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Explore the impact of changing commerce trends on tax planning, economic growth, and state tax revenues. Dive into the principles of neutrality, efficiency, certainty, effectiveness, and flexibility in taxation. Learn about the importance of encouraging economic growth through policies that support entrepreneurs and high-growth firms. Discover conceptual possibilities for tax collection in multijurisdictional commerce, including digital presence standards and VAT implementation. Stay informed about evolving tax policies to ensure fair and effective revenue generation in a global business landscape.
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Fiscal/Tax Competition:State Issues Ken Klassen
Overview • Outline: • Overview of trends multijurisdictional commerce and implication for tax planning • Encouraging economic growth • Some thoughts on directions for research
1. Importance of the Topic • Much discussion of international tax systems’ effects of global businesses, country economies, tax revenues. • “Governments risk ‘global tax chaos’ as they chase dwindling revenues from multinational companies unless the international tax regime is radically overhauled” —G20 Report
The 1998 Ottawa Taxation Framework Conditions • Main principles • Neutrality: between form and across method • Efficiency: cost of compliance • Certainty and Simplicity: when, where, how • Effectiveness and Fairness: right amountand timing with minimal avoidance opportunities • Flexibility: the world will change
Trends • Connectivity, and the diversity thereof, is increasing rapidly • Devices are sold at a loss to achieve services • Cloud computing • Eventually to “The Internet of Things” • Robotics and 3-D printing
Tax Issues Raised by Changing Mode of Commerce • Strategic income location • well, BEPS • Can shift burden of taxation to single-state business or across forms of business • Creates non-neutralities of location or form • Always existed, but trends have made the revenue effect larger and it is likely to grow
The 1998 Ottawa Taxation Framework Conditions • Main principles • Neutrality: between form and across method • Efficiency: cost of compliance • Certainty and Simplicity: when, where, how • Effectiveness and Fairness: right amountand timing with minimal avoidance opportunities • Flexibility: the world will change
2. Encouraging Economic Growth • Beyond neutrality • Who creates economic growth? • Deloitte 2012: Growing businesses • Van Praag and Versloot (2007) • Meta analysis of 57 ‘high quality’ studies • Small and young firms employment growth and maybe productivity growth • <10% use self-employment as def’n
Encouraging Growth • Wong et al. (2005) and Stam et al (2011) • The effect of entrepreneurs on growth is not universal across entrepreneurs • Only “ambitious” entrepreneurs relate to economic growth • Other entrepreneurs and other high-growth firms have no incremental effect • The results for high-growth firms may be because their growth results from M&A
3. Three Conceptual Possibilities • Collect tax in customer’s jurisdiction through self-assessment • Rarely does anyone self assess • …in the seller’s jurisdiction • Wrong tax rate and wrong government • …in the customer’s jurisdiction by seller • Requires non-Nexus entities to register creating complexity and limiting supply
Options considered at the OECD • Create a ‘digital presence’ standard analogous to physical presence • Some form of ‘virtual permanent establishment’ • Require remote suppliers to register locally • Require federal mediation or state collective
Other Options • Introduce a VAT rather than sales tax • Suffers from some of the same issues • Possibly easier to achieve multi-state collection agreements • Other advantages as well • Much less concern about cascading
Conclusion • Important issues as pressure on state tax revenue continues • Tax in a neutral fashion both harder and more important as methods of business evolve • Continued need for careful examination of policies focused on economic growth
