Taxation in an integrated world

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Taxation in an integrated world

• Katharina Stemmer I Lisa Kammermeier I Liliana
  Marques I Elzbieta Kristen

2
Overview

• Introduction
• Labour mobility and personal income taxation
• Trade liberalization and indirect taxation
• Capital income taxation
• Allocation of financial capital
• Conclusion

3
Taxation systems

• No harmonized system between countries
• Each country may imply its own rules
• Systems were created mostly after
• World War II, when economies were more
• closed.

4
Effect of globalization

• Barriers to the movements of goods across nations
  have been falling specially across nations
  belonging to free trade area such as EU and
  NAFTA.
• The barriers to the provision of services across
  countries (mainly of banking, insurance, air
  transportation) remain significant and have been
  given attention by GATT and some governments.
• Financial capital now can be shifted across,
  countries, facilitated by new tecnologies mainly
  in industrial countries almost without barriers.

5
Internalization of economic activity

• Affect taxable bases and force some countries to
  take a close look in order to prevent the
  migration of their taxable capacity (base).
• Groups of countries recognize the necessity of
  collective actions aimed at coordination.
• Increasing the exchange of information.
• Harmonizing tax systems in order to reduce
  arbitrage possibilities.

6
Taxation and Economic Integration

• Key elements
• Competition
• Co-ordination
• Harmonization

7
Competition

• Tax Competition high tax rate inhibit
  economic growth
• encourage
  savings and investment to move more easily around
  the globe

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Co-ordination

• Contacts among tax officials of different
  countries who exchange information about planned
  reforms, through meetings in which high tax level
  countries representatives announce the tax
  reforms that plan to introduce and try to avoid
  tax changes that may negatively affect other
  countries.

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Form of tax co-ordination

• Committee on Fiscal Affairs on the Organization
  for Economic Cooperation and Development - OECD
  
• meets twice a year in Paris, attended by
  representatives of the tax offices.

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Harmonization countries agree on tax
systems with equal rates and bases for a relevant
taxes

• ?
• Increases efficiency in allocating international
  resources
• Better control on taxpayers
• Increases efficiency in governments tax
  revenues
• Decrease the competitiveness between countries
  reducing the incentives to escape of production
  factors with high fiscal weight.

• ?
• Consumption
• Low tax in foreign country vs high tax in own
  country
• Production may decrease
• Investments of financial savings abroad

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Indirect direct taxation

• Trade is influenced by indirect taxes especially
  foreign trade taxes
• indirect taxes direct
  taxes
• collected from someone other than collected
  from people or organizations
• the person who is responsible to pay the tax
• general sales taxes excises income
  taxes
• turnover retail VAT
• tax tax (value added tax)

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Labour mobility and personal income taxation

• Influences of labour mobility Taxes size of
  the country
• Importance of international cooperations? greater
  labor mobility? causes cultural, social
  problems in the receiving country
• Highly skilled labour is more important for
  growth (Murphy, Shleifer, Vishny (1991)BUT
  deeper integration raise policy concerns or the
  countries, who are the net losers of these
  individuals

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Labour mobility and personal income taxation

• Does taxation play a role in labour movements?
• US generally NO
• BUT there is a competition among states in
  setting marginal tax rates on individuals
• despite low income taxes, labour mobility is may
  affected
• -- highest marginal personal income tax should
  be in line with those of revival states

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Labour mobility and personal income taxation

• Does taxation play a role in labour movements?
• Independent countries pull push is greater
• 1. the linguistic, cultural, and regulatory
  obstacles2. importance of income taxes is much
  greater
• allocation of talent has significant effects on
  the growth rate of the economy (Murpher,
  Schleifer,Visney) ? creation of the brain drain
  phenomen

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Labour mobility and personal income taxation

• Taxes of capital income should be low or even
  zero
• Taxes of labour need not to be low
• Labour income is taxed in most countries with
  progressive rates often the largest part of the
  global income tax
• main policy conclusion especially small
  countries should be careful in taxing individuals
  with exceptional talents best solution
  reduction of the highest marginal tax rate

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Turnover Tax

• it taxes intermediate and possibly capital goods
  ( on ad valorem basis)
• Example when manufacturing activity is
  completed, a tax may be charged on some companies
  
• still exists in developing countries
• but disappeared in industrial countries
• In Europe replaced by VAT to allow movements of
  goods across the countries
• one of the successful political attempts aimed at
  coordinating tax policies

