ENSURING A SOUND TAX BASE IN DEVELOPING COUNTRIES

Transcription

1 ENSURING A SOUND TAX BASE IN DEVELOPING COUNTRIES WORLD BANK PROGRAM EXPERIENCE ON TRANSFER PRICING AND INCENTIVE POLICY Jan Loeprick, PSD Specialist «Pay your taxes where you add the value», The Hague, 2nd of July 2015

2 PRESENTATION STRUCTURE I. Ensuring a sound tax base in developing countries: A pitch for three (related) issues: Bespoke technical assistance on transfer pricing Smarter use of tax incentives to attract investment and encourage formalization of Micro and Small Businesses II. Discussion Statements 1

3 TRANSFER PRICING LEGISLATION INTERNATIONAL & DOMESTIC ASPECTS The number of countries introducing, or updating, transfer pricing provisions in their tax law continues to increase: During the period , the number of countries with effective transfer pricing documentation rules increased from 4 to more than And we have some evidence of their effectiveness in a few areas : Source: International Transfer Pricing: From Implementation to Application (World Bank Group, forthcoming) Mitigation effect for selected groups. The figure is illustrates the estimated elasticity of taxable profits with respect to the tax differential as a function of the presence of documentation requirements. The first panel shows the effect of documentation requirements for the whole sample. The second (third) panel present the effect for intangible intensive (highly complex) subsidiaries with an average level of complexity (intangible intensity). The solid line is the expected value. The dashed lines are 95 % confidence intervals 2 Source: Beer and Loeprick Global profit shifting: Drivers and the Effect of Countermeasures International Tax and Public Finance

4 DEALING WITH TP CHALLENGES: PROGRAM DESIGN FOR TECHNICAL ASSISTANCE Challenges are multifaceted: Administration of transfer pricing legislation is somewhat unique Ensuring commensurate administrative capacity is crucial for both the private sector and for revenue collection Experienced transfer pricing specialists are scarce Program components: 3 Transfer pricing needs assessment/diagnostic Legislative assistance Implementation assistance Development of practical guidance (administrative guidelines etc.) Structure and procedures for TP unit (establish unit, case selection, case mgmt etc.) Capacity building for transfer pricing (tax administration and judiciary) Dispute resolution mechanisms (international and domestic) Advance pricing agreement program

5 TRANSFER PRICING AND TAX REVENUES IS IT WORTH THE EFFORT? $100 billion approximate amount of tax revenue lost by developing countries annually to misuse of transfer pricing from 2002 to 2006 (Hollingshead 2010). $15.42bn total transfer pricing adjustments made by the Indian Revenue during the period $3.4bn payment by GSK to IRS to settle transfer pricing dispute in United States 160m tax revenues revealed by Hungarian Tax Administration from transfer pricing in 2012 $110m transfer pricing adjustments made by Vietnamese tax administration by end of 2013 $85m tax revenues collected by the Kenyan Revenue Authority in y/e 30 June 2013 from transfer pricing $9.13m - collections from transfer pricing by the Columbian tax administration for

6 PRESENTATION STRUCTURE I. a pitch for three (related) issues: Bespoke technical assistance on transfer pricing Smarter use of tax incentives to attract investment and encourage formalization of Micro and Small Businesses II. Discussion Statements 5

7 PREVALENCE OF FISCAL INCENTIVES A FACT OF LIFE: WIDESPREAD USE OF FISCAL INCENTIVES Number of countries surveyed Tax holiday / Tax exemption Reduced tax rate Investment allowance / Tax credit R&D Tax Incentive Superdeductions SEZ / Free Zones / EPZ / Freeport Discretionary process East Asia and Pacific Eastern Europe and Central Asia Latin America and the Caribbean Middle East and North Africa 12 92% 75% 67% 83% 33% 92% 83% 16 88% 38% 25% 31% 0% 100% 38% 25 88% 32% 52% 12% 4% 72% 40% 15 80% 40% 13% 0% 0% 80% 40% OECD 33 21% 36% 64% 76% 21% 67% 33% South Asia 7 100% 43% 71% 29% 71% 71% 43% Sub-Saharan Africa 45 78% 62% 78% 11% 18% 64% 82% Based on various tax guides, IBFD and others. See: Sebastian S. James (2013), Effectiveness of Tax Incentives in Developing countries Evidence and Policy Implications, The World Bank Group. 6

