Fiscal/Tax Competition:State Issues

Ken Klassen

Overview• Outline:

1. Overview of trends multijurisdictional commerce and implication for tax planning

2. Encouraging economic growth3. 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 amount and

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 amount and

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