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VAT Value Added Tax

• tax on exchanges
• Applies to all commercial activities involving
  the production and distribution of goods and the
  provision of services
• Example 10 VAT
• manufacturer pays 1.10 (1 10) for raw
  materialseller of raw material pays to the
  government 0.10
• Manufacturer charges the retailer 1.32 (1.20
  10)pays the government 0.02 (0.12 - 0.10)
• Retailer charges the consumer 1.65 (1.50
  10)pays the government 0.03 (0.15-0.12)

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VAT Value Added Tax

• Trade liberalization introduction of VAT are
  closely interrelated
• Main reason for introduction of VAT in EU
• Neutrality vis-à-vis trade across member
  countries (destination principle consistent
  with GATT guidelines)
• -- VAT based on the destination principle would
  be an ideal tax in a world undergoing a process
  of integration
• allows governments to tax consumption alone
• independence of countries in setting rates what
  they want
• export prices do not reflect this tax, they are
  not distorted by attempts at manipulating trade
• imports and domestic products are taxed in the
  same way no discrimination

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VAT Problems

• 1. exceptions given to particular
  sector - difficulties of taxing certain sectors
  - sectors dont pay taxes on their sales
  dont receive rebates for the taxes paid on their
  inputs - price of their sales contains tax
  element that depends on the ratio of their
  own value added and on tax rates on inputs -
  ratio varies from sector to sector ? tax
  generated distortion in the final price

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VAT Problems

• 2. Need of border controls (destination
  principle)
• - permit exporters to claim rebate for the
  taxes paid on the exported goods - border
  controls impose substantial compliance costs
  on exporters ? reduction of the beneficial effect
  of VAT
• deeply integrated areas like US and EU do not
  want to
• have border controls

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VAT vs Retail Tax
VAT has a considerable advantage as regards
robustness against tax evasion
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VAT system in the EU

• pre 1993 VAT based on destination principle
• 1993 VAT based on origin principle
  abolishment of fiscal frontiers
• - This was not acceptable of member states,
  because taxes of VAT were too different
• Commission created Transitional VAT System
• maintains different fiscal systems but without
  frontier controls
• origin based system for sales to private persons
  who can go and buy tax paid anywhere they like in
  the Union and take the goods home wihtout having
  to pay VAT again. (there are some exceptions)
• For transactions between taxable persons it is
  still a destination based VAT system.

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European Commission Taxation and Customs
Union Jan. 1, 2007
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Excise Taxes

• Are levied on the sale of particular goods and
  services
• Can be collected at retail level or at
  manufaturing level
• Tax fall on specific products
• For which reasons? - to tax individuals, for
  benefits they may receive (e.g. gasoline
  free use of roads) - to discourage use of some
  commoditiy that is damaging health (e.g.
  cigarettes) - penalize users of some commodities
  for negative externalities they may impose on
  society (alcohol) - to attempt to give some
  prgressivity to the tax system (luxuary
  goods)

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Excise Taxes

• Are used as proxies for import duties ( e.g.
  excise tax on bananas imposed by european and
  N-American countries)
• Borders are more open, people travel more ? more
  difficult to keep taxes high competition push
  the taxes down
• For world at large taxes still remain widely
  divergent (e.g. petroleum products)

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Excise Taxes Petroleum products

• Presents enormous differences ? different level
  of consumption ? major reallocation of ressourses
  on world basis
• very large differences in the taxes for gasoline
• Very low level in the United States
• ? increases demand in large country
• ? high petroleum taxes in Europe and Japan
  reduce level of consumption

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Capital income tax - main principles

• THE RESIDENCE OF
• TAXPAYER PRINCIPLE
• An investor from a multinational
• pays all capital income taxes in a country where
  his company resides.
• Implements capital export neutrality.
• The total tax burden should be same, nevertheless
  an investor gains his income in a home or in a
  foreign country.

• THE SOURCE OF INCOME
• PRINCIPLE
• An investor from a multinational
• pays capital income taxes in every country his
  income was generated.
• Implements capital import neutrality.
• Branches should be taxed according to national
  rules of host countries.