8 TYPOLOGY OF FDI AND RESPONSE TO TAX INCENTIVES SECTOR SPECIFICS MATTER Type of Investment Factors that drive it Response to investment incentives 1 Natural Resource/Skillseeking FDI Location of Natural Resources/Skills Low response. FDI driven primarily by non-tax factors 2 Market-seeking FDI Market potential Market dimensions Income per-capita Customer specific preferences Kind of goods and services to be provided Low response. Level playing field between firms is critical (same tax system for all competitors). 3 Strategic Assetseeking FDI Acquiring Strategic Assets Brands and Market positioning Know-how Technology Distribution Networks Human Capital Low response. FDI is driven by the location of the asset. However lower taxes on capital gains reduces the costs of the transfer of these assets. 4 Efficiency-seeking FDI Lower Costs Mostly export oriented Availability of skills at a Low cost skills Close to markets Low relocation costs ( footloose ) High response to tax incentives. Firms are expected to compete globally, hence the lower the costs, the better their ability to compete globally Based on Dunning 7

9 SURVEY RESULTS: HIGH (SELF-REPORTED) REDUNDANCY RATIOS Author Focus of survey Conclusion Investment Climate Advisory (FIAS) investor motivation surveys Did incentives influence Investment level? (% saying yes) Malaysia (2014) Redundancy 81% 33% Guinea (2012) ratio for 92% 6% Jordan (2009) incentives 70% 28% Kenya (2012) (Would have 61% 11% El Salvador (2013) invested even if 37% 13% Incentives were Nicaragua (2009) 15% (51% for nonexporting firms 17% not provided) outside free zones) Serbia (2009) 71% 6% Tanzania (2011) 91% 8% Tunisia (2012) 58% 25% FIAS Vietnam (2004) 85% - FIAS Thailand (1999) 81% - Nathan Associates Mozambique (2009) 78% 13% Guisinger and Associates Investment incentives and performance 33% (1985) requirements for export-oriented firms Reuber (1973) FDI and market orientation 52% for exportoriented firms Mckinsey MNE investment in developing economies (2003) Fortune/Deloitte and Touche (1997) Business process outsourcing (BPO) and automobile sectors in India (2003) Business location study G 30 (1984) Study of 52 multinational corporations covering half of world s FDI stock 8 Incentives not among top 3 factors driving location decisions Taxes ranked 13 th of 26 factors in importance for investments Incentives ranked 7 th in importance for investments

10 BENEFITS AND COSTS OF INCENTIVES A SIMPLE MODEL TO MEASURE EFFECTIVENESS The Benefits and Costs of an Incentive Policy Revenue rise due to increased investment Social benefits from increased investment Lost revenue from investments that would have been made anyway + > + Indirect cost of incentives Social Benefits include cleaner environment, better skills, better health, etc. 9

11 THE COST OF INCENTIVES: TAX EXPENDITURES AROUND THE WORLD 10,0% Tax Expenditure as % of GDP 9,0% 8,0% 7,0% 6,0% 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% 10 Source: James, Effectiveness of Tax Incentives in Developing countries Evidence and Policy Implications, The World Bank Group.

12 THE COST OF INCENTIVES CONT D: TRANSACTION COSTS WHEN OBTAINING INCENTIVES Mozambique (60 Respondents) Jordan (61 Respondents) Serbia (50 Respondents) Nicaragua (71 Respondents) Did obtaining incentives delay project implementation? 78% 22% 10% by 1 3 months 8% by 3 6 months 82% 18% 8% by 3 6 months 2% by 18 months or more 98% 2% 72% 27% 20% by 2-12 months 1% by more than 1 year Did obtaining incentives add to project costs? 72% 95% 80% 87% 28% 5% 20% 13% What were the main additional costs? Additional senior management time: 18% Loss of business: 15% Not an issue Additional senior management time : 6% Additional consulting fees: 12% Additional senior management time: 26% Legal fees: 24% Loss of business: 17% 11

13 EMPIRICAL EVIDENCE IS HIGHLY INCONCLUSIVE THE OVERALL INVESTMENT CLIMATE MATTERS Fiscal Policy Effectiveness and the Investment Climate FDI as % of GDP SRB BEL HKG BGR LVA KEN NGA HUN GEO NLD SGP ISL MDG CHEJOR HRV IRL VNM KAZ EGY CHL ZMB FJI AUT CAN JAM LSO TCD UKR CRIGBR ROM GHA FRA MUS POLCZE SLE SVK MYS FIN PER AUS DNK THA ESP TUR UGA MAR TZA TUN PAK RUS RWA ZAF MEX PRT NZL SWE NOR DEU USA BGD BOL IND BRA GRC ETH IDN ITA UZB ECU BWAIRN JPNKOR Almost no impact of lowering Effective Tax Rates on FDI in low IC countries CHN ARG METR High IC countries Trend High IC countries Low IC Countries Trend Low IC Countries 12 Source: James and Van Parys, 2009

14 SUMMARY: GOOD PRACTICES IN USING FISCAL INCENTIVES Tax incentives are used minimally and mainly to address market failures and generate multiplier effects If they are to be provided, tax incentives are offered through the law and in a nondiscretionary manner If they are to be provided, tax incentives should, as far as possible, be linked to the investment level, and tax holidays should be avoided The Tax Administration administers investors who benefit from tax incentives to prevent leakage The tax expenditure statements are prepared on a regular basis to measure the costs of the tax incentives Indirect costs of tax incentives are taken into consideration when designing policy Regional cooperation/coordination should be encouraged to prevent harmful tax competition 13 See also: WBG, A Handbook for Tax Simplification, 2009

