SMU-TA Centre for Excellence in Taxation Inaugural Conference:

Transcription

1 SMU-TA Centre for Excellence in Taxation Inaugural Conference 2015 SMU-TA Centre for Excellence in Taxation Inaugural Conference: Growth and Tax Competition in a Post-BEPS World: A new equilibrium in tax competition and global tax Implications for Asia cooperation? Jeffrey Owens Director WU Global Tax Policy Center Singapore 17 September 2015

2 SMU-TA Centre for Excellence in Taxation Inaugural Conference 2015 Part I Recent Trends in World Trade and FDI The overall environment within which Asian Countries tax systems operate

3 Section I The overall environment within which Asian Countries tax systems will have to operate FDI inflows, global and by group of economies, (Billions of dollars) Business 3

4 Section I The overall environment within which Asian countries tax systems will have to operate FDI flows, by region, (Billions of dollars and per cent)e Business 4

5 Section I The overall environment within which Asian countries tax systems will have to operate Global inward FDI stock, by sector, 2012 (Per cent of total value) Business 5

6 MNEs are growing in economic importance Of the world s largest 100 economies/economic entities, 42 are MNEs, not countries, if one compares firm revenues with country GDP; and value added by MNEs constitutes approximately 11 percent of world GDP. ( Draining Development, The World Bank, 2012 at 206). Estimates vary by country but the global average that is often cited is that 1/3 to 60% of global trade occurs within related groups. Foreign affiliate exports are 1/3 of world exports (UNCTAD 2010) 48% of US exports and 40% of US imports represent trade between related parties (US Census Bureau, 2010) Global Value Chains (GVC) are expanding 30-60% of G20 countries exports are now based upon imported intermediary goods and services 80% of GVCs are controlled by MNEs Most continents well integrated into GVCs, except for Africa 6

7 Section I The overall environment within which Asian countries tax systems will have to operate Government Revenues contributed by foreign affiliates of MNEs Business 7

8 What conclusions can we draw from these and other trends? Megatrends: demographics (some countries aging, others growing younger); increased urbanisation and growth of the middle class will all put pressure on government expenditures and increase revenue needs Climate change will require a move away from fossil based economies, reducing extractive revenues and requiring new investment in clean technologies New technologies will offer new opportunities to tax administrations but also new challenges on how to tax the digital economy and Global Value Chains Increased regional integration (the EEC, TTP, etc.) will require tax policymakers to engage in a dialogue with those dealing with BITs and Free Trade Agreements and to avoid conflicts between the EEC and the EC Dealing with growing inequalities will require a higher investment in education and social programs and increased taxes on capital. The growing dominance of MNEs pose risk to the corporate income tax but also opportunities for new tax handles The shift from goods to service will question many of the basic concepts built into tax systems especially as the importance of bundle products (which combine both goods and services) increases As economies in transition become both capital exporters and importers, so traditional distinctions between source and residence countries will need to be reviewed Getting the right balance between protecting the revenue base and encouraging investment will be more challenging How countries achieve this will in part depend upon the structure of their economies and natural endowment 8

9 Part II A Snapshot of Asian Pacific Tax Systems

10 Corporate tax collection higher share of total Revenues and GDP in selected Asian countries Corporate Income tax to total non-oil tax revenue Corporate income tax to GDP Indonesia Indonesia Japan Japan Korea Korea Malaysia Malaysia Thailand Thailand Vietnam Vietnam China China OECD Av OECD Av (Sources: CEIC and national data sources) suggests higher vulnerability to profit shifting for ASEAN countries

11 Corporate tax system: a three country ASEAN example Headline tax rate 17% 25% Singapore Malaysia Thailand (24% from 2016) 20% Goods and Services Tax (GST) / Value Added Tax (VAT) 7% GST 6% GST w.e.f 1 April % VAT on the sale of goods and the provision of services 0% VAT applied to exported goods and services Withholding tax (reduced rates under tax treaties are available) Dividend Nil Dividend 0% Dividend 10% Interest 15% Interest 15% Interest 15% Royalties 10% Royalties 10% Royalties 15% Page 5 Services 17% Services 10% Services 15%

