business views. Indeed, as Pascal Saint‑Amans recently noted in an interview with EY, taxpayers can and should probably do a better job of advocating for themselves.
“If you are not happy with the access to MAP, with the way that MAP is handled, with all the aspects of the relationship with the tax administrations relating to the elimination of double taxation, let us know because this will be taken into consideration,” Saint-Amans said, adding, “How can taxpayers contribute? By letting us know what they think. If they miss this opportunity, then they should not complain.”
So, this work on tax certainty should be welcomed but considered to be the first step, not the last.
Read more: Global Tax Policy and Controversy Briefing
 http://www.g20.utoronto.ca/2016/160905- communique.html
 EY Global Tax Alert, OECD Tax certainty survey closes on 16 December 2016, 13 December 2016.
 Political certainty, while scoring the same overall score as “The overall tax environment,” did attract a large overall number of 4 and 5 responses.