15 PRESENTATION STRUCTURE I. Overview on WBG work on tax policy & administration II. A pitch for three (related) issues: Bespoke technical assistance on transfer pricing Smarter use of tax incentives to attract investment and encourage formalization of Micro and Small Businesses III. Discussion Statements 14

16 FORMALIZATION OF MICRO AND SMALL BUSINESSES A ROLE FOR SPECIAL TAX MEASURES? 20 Tax compliance costs as % of Turnover 18 South Africa 16 Ukraine 14 Uzbekista n 12 Armenia 10 India (Bihar) 8 Kenya 6 Georgia Turnover (USD '000) Source: Tax Compliance Cost Surveys in Selected Countries

17 FORMALIZATION OF MICRO AND SMALL BUSINESSES A ROLE FOR SPECIAL TAX MEASURES? Informality frequently seen as a critical challenge for many developing and emerging economies Tax is an important part of regulatory/administrative burden Definitions matter: Registration filing payment share of declared sales/employees, etc Simplified taxation systems for MSEs: reform effort in emerging and several developed economies (ITD 2007, IFC 2008, Weichenrieder 2007). Lots of theory, but little empirical evidence on effect of MSME regimes: Fajnzylber et al (2011) & Monteiro & Assuncao (2012) look at Brazilian reform ( Simples ) with RDD and DD design: Find a local effect on formality and firm performance Bruhn & Loeprick (2014): Georgian MSME regime introduction: local effect on micro business registration, but also evidence of strategic behavior/abuse. 16

18 SPECIAL TREATMENT OF MSES: STRATEGIC BEHAVIOR AND ABUSE ARE COMMON Sorting around the eligibility threshold in Georgia Downward migration in Uzbekistan 17 Sources: WBG Country reports and Bruhn & Loeprick 2014

19 INFORMALITY AND MSE TAX POLICY AND ADMINISTRATION CHALLENGES & ISSUES FOR DISCUSSION MSMEs remain largely irrelevant from a broader revenue perspective, but local government incentives may matter Clarity in the theory of policy design option, vanishes in light of the implementation challenges and limited data available Turnover tax design often an area of politically motivated guesswork, rather than driven by design principles and thorough analysis Poorly designed regimes act as a disincentive for growth and provide incentives for downward migration. Incentive creep is a problem in the context of many presumptive tax regimes Even when the general system has been dramatically simplified in the context of flat tax reforms, simplified systems may still be needed/justified 18

20 STATEMENT 1 FOR DISCUSSION I. There are substantial low-hanging fruits available to developing countries catching-up on the international tax agenda / TP 19

21 THERE ARE SUBSTANTIAL LOW-HANGING FRUITS AVAILABLE TO DEVELOPING COUNTRIES CATCHINGUP ON THE INTERNATIONAL TAX AGENDA / TP A. Agree B. Disagree The question will open when you start your session and slideshow. # votes: 35 Internet TXT 20 Twitter Closed This text box will be used to describe the different message sending methods. The applicable explanations will be inserted after you have started a session. It is possible to move, resize and modify the appearance of this text box.

22 THERE ARE SUBSTANTIAL LOW-HANGING FRUITS AVAILABLE TO DEVELOPING COUNTRIES CATCHINGUP ON THE INTERNATIONAL TAX AGENDA / TP A. Agree B. Disagree 33 2 Closed Internet TXT 21 Twitter This text box will be used to describe the different message sending methods. The applicable explanations will be inserted after you have started a session. It is possible to move, resize and modify the appearance of this text box.

23 STATEMENT 2 FOR DISCUSSION II. A meaningful BEPS agenda in developing countries needs to cover the (mis)use of tax incentives at the domestic level 22

24 A MEANINGFUL BEPS AGENDA IN DEVELOPING COUNTRIES NEEDS TO COVER THE (MIS)USE OF TAX INCENTIVES AT THE DOMESTIC LEVEL A. Agree B. Disagree The question will open when you start your session and slideshow. # votes: 22 Internet TXT 23 Twitter Closed This text box will be used to describe the different message sending methods. The applicable explanations will be inserted after you have started a session. It is possible to move, resize and modify the appearance of this text box.

25 A MEANINGFUL BEPS AGENDA IN DEVELOPING COUNTRIES NEEDS TO COVER THE (MIS)USE OF TAX INCENTIVES AT THE DOMESTIC LEVEL A. Agree B. Disagree 19 3 Closed Internet TXT 24 Twitter This text box will be used to describe the different message sending methods. The applicable explanations will be inserted after you have started a session. It is possible to move, resize and modify the appearance of this text box.