12 Corporate tax system: a three country ASEAN example Tax treaties and Free Trade Agreements (FTA) Singapore Malaysia Thailand Extensive FTA and treaty network (>70 DTAs and >20 FTAs) Incentives available Yes, wide range of tax incentives and schemes available Primary administering body for inbound foreign direct investment Singapore Economic Development Board (EDB) Extensive FTA and treaty (>70) network Yes, wide range of tax incentives and schemes available Malaysian Investment Development Authority (MIDA) Extensive FTA and treaty (>50) network Yes, wide range of tax incentives and schemes available Thailand Board of Investmen t (BOI) Personal income tax Page 6 0% 20% 0% - 25% (2015 onwards) 0% - 35%

13 Part III The Changing Environment within which tax competition now has to be understood

14 Tax transparency Exchange of Information (Eol) FATCA/OECD Common Reporting Standard (CRS) OECD BEPS actions 12 & 13 Enablement from international organisations DTTs/TIEAs Tax transparency FATCA and Intergovernmen tal Agreement (IGAs) Support from political bodies (G20/G8) Anti-Money Laundering (AML) standards EU tax transparency package (Rulings/APAs) Sector initiatives: Extractive Industries Transparency Initiative (EITI) Dodd-Frank Act 14

15 The transparency timeline 2009 September 2009 OECD proclaims a revolution in transparency and exchange of tax Information March May March 2010 FATCA signed into law May 2010 Amendment of OECD Multilateral Convention (Mutual Administrative Assistance in Tax Matters) March-June May 2013 Australia introduces a tax bill on public report by ATO for companies with annual income of $100 million or more 13 June 2013 UK launched Fair Tax Mark March-June January 2014 OECD Discussion Draft on BEPS Action February 2014 OECD releases Common Reporting Standards 11 June 2014 Announcement by EC on state aid investigations Feb Mar February 2015 Implementation guidelines for CbCR issued by OECD 18 March 2015 EC proposes for Transparency Package 19 March 2015 EC s negotiations with Switzerland on landmark tax transparency agreement Jul Sep 2010 June Dec 2013 Aug Dec 2014 Sep June 2003 Extractive Industries Transparency Initiative (EITI) launched UK introduces Disclosure of Tax Avoidance Schemes (DOTAS) 21 July 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act signed into federal law 24 September 2010 US IRS releases final schedule/instructions for Schedule UTP June 2013 EC asks information about tax ruling practice June 2013 Information request about IPregimes from the ten EC Member States 31 December 2013 Deadline for EU Member States to transpose country by country reporting obligation for banks under CRD IV into domestic law 13 August 2014 Standard for Automatic Exchange of Information in Tax Matters (OECD) 16 September 2014 Report on BEPS Action 5 (OECD) 17 December 2014 EC extends information enquiry on tax ruling practice to all Member States September 2015: OECD BEPS Action 12 finalized 1 January 2016: Exchange of cross-border tax rulings/ APAs to commence under revised EU Directive on Administrative Cooperation 2016: Early adopting countries begin automatic exchange of tax information using the OECD CRS 2017: First exchange of information under CbCR, using FY2016 data 15

16 OECD is reviewing its Principles, reflecting developments in the corporate sector and capital markets. Tax is increasingly considered an essential part of corporate governance. Putting tax compliance into good corporate governance Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders: Para 104: In nearly all jurisdictions, the duty of care does not extend to errors of business judgement so long as board members are not grossly negligent and a decision is made with due diligence etc., or to an obligation to pursue aggressive tax avoidance The board should apply high ethical standards. It should take into account the interest of stakeholders: Para 106: jurisdictions are increasingly demanding that boards oversee the tax planning strategies management is allowed to conduct, thus discouraging practices that do not contribute to the long term interests of the company and its shareholders, and can cause legal and reputational risks. OECD guidelines on MNE now refer to need for MNE to respect both letter & spirit of law. 16