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Capital income tax - controversies

• Enterprises may delay or even avoid some tax
  payments many residence countries allow
  subsidiaries of a foreign company to postpone its
  income tax payments till they repatriate their
  profits
• The residence of taxpayer principle

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Capital income tax - controversies

• Existence of tax havens
• politically stable countries with low or zero
  tax rate, banking secrecy, easy access for
  foreign firms, free exchange market and with
  established treaties with important countries
  from economic point of view (Tanzi, p. 79),
• Anguilla, Antigua and Barbuda, Aruba, Bahamas,
  Bahrain, Belize, Bermuda, British Virgin
  Islands, Cayman Islands, Cook Islands, Cyprus,
  Dominica, Gibraltar, Grenada, Guernsey, Isle of
  Man, Jersey, Malta, Mauritius, Montserrat,
  Nauru, Netherlands Antilles, Niue, Panama
  (Spanish), (English), Samoa, San Marino,
  Seychelles, St. Lucia, St. Kitts Nevis, St.
  Vincent and the Grenadines, Turks Caicos
  Islands, US Virgin Islands, Vanuatu (OECD,
  www.oecd.org)

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Capital income tax - controversies

• Tax havens companies would escape from taxation
  by moving the capital to the legal headquarters
  established in tax havens.
• Residence of a taxpayer principle

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Capital income tax - controversies

• Double taxation, exchanging information, tax
  evasion to prevent them, treaties were
  introduced
• contain provisions for mutual assistance,
• 2 major models of double-taxation treaties
  OECD and UN.
• The residence of taxpayer and the source of
  income principles

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Capital income tax - controversies

• THE OECD MODEL
• Focuses on the residence rule
• A foreign investor is not supposed to pay (or pay
  very low) income tax in a source country, with a
  full taxation rate paid in a residence country
• Requires a proper exchange of information between
  two countries.

• THE UN MODEL
• Focuses on the residence rule AND the source of
  income rule
• More concerned about developing countries
• A developing country may negotiate capital
  incomes tax rates, that are to be paid in another
  country.

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Capital income tax - controversies

• Other problems
• legal increasing role of investors rights
  (i.e. trade secrets, special administrative
  guarantees, tax havens legislation systems),
• technical (i.e. different languages),
• political because of the competition between
  governments in a global economy, information
  about investors is not exchanged.

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Allocation of Financial Capital

• Origin of cross border portfolio incomes
• Deposits in banks made by nonresident depositors
• Bonds held by nonresident depositors
• Dividends received by shareholders residing
  abroad
• Dividends received by companies from other
  companies
• Factors of distortion
• Rate of inflation
• Level of marginal statutory rate
• Way interest incomes are taxed
• Tax treatment of interest expenses

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Remember

• The Fisher Effect
• ? The higher the expected inflation rate
• The higher the nominal interest rate
• And Nominal interest payments are deductible!
• Reallocation From high inflation and high
  marginal tax rates to low inflation and low tax
  rates

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• Effective marginal tax rate gt 100
• Income tax becomes a capital tax
• Incentive to invest in domestic financial assets
  will be much reduced

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• With a high marginal tax rate and high inflation
  rate, the real after tax borrowing rate can
  easily become negative
• Income tax becomes capital subsidy for borrowers
• Demand for credit by individuals will rise
• Country will tend to spend more and suck in
  financial capital from other countries

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• Liberalization of capital flows
• creates large movement of financial capital
• residence principle
• countries from where the capital
  originates are often unable to tax these
  incomes
• Countries have to prevent large capital ouflows
  by
• lowering withholding taxes
• creating tax exempt opportunities
• enforcement

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Taxes on Cross Border Portfolio Incomes

• Residence Principle - countries tend not to tax
  the interest income of nonresidents
• Strong incentive for financial investments abroad
• Progressive removal of capital restrictions
• Technological innovation increases
• Tax evasion and tax avoidance

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• Taxes distort the allocation of resources and
  impose dead weight losses on the economies,
  affect the choice by consumers among products,
  producers among factor of production, workers
  between work and leisure, savers between
  consumption and saving

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Conclusions

• There are inefficiencies in the allocation of the
  worlds capital, because tax rates differences
  tend to increase
• ??Effective progression of the tax systems can
  proceed thanks to the possibility for the capital
  or labor force to move to lower-tax-rate
  countries
• Governments have to face limits while thinking
  about public expenditures due to the worldwide
  trend to lower tax rates (run-to-the-bottom
  tendency).

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Thank you for your attention!!!!