International taxation on the road to economic recovery

1. International taxation on the road to economic recovery Trilateral meeting of the German, Netherlands and British Branches of the International Fiscal Association London 3 November 2010

2. Some reactions to the crisis in the tax policy area • Measures providing relief to businesses in general (in particular in the loss compensation area) • Measures seeking relief for national Budgets that are under pressure because of the crisis • Some recommendations from the IMF report for the G-20 • Concluding remarks/views

3. Relief to businesses in the loss compensation area • To provide liquidity to tax payers with losses, some countries have made changes to (the application of) their loss compensation rules • United States • Worker, Home-ownership, and Business Assistance Act of 2009 extended carry back period from 2 to 5 years for corporate tax payers that were not TARP recipients • In 2009, special relief from the Change of Ownership rules (Section 382 IRC) was provided to US loss companies that had received capital support from the US Government • The Netherlands • Tax payers can elect to obtain an extension of the carry back period from 1 to 2 years in exchange for a reduction of the carry forward period from 9 to 6 years. Extra carry back is capped at EUR 10 mln per year. • This temporary measure was introduced for the tax years 2009 and 2010 and has been extended for 2011

4. Budget raisers/protection of the national tax base • Legislators across the globe have introduced legislation that aims at reducing budget deficits • A lot of these measures focus at increasing tax proceeds, rather than reducing the tax and administrative burden to stimulate growth • Some of these measures specifically aim at protecting the domestic tax base against potential damage caused by cross border investment • In his so-called “Sinterklaas” letter (letter sent on 5 December 2009) the Dutch Under Minister responsible for taxation indicated that he would consider to change the tax treatment of p.e.- results. This would effectively mean that foreign p.e.-losses would be excluded from the Dutch tax base. • In the same letter a measure was described that would limit the deductibility of interest for the acquisition of a Dutch target which after the acquisition would be included in a fiscal unity with the target. In that situation interest would only be deductible against the profits of the acquiring entity on a stand-alone basis.

5. IMF report for the G-20 Report is a mixed bag of policy recommendations: • Page 3 with respect to banking taxes: “International cooperation would be beneficial, particularly in the context of cross-border financial institutions” • “Actions are also needed to reduce current tax distortions that run counter to regulatory and stability objectives. The pervasive tax bias in favour of debt finance (through the deductibility of interest but not the return to equity under most tax regimes) could be addressed by a range of reforms, as some countries already have done.” (page 3) • In appendix 4 the report indentifies three ways to reduce this bias in favour of debt financing: • thin cap rules • a comprehensive business income tax that would deny interest deductibility • an allowance for corporate equity (ACE) that would retain interest deductibility but also would provide a deduction for a notional return on equity

6. IMF report for the G-20 • “Address existing tax distortions, create few new ones, and consider the overall burden of regulation and taxation” (page 9) • Appendix 3: “Broadly speaking two tax- (or fee) related options for corrective policy in the financial sector have been proposed” • A systemic risk tax • A tax on short-term wholesale funding • “Recognizing financial intermediation’s special role in the economy, it is important that the design of new levies/charges take into account the expected costs of future regulatory policies. This is needed to avoid imposing, through both explicit and implicit taxation, excessive costs on financial institutions” (page 9)

7. Concluding remarks/views With respect to mitigating the distortive effect of the deductibility of interest • A lot of countries have been looking at the treatment of interest, but many have been hesitant to implement major changes. I believe that policy makers are right in being extremely careful in changing such a major element of the global tax system. Economic recovery around the globe is still extremely fragile, it is better to leave over leveraging to the market or to regulators. The international business environment • The interconnectedness of financial systems created significant exposures for companies and their respective governments. In protecting themselves against these exposures policymakers should be careful. Excessive protection could easily inflict severe damage to the environment for cross border investment, which is an absolute requirement for long term sustainable economic growth. Tax or regulations, or both? • It may be tempting, in particular for tax policy makers, to try to repair flaws in the economic system by designing corrective tax measures. A lot of the flaws in the system, however, should be primarily addressed by regulation rather than taxation and certainly not by both.