17 The move to multilateralism Multiple instruments to incite cooperation Multilateral convention on mutual administrative assistance in tax matters BEPS Action 15: Aims to develop a Multilateral Instrument to amend bilateral tax treaties Joint audits, multilateral APA, FTA launched a new international platform called the Joint International Tax Shelter Information and Collaboration Network (JITSIC) Multilateral Cooperative Compliance approach New mechanism by means of which revenue bodies wish to influence and improve taxpayer compliance and behaviour 17

18 The move towards global cooperation OECD Global Forum for Exchange of Information The current standard for exchange of information is on request; As of 2017, new standard: Automatic Exchange of Information (AEOI) AEOI will bring in the Common Reporting Standard Burden is on the financial institutions to report the information; CRS is based on the same principles as FATCA; One uniform global standard to be applied by all financial institutions; Active income types are to be reported: interest, dividends, royalties, salaries and pensions. Terms of Reference will therefore include requests in relation to Group of taxpayers Record retention requirements It is also meant to protect taxpayer s rights and safeguards Beneficial ownership information allow tax bodies to understand who ultimately owns and controls a legal entity or corporate group Financial Action Tax Force (FATF) definition of beneficial ownership, to be included 18 into the Global Forum s Terms of Reference

19 Part IV A Conceptual Framework for analyzing tax competition

20 Maximizing the benefits of tax competition - As a constraint to ensure that governments meet the real needs of citizens - As part of the package that governments can use to attract real investment But to get the full benefits of tax competition requires a set of rules on what is acceptable and acceptable tax competition. Just as to get the full benefits of free trade require WTO to set out rules to distinguish between fair and unfair competition.

21 The 1998 Report: the first BEPS analysis What is harmful tax competition? - Low rate and other features which indicate that principal purpose is to attract tax base (not real activities) from other country Three basic situations - Tax havens - Preferential regimes in Member countries - Preferential regimes in Non-member countries

22 The report: some key concepts Support for FAIR tax competition - Measures which implement domestic policy goals, not aimed at other countries Support for Fiscal Sovereignty - Each country can and should choose its own tax mix and tax level Support of Fiscal Innovation - Trend of low rates and broad base

23 The report: some key concepts Coordination and NOT Harmonization - No setting of minimum rates - No uniform tax base - Eliminating distortions - Limited scope: mobile activities only - Sets up international framework for cooperation, coordination and dialogue - Saving sovereignty by cooperative limits

24 Identifying Harmful Tax Competition Low/nominal/no tax is necessary - If no tax preference, no problem - Must be a special rate for mobile income, not an overall general rate - Can be an explicit rate or a low rate created by failure to properly identify the tax base - Harmful tax competition is the combination of a low/nominal/no tax with some other criterion

25 Identifying Harmful Tax Competition Examples - Country A has a 35% rate on business profits but taxes offshore banking income to at 3.5%. - Country B has a 35% rate on business income but allows the tax base for co-coordination centers to be calculated on a cost plus basis which results in an effective tax rate of 3.5% - Country C has a system which only taxes domestic source income but defines domestic income in such a way that all banking income involving non-residents is treated as foreign source and not taxed0

26 Identifying Harmful Tax Competition Ring Fencing - Harmful tax competition is present where a country tries to isolate the effects of its preferential regime from the domestic market - If companies operating in the preferential regime cannot do business in the domestic market, there is no burden on the domestic tax base, only negative effects on other countries

27 Identifying Harmful Tax Competition - If domestic investors cannot invest in companies in the preferential regime, again there is no tax cost to the regime country, only to the country of residence of the foreign shareholder - In both cases, the regime has the effect of attacking the tax base of another country without impact on the offering country

