Fiscal/Tax Competition:State Issues

Ken Klassen

Overview

• Outline:1. Overview of trends multijurisdictional

commerce and implication for tax planning

2. Encouraging economic growth

3. 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