28 Identifying Harmful Tax Competition Examples - Country A allows companies organized under the regime to do business in the domestic economy, but the income realized is subject to the usually applicable tax rate While the regime is not technically ring fenced, the restriction of the preference to foreign income has the same effect. - Country B allows domestic shareholders in principle to invest in the preferential regime but limits the kinds of activities in such a way that only foreign shareholders in fact can qualify

29 Identifying Harmful Tax Competition No substantial activities - Criterion which applies in the case of tax havens since ringfencing may not be relevant if no local economy - Shows that the jurisdiction is trying to get the tax base of another country by allowing offshore companies to be based there and to which income can be transferred

30 Identifying Harmful Tax Competition Lack of transparency - Relation to exchange of information - Non-transparency in design - Non-transparency in administration - Rulings practices - Negotiated tax rates - Excessive administrative discretion - Lax audit standards

31 Identifying Harmful Tax Competition Other factors identified by the Report - Failure to adhere to international transfer pricing standards - Creates artificial tax base and lower effective tax rate - Use of inappropriate safe harbors - Prevents effective exchange of information as there is a lack of relevant data - Non-transparent - Can be used for ring-fencing if different rules applied to domestic and foreign transactions

32 Identifying Harmful Tax Competition - Inappropriate use of the exemption method - Negotiable tax rate or base - Non-transparent - Secrecy provisions - Bank Secrecy - Bearer shares - Treaty network without treaty shopping limits - Publicity as tax minimization location for tax driven operations - No substance

33 Action 5 of the BEPS project: Revamp of the FHTP work An holistic approach to preferential tax regimes in the BEPS context: complete the review of the OECD/G20 countries and engage other partners On the basis of the existing framework, and consider revisions/additions: Substantial activity requirement for preferential regimes; improve transparency, including compulsory spontaneous exchange on rulings related to preferential regimes As regards OECD countries, ongoing work covers 30 preferential regimes. IP regimes to be submitted to the nexus approach

34 Part V Tax Incentives: the good, the bad and the ugly

35 Overview of government incentives Non-fiscal incentives Fiscal incentives Tax incentives Grants/ subsidies Direct tax Indirect tax

36 Importance of Tax Incentive Packages Relative to Other Factors in Investor Location Surveys (Left: Relative Rank; Right: Change in Rank) Economic stability Political stability Political stability ,28 Local markets Costs of raw materials Availability of skilled labour Local markets Economic stability Transparency of legal framework Quality of life Availability of skilled labour Transparency of legal framework Labour costs Availability of local suppliers Quality of life Bilateral agreements and treaties Availability of local suppliers Export market Bilateral agreements and treaties Labour costs Incentives package Costs of raw materials Export market Incentives package Source: UNIDO (2010)

37 Tax incentives are used more in East Asia than anywhere else in the world Source: Sebastian James, (2013), presentation to Central Asian Tax Administrators, November.

38 Page 24 Manufacturing incentives in three Asean Countries Singapore Malaysia Thailand Name of incentive Pioneer Incentive (PI) Development & Expansion Incentive (DEI) Pioneer Status (PS) Investment Tax Allowance (ITA) BOI Incentive Investment allowance (IA) Corporate tax benefits PI: full income tax exemption on qualifying income DEI: reduced tax rate (typically 5% or 10%) on qualifying income IA: additional allowance (typically 30% or 50%) on qualifying capital expenditure PS: Partial (70%) or full (100%) income tax exemption on statutory income ITA: Allowance of 60% or 100% of qualifying capital expenditure available for offset against 70% or 100% of statutory income Income tax exemption on qualifying income Tax exemption amount capped at amount of investment (excluding land and working capital) Other benefits N.A. Import duty exemptions Approval of expatriate positions Import duty exemption or reduction Dividend withholding tax exemption on BOI income paid during tax exemption period

39 Page 29 2 July 2015 R&D Incentives in three Asean Countries Singapore Malaysia Thailand PIC (Productivity and Innovation Credit) scheme extended for 3 years, up to YA 2018 where there will be a total 400% deduction for the first S$400,000 (including R&D performed overseas). The balance of qualifying expenditure (in excess of S$400K) will enjoy a total 150% (for R&D performed in Singapore) and 100% deduction (for R&D performed in overseas) under Section 14D and 14DA of the Income Tax Act Alternative relief available: 200% deduction on qualifying R&D project or R&D Grant schemes available 200% deduction on qualifying expenditure or Pioneer - 100% exemption for 5 years [available to contract R&D Company] or ITA - 50% to 100% on qualifying capex, available for offset up to 70% of statutory income for 10 years [available for in-house R&D, contract R&D Company and R&D Company] or R&D grants or financial assistance schemes (approval required) [case by case] BOI Corporate income tax exemption under the BOI incentive R&D activities can also be used to enhance the benefits (e.g. additional duration/tenure, additional allowance/caps) of the existing BOI incentive Revenue Department 200% deduction on R&D payments to eligible Thai R&D service providers

40 Headquarters, corporate support and trading activities: in three ASEAN countries Singapore Malaysia Thailand Duration Headquarters program: 5 to 40 years GTP(Global Trader Programme): 3 year scheme (non-renewable or 5 year scheme (renewable) 5 years (extendable for another 5 years) 15 years Corporate tax benefits PI: Full income tax exemption on qualifying income DEI (Development and Expansion Incentive) -IHQ/RHQ (International/Regional Headquarters) and GTP: Reduced tax rate (typically 5%, 10% or 15%) on qualifying income 0% - 10% (3-tiers concessionary rates) Corporate income tax exemption for qualifying income received from overseas associated enterprises Corporate income tax reduction (10%) for qualifying income from Thailand associated enterprises Other benefits N.A. Allow 100% foreign equity participation Withholding tax exemption Foreign exchange administration flexibilities Flexible qualifying criteria including no limit on drop shipment Personal income tax reduction (15%) for qualifying expatriates working for IHQ / ITC Customs duty exemption Specific business tax exemption on interest income under treasury center services Page 21 Expatriate employment

41 Tax Incentives: The Plus Side Promoting new economic structures within an economy by: Increased capital transfers Transfers of know-how and technology Increased employment and improved workforce Spillover effects Increased economic activity from related suppliers and consumers Increased tax revenue (VAT, social security, property taxes, etc.)

42 Tax incentives: the down side Erosion of tax base Some investments would have taken place even without tax incentives Investors use tax incentives to aggressively tax plan Shift tax burden to immobile tax bases Encourage activity that is not economically viable within long run Increased complexity Encouraging lobbying activities Undermines compliance Create opportunities for corruption Encourages race to bottom

43 Tax Incentive regimes: potential risks Existing firms transform to new entities to qualify for incentives. Domestic firms restructure as foreign investors. Transfer pricing schemes with related entities Overvaluation of assets for depreciation, tax credit, or other purposes. Employment and training credits fictitious employees and phony training programs. Export zones leakages into domestic economy. Regional investment incentives and enterprise zones divert activities to outside the region or zone. Disguise or bury non-qualifying activities into qualifying activities.

44 OECD draft principles to enhance the transparency and governance of tax incentives for investment in developing countries 1. Make public a statement of all tax incentives for investments and their objectives within the governing framework. 2. Provide tax incentives for investment through tax laws only. 3. Consolidate all tax incentives for investment under the authority of one government body, where possible. 4. Ensure tax incentives for investments are ratified through the lawmaking body or parliament. 5. Administer tax incentives for investment in a transparent manner. 6. Calculate the amount of revenue forgone attributable to tax incentives for investment and publicly release a statement of tax expenditures. 7. Carry out periodic review of the continuance of existing tax incentives by assessing the extent to which they meet the stated objectives. 8. Highlight the largest beneficiaries of tax incentives for investment by specific provision in a regular statement of tax expenditures, where possible. 9. Collect data systematically to underpin the statement of tax expenditures for investment and to monitor the overall effects and effectiveness of individual tax incentives. 10. Enhanced regional cooperation to avoid harmful tax competition.

45 The correct policy process Decide on policy objective Agree how much funds available to pursue Discuss the best way to deliver Direct expenditures Regulations Tax expenditures Set-up framework to regularly evaluate costs and benefits (tax expenditure framework) Integrate into normal budgetary review

46 Part VI The forgotten linkage between HTP, State Aid and WTO Subsidies

47 When would a tax incentive/regime constitute a harmful practice of unacceptable subsidy? OECD HTP EU Code State Aid WTO Subsidy No/Low effective tax rate Ring-fenced/ Distorting/ Discriminatory/ Prohibited/ Specific with adverse effects / Selective Lack of transparency Lack of EOI No substantive activity Deviation from international norm This overlap suggests that more dialogue is needed between the trade, investment and tax communities with the aim of making these different but overlapping rules more mutually reinforcing and having greater clarity in the distinction between tax incentives, state aid and tax subsidies.

48 Part VII Taking Forward the Tax Competition Debate in Asia

49 Future of Tax Competition in Asia in a post-beps environment Can a one size fits all approach work in a region which has economies at very different levels of development? How much diversity can be permitted in a more coordinated tax environment? Successful coordination will require a basic level of trust between countries and effective monitoring mechanisms Should ASEAN undertake a study of how Actin 5 could be implemented and perhaps expanded in an Asia context? How relevant is the debate on patent boxes to Asia?

50 Benefits from Regional Tax Coordination The move within ASEAN to economic integration The ASEAN Economic Community (AEC) set as a goal to become an integrated economic space by end 2015: Single market and production base Highly competitive Equitable economic development Fully integrated with the global economy

51 Benefits from Regional Tax Coordination The role of tax dialogue, in this integration agenda A key component of creating a single market Regional approach best setting to share experience, data and good practices: mutual trust, appropriate context Tax issues affect revenue generation and competitiveness nationally and regionally: crucial to get the balance right

52 Benefits from Regional Tax Coordination Potential benefits are significant Minimizing harmful tax competition and greater international tax coordination are expected to lead to: Higher fiscal revenues More productive investment Increased regional investment But care needs to be taken not to make the region uncompetitive vis a vis other regions Exchange of information regionally builds trust and helps move country towards good practices

53 Benefits from Regional Tax Coordination Regional Tax Integration: The Building Blocks Agreement on broad policy objectives and basic guiding principles identify tax barriers to regional integration Collecting, updating and sharing experiences on such tax policies. Reviewing treaty policies towards third countries Examining the interface between regional free trade agreements, BIT and Tax Treaties Regional Response to Global Tax initiatives Developing good practices on tax administration Implementation of regional mechanisms which deal with country level disputes

54 Benefits from Regional Tax Coordination Possible steps to consider on the road to greater regional coordination Conduct a detailed study on regional tax coordination with the ASEAN Forum on Taxation Conduct a stock-take of tax incentives across all ASEAN members Examine the broader policy objectives of how tax systems can be used to drive inclusive, sustainable growth in the area in a fair and equitable manner Development and implementation of regional based guiding principles through a structured dialogue process Agree on a common framework for reporting of incentives Establish a mechanism to develop a set of common rules and to effectively monitor their implementation

55 SMU-TA Centre for Excellence in Taxation Inaugural Conference 2015 SMU-TA CET All rights reserved. No part of these materials may be reproduced or transmitted in any form or by any means, including photocopying and recording, or storing in any medium by electronic means and whether or not transient or incidentally, without the written permission of the copyright holder. These materials are for exclusive use of the conference participants. They do not in any way represent the official views of the SMU-TA CET or any other person or authority. The authors and the SMU-TA CET are not responsible for the results of any actions or omissions taken on the basis of information in these materials, nor for any errors or omissions. The authors and the SMU-TA CET expressly disclaim any liability to any person, whether a conference participant or otherwise, in respect of anything done or omitted to be done by any such person in reliance on any part of the contents